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, 2003
Commission file number 0-28839
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 (631) 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 No X
------ -------
Number of shares of each class of the registrant's Common Stock outstanding as
of the latest practicable date.
[GRAPHIC OMITTED]
Class Outstanding at May 23, 2003
Class A Common Stock 20,651,374 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,
2002 and February 28, 2003 (unaudited) 3
Consolidated Statements of Operations for the
Three Months Ended February 28, 2002 (unaudited),
as restated, and February 28, 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended February 28, 2002 (unaudited), as restated, and February
28, 2003
(unaudited) 5
Notes to Consolidated Financial Statements 6 - 21
ITEM 2 Management's Discussion and Analysis of
Financial Conditions and Results of
Operations 21 - 42
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 42
SIGNATURES 43
Certifications 44 - 47
2
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
November 30, February 28,
2002 2003
------------ --------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,758 $ 43,133
Accounts receivable, net 186,564 105,262
Inventory, net 290,064 214,009
Receivable from vendor 14,174 1,922
Prepaid expenses and other current assets 7,626 10,274
Deferred income taxes, net 7,653 6,919
--------- ---------
Total current assets 508,839 381,519
Investment securities 5,405 5,651
Equity investments 11,097 11,344
Property, plant and equipment, net 18,381 16,301
Excess cost over fair value of assets acquired and other intangible assets, net 6,826 7,388
Other assets 687 3,419
--------- ---------
$ 551,235 $ 425,622
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 121,127 $ 28,888
Accrued expenses and other current liabilities 34,983 30,999
Accrued sales incentives 12,151 13,202
Income taxes payable 7,643 12,153
Bank obligations 40,248 3,291
--------- ---------
Total current liabilities 216,152 88,533
Long-term debt 8,140 8,138
Capital lease obligation 6,141 6,126
Deferred income tax payable, net 2,704 2,152
Deferred compensation 3,969 4,034
--------- ---------
Total liabilities 237,106 108,983
--------- ---------
Minority interest 4,616 4,997
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 2,500
Common stock:
Class A; 60,000,000 authorized; 20,632,182 issued at November 30, 2002
and February 28, 2003; 19,559,445 outstanding at November 30, 2002 and
19,573,145 outstanding at February 28, 2003 207 207
Class B convertible; 10,000,000 authorized; 2,260,954 issued and outstanding 22 22
Paid-in capital 250,917 251,031
Retained earnings 69,396 70,604
Accumulated other comprehensive loss (5,018) (4,211)
Treasury stock, at cost, 1,072,737 Class A common stock at November 30, 2002 and
February 28, 2003 (8,511) (8,511)
--------- ---------
Total stockholders' equity 309,513 311,642
--------- ---------
Total liabilities and stockholders' equity $ 551,235 $ 425,622
========= =========
See accompanying notes to consolidated financial statements.
3
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months Ended February 28, 2002 and February 28, 2003
(In thousands, except share and per share data)
(unaudited)
Three Months Ended
February 28, February 28,
2002 2003
------------ ------------
As Restated
See Note 2
Net sales $ 184,269 $ 296,818
Cost of sales 170,546 271,350
------------ ------------
Gross profit 13,723 25,468
------------ ------------
Operating expenses:
Selling 6,751 7,303
General and administrative 11,053 12,305
Warehousing and technical support 1,142 1,399
------------ ------------
Total operating expenses 18,946 21,007
------------ ------------
Operating income (loss) (5,223) 4,461
------------ ------------
Other income (expense):
Interest and bank charges (963) (1,105)
Equity in income of equity investments 304 371
Other, net (1,672) (1,099)
------------ ------------
Total other income (expense), net (2,331) (1,833)
------------ ------------
Income (loss) before provision for (recovery of) income taxes, minority interest and
cumulative effect of a change in accounting for negative goodwill (7,554) 2,628
Provision for (recovery of) income taxes (1,500) 1,040
Minority interest 557 (380)
------------ ------------
Income (loss) before cumulative effect of a change in accounting for negative goodwill (5,497) 1,208
Cumulative effect of a change in accounting for negative goodwill 240 --
------------ ------------
Net income (loss) $ (5,257) $ 1,208
============ ============
Net income (loss) per common share (basic):
Income (loss) before cumulative effect of a change in accounting for
negative goodwill $ (0.25) $ 0.06
Cumulative effect of a change in accounting for negative goodwill 0.01 --
------------ ------------
Net income (loss) per common share $ (0.24) $ 0.06
============ ============
Net income (loss) per common share (diluted)
Income (loss) before cumulative effect of a change in accounting for negative
goodwill $ (0.25) $ 0.05
Cumulative effect of a change in accounting for negative goodwill 0.01 --
------------ ------------
Net income (loss) per common share $ (0.24) $ 0.05
============ ============
Weighted average number of common shares outstanding:
Basic 21,967,263 21,830,480
============ ============
Diluted 21,967,263 22,021,548
============ ============
See accompanying notes to consolidated financial statements.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended February 28, 2002 and February 28, 2003
(In thousands)
(unaudited)
2002 2003
--------- ---------
As Restated
Cash flows from operating activities:
Net income (loss) $ (5,257) $ 1,208
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities
Depreciation and amortization 1,086 1,030
Provision for bad debt expense 242 48
Equity in income of equity investments (304) (371)
Minority interest (557) 380
Deferred income tax (benefit) expense, net (878) 79
(Gain) loss on disposal of property, plant and equipment, net (12) 116
Cumulative effect of a change in accounting for goodwill (240) --
Changes in operating assets and liabilities:
Accounts receivable 130,235 81,337
Receivable from vendor 5,121 12,252
Inventory (46,237) 76,436
Accounts payable, accrued expenses, other current liabilities and accrued sales incentives 982 (93,551)
Income taxes payable 890 4,369
Investment securities-trading (560) (65)
Prepaid expenses and other, net (443) (6,087)
--------- ---------
Net cash provided by operating activities 84,068 77,181
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (470) (90)
Proceeds from the sale of property, plant and equipment 120 183
Proceeds from distribution from an equity investee 159 70
--------- ---------
Net cash provided by (used in) investing activities (191) 163
--------- ---------
Cash flows from financing activities:
Borrowings of bank obligations 118,506 149,546
Repayments on bank obligations (199,729) (186,495)
Principal payments on capital lease obligation (12) (15)
--------- ---------
Net cash used in financing activities (81,235) (36,964)
--------- ---------
Effect of exchange rate changes on cash (87) (5)
--------- ---------
Net increase in cash 2,555 40,375
Cash at beginning of period 3,025 2,758
--------- ---------
$ 5,580 $ 43,133
========= =========
Cash at end of period
See accompanying notes to consolidated financial statements.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended February 28, 2002 and February 28, 2003
(Dollars in thousands, except share and per share data)
(1) Basis of Presentation
The accompanying consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United
States of America 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, 2002 and
February 28, 2003, the consolidated statements of operations for the three
month periods ended February 28, 2002 (as restated) and February 28, 2003,
and the consolidated statements of cash flows for the three month periods
ended February 28, 2002 (as restated) and February 28, 2003. The interim
figures are not necessarily indicative of the results for the year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, including the allowance for doubtful
accounts, allowance for cellular deactivations, inventory valuation,
recoverability of deferred tax assets, valuation of long-lived assets and
accrued sales incentives, warranty reserves and disclosure of the
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
A summary of the Company's significant accounting policies is identified in
Note 1 of the Notes to Consolidated Financial Statements included in the
Company's 2002 Annual Report filed on Form 10-K. There have been no changes
to the Company's significant accounting policies subsequent to November 30,
2002. Certain reclassifications have been made to the 2002 consolidated
financial statements in order to conform to the 2003 presentation.
(2) Restatement of Prior Period Consolidated Financial Statements
As discussed in Note 2 of the Notes to Consolidated Financial Statements
included in the Company's 2002 Annual Report filed on Form 10-K, the
Company has restated its consolidated financial statements for fiscal 2000,
2001 and for the first three quarters of fiscal 2002. These restatement
adjustments were the result of the misapplication of generally accepted
accounting principles. In addition, the Company has reclassified certain
expenses from operating expenses to cost of sales for the quarter ended
February 28, 2002.
6
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The net effect of the restatement adjustments on net loss for the quarter
ended February 28, 2002 is as follows:
First
Quarter
2002
Increase loss before cumulative effect of a change in
accounting for negative goodwill $(1,308)
Increase net loss (1,308)
Increase net loss per common share - diluted $ (0.06)
The following table provides additional unaudited information regarding the
effects of restatement adjustments on the Company's February 28, 2002 net
loss:
(in thousands)
(Increase)
Decrease
----------
Restatement adjustments:
Timing of revenue $ (82)
Litigation (399)
Foreign currency translation (1,317)
Inventory pricing 387
Sales incentives 273
Operating expense reclassification to cost of sales (1) --
-------
Total adjustment to increase pre-tax income (loss) (1,138)
(Provision for) recovery of income taxes (170)
-------
Total increase on net loss $(1,308)
=======
(1) This adjustment represents a reclassification of warehousing and
technical support and general and administrative costs (which are
components of operating expenses) to cost of sales. This
reclassification did not have any effect on previously reported net
loss for the first quarter of fiscal 2002.
The following discussion addresses each of the restatement adjustments for
the corrections of accounting errors and the reclassification adjustment.
(a) Timing of revenue. During the first quarter of fiscal 2002, the
Company overstated net sales by $4,601 as the timing of revenue
recognition was not in accordance with the established shipping terms
with certain customers. SAB 101 specifically states
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
that delivery generally is not considered to have occurred unless the
customer has taken title (which is in this situation when the product
was delivered to the customer's site). Accordingly, the Company should
have deferred revenue recognition until delivery was made to the
customer's site. In addition, during the first quarter of fiscal 2002,
gross profit was overstated by $99 and operating expenses were
overstated by $17.
(b) Litigation. During the first quarter of fiscal 2002, the Company
overestimated its provisions for certain litigation matters, thereby
overstating cost of sales by $176. Also, the Company understated
operating expenses by $497 in the first quarter of fiscal 2002 as a
result of not recording a settlement offer in the period the Company
offered it.
During the first quarter of fiscal 2002, the Company understated
operating expenses by $78 as a result of inappropriately deferring
costs related to an insurance claim. The Company's insurance company
refused to defend the Company against a legal claim made against the
Company. The Company took legal action against the insurance company
and was unsuccessful. The Company was improperly capitalizing costs
that were not probable of recovery.
(c) Foreign currency translation. During the first quarter of fiscal 2002,
the Company did not properly account for a change in accounting for
its Venezuelan subsidiary as operating in a non-highly inflationary
economy. In prior periods, Venezuela was deemed to be a
highly-inflationary economy in accordance with certain technical
accounting pronouncements. Effective January 1, 2002, it was deemed
that Venezuela should cease to be considered a highly-inflationary
economy, however, the Company did not account for this change. The
Company incorrectly recorded the foreign currency translation
adjustment in other income rather than as other comprehensive income.
As a result, the Company understated other expenses, net, by $1,360
for the first quarter of fiscal 2002. Also, the Company overstated
operating expenses by $43 for the first quarter of fiscal 2002.
(d) Inventory pricing. During the first quarter of fiscal 2002, the
Company overstated cost of sales related to an inventory pricing error
that occurred at its Venezuelan subsidiary. The Company was not
properly pricing its inventory at the lower of cost or market in
accordance with generally accepted accounting principles. As a result,
the Company overstated cost of sales by $387 for the first quarter of
fiscal 2002.
(e) Sales incentives. During the three months ended February 28, 2002, the
Electronics segment underestimated accruals for additional sales
incentives (other trade
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
allowances) that were not yet offered to its customers. As a result,
for the first quarter of fiscal 2002, the Company overstated net sales
by $442.
Furthermore, during the three months ended February 28, 2002, the
Electronics segment was also not reversing earned and unclaimed sales
incentives (i.e., cooperative advertising, market development and
volume incentive rebate funds) upon the expiration of the established
claim period. As a result, for the quarter ended February 28, 2002,
the Company understated net sales by $715.
(f) Income taxes. Income taxes were adjusted for the restatement
adjustments discussed above for each period presented.
The Company also applied income taxes to minority interest amounts
during the first quarter of fiscal 2002. As a result of these
adjustments, the Company understated the provision for/recovery of
income taxes by $170 for the quarter ended February 28, 2002.
(g) Operating expense reclassification. The Company reclassified certain
costs as operating expenses, which were included as a component of
warehousing and technical support and general and administrative
costs, which should have been classified as a component of cost of
sales. The effect of this reclassification for the quarter ended
February 28, 2002 was to understate cost of sales and overstate
operating expenses by $4,823. This reclassification did not have any
effect on previously reported net income or loss for any fiscal year
or period presented herein. This reclassification reduced gross margin
by 2.6 percentage points for the quarter ended February 28, 2002.
9
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following represents the effect of the restatement and
reclassification adjustments in the consolidated statements of
operations for the quarter ended February 28, 2002:
Fiscal 2002
For the Quarter Ended February 28,
----------------------------------------------------------------------
Restatement Reclassification
As Reported (1) Adjustments Adjustments As Restated
-------------- --------------- ---------------- ------------
Net sales $ 188,597 $ (4,328) (2)(8) - $ 184,269
Cost of sales 170,781 (5,058)(2)(6)7) $ 4,823 (3) 170,546
------------ ------------ ------------ ------------
Gross profit 17,816 730 (4,823) 13,723
------------ ------------ ------------ ------------
Operating expenses:
Selling 6,754 (3) (2) - 6,751
General and administrative 10,651 542 (2)(5)(6) (140) (3) 11,053
Warehousing and technical support 5,846 (21) (2) (4,683) (3) 1,142
------------ ------------ ------------ ------------
Total operating expenses 23,251 518 (4,823) 18,946
------------ ------------ ------------ ------------
Operating income (loss) (5,435) 212 - (5,223)
Total other income (expense), net (981) (1,350) (5) - (2,331)
------------ ------------ ------------ ------------
Loss before provision for (recovery of)
income taxes, minority interest and before
cumulative effect of a change in accounting
for negative goodwill (6,416) (1,138) - (7,554)
Provision for (recovery of) income taxes (1,670) 170 (4) - (1,500)
Minority interest 557 - - 557
------------ ------------ ------------ ------------
Loss before cumulative effect of a change in
accounting for negative goodwill (4,189) (1,308) - (5,497)
Cumulative effect of a change in accounting
for negative goodwill 240 - - 240
------------ ------------ ------------ ------------
Net loss $ (3,949) $ (1,308) - $ (5,257)
============ ============ ============ ============
Net loss per common share (basic) before
cumulative effect of a change in accounting
for negative goodwill $ (0.19) $ (0.06) - $ (0.25)
Cumulative effect of a change in accounting
for negative goodwill 0.01 - - 0.01
------------ ------------ ------------ ------------
Net loss per common share (basic) $ (0.18) $ (0.06) - $ (0.24)
============ ============ ============ ============
Net loss per common share (diluted) before
cumulative effect of a change in accounting
for negative goodwill $ (0.19) $ (0.06) - $ (0.25)
Cumulative effect of a change in accounting
for negative goodwill 0.01 - - 0.01
------------ ------------ ------------ ------------
Net loss per common share (diluted) $ (0.18) $ (0.06) - $ (0.24)
============ ============ ============ ============
Weighted average number of common shares
outstanding (basic) 21,967,263 21,967,263
============ ===========
Weighted average number of common shares
outstanding (diluted) 21,967,263 21,967,263
============ ===========
(1) Includes reclassification of sales incentives (previously reported in
operating expenses) pursuant to EITF 01-9, "Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's
Products)".
(2) Amounts reflect adjustments for (a) timing of revenue.
10
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Amounts reflect adjustments for (g) operating expense reclassification.
(4) Amounts reflect adjustments for (f) income taxes.
(5) Amounts reflect adjustments for (c) foreign currency translation.
(6) Amounts reflect adjustments for (b)litigation.
(7) Amounts reflect adjustments for (d) inventory pricing.
(8) Amounts reflect adjustments for (e) sales incentives.
As a result of the restatement for the quarter ended February 28, 2002, cash
flows from operating activities was decreased $377 and cash used in investing
activities was decreased $376. There has not been any change to cash used in
financing activities.
(3) Accrued Sales Incentives
During the prior year, the Company adopted the provisions of EITF 01-9
"Accounting for Consideration Given by a Vendor to a Customer". As a
result, the Company has reclassified co-operative advertising, market
development funds and volume incentive rebate costs (collectively sales
incentives), which were previously included in selling expenses, to net
sales as the Company does not receive an identifiable benefit in connection
with these costs. As a result of this reclassification, net sales and
selling expenses, after restatement, were reduced by $2,142 for the quarter
ended February 28, 2002. There was no further impact on the Company's
consolidated financial statements as a result of the adoption of EITF 01-9
as the Company's historical accounting policy with respect to the
recognition and measure of sales incentives is consistent with EITF 01-9.
A summary of the activity with respect to sales incentives for the quarters
ended February 28, 2002 and 2003 on a segment and consolidated basis is
provided below:
Wireless
February 28, February 28,
2002 2003
----------- --------------
As Restated
Opening balance $ 5,209 $ 7,525
Accruals 1,557 5,552
Payments (2,421) (4,273)
Reversals for unearned incentives -- --
Reversals for unclaimed incentives (30) (163)
------- -------
Ending balance $ 4,315 $ 8,641
======= =======
11
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Electronics
February 28, February 28,
2002 2003
----------- --------------
As Restated
Opening balance $ 3,265 $ 4,626
Accruals 1,286 1,965
Payments (998) (1,299)
Reversals for unearned incentives -- --
Reversals for unclaimed incentives (671) (731)
------- -------
Ending balance $ 2,882 $ 4,561
======= =======
Consolidated
February 28, February 28,
2002 2003
----------- --------------
As Restated
Opening balance $ 8,474 $ 12,151
Accruals 2,843 7,517
Payments (3,419) (5,572)
Reversals (701) (894)
-------- --------
Ending balance $ 7,197 $ 13,202
======== ========
The majority of the reversals of previously established sales incentive
liabilities pertain to sales recorded in prior periods.
(4) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
Three Months Ended
February 28, February 28,
2002 2003
------ -----
Cash paid during the period:
Interest (excluding bank charges) $ 872 $ 682
Income taxes (net of refunds) $ 295 $2,408
12
During the three months ended February 28, 2002 and February 28, 2003, the
Company recorded a net unrealized holding gain or (loss) relating to
available-for-sale marketable securities, net of deferred taxes, of $(349)
and $122, respectively, as a component of accumulated other comprehensive
loss.
(5) 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:
Three Months Ended
February 28, February 28,
2002 2003
------------------ ------------
(As Restated)
Net income (loss) (numerator for basic income per share) $ (5,257) $ 1,208
=========== =============
Weighted average common shares (denominator for basic income
per share) 21,967,263 21,830,480
Effect of dilutive securities:
Employee stock options and stock warrants -- 191,068
----------- ------------
Weighted average common and potential common shares
outstanding (denominator for diluted income per share) 21,967,263 22,021,548
=========== =============
Net income (loss) per common share (basic):
Income (loss) before cumulative effect of a change in
accounting for negative goodwill $ (0.25) $ 0.06
Cumulative effect of a change in accounting for negative
goodwill 0.01 --
----------- ------------
Net income (loss) per common share $ (0.24) $ 0.06
=========== =============
Net income (loss) per common share (diluted):
Income (loss) before cumulative effect of a change in
accounting for negative goodwill $ (0.25) $ 0.05
Cumulative effect of a change in accounting for negative
goodwill 0.01 --
----------- ------------
Net income (loss) per common share $ (0.24) $ 0.05
=========== =============
Stock options and warrants totaling 2,739,700 and 1,588,200 for the three
months ended February 28, 2002 and February 28, 2003, respectively, were
not included in the net loss per common share calculation because their
effect would have been anti-dilutive.
13
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Comprehensive Income (Loss)
The accumulated other comprehensive loss of $5,018 and $4,211 at November
30, 2002 and February 28, 2003, respectively, on the accompanying
consolidated balance sheets is the net accumulated unrealized loss on the
Company's available-for-sale investment securities of $599 and $477 at
November 30, 2002 and February 28, 2003, respectively, and the accumulated
foreign currency translation adjustment of $4,419 and $3,734 at November
30, 2002 and February 28, 2003, respectively.
The Company's total comprehensive income (loss) was as follows:
Three Months Ended
February 28, February 28,
2002 2003
----------- -------------
(As Restated)
Net income (loss) $(5,257) $ 1,208
Other comprehensive income (loss):
Foreign currency translation adjustments (410) 685
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during
period, net of tax (349) 122
------- -------
Other comprehensive loss, net of tax (759) 807
------- -------
Total comprehensive income (loss) $(6,016) $ 2,015
======= =======
The change in the net unrealized gain (loss) arising during the periods
presented above are net of tax (provision) benefit of $214 and $(75) for
the three months ended February 28, 2002 and February 28, 2003,
respectively. There were no reclassification adjustments for the three
months ended February 28, 2002 and 2003.
(7) 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, specialty retailers, new car dealers, original
equipment manufacturers (OEM), independent installers of automotive
accessories and the U.S. military.
14
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 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 28,
2002 and February 28, 2003, 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 Totals
Three Months Ended
February 28, 2002 - As Restated
Net sales $ 112,991 $ 71,278 -- $ 184,269
Intersegment sales (purchases) (43) 43 -- --
Pre-tax income (loss) (6,707) 1,344 $ (2,191) (7,554)
Total assets 286,561 105,421 61,529 453,511
Goodwill, net -- 362 4,602 4,964
Three Months Ended
February 28, 2003
Net sales $ 216,562 $ 80,256 -- $ 296,818
Intersegment sales (purchases) (176) 176 -- --
Pre-tax income (loss) 3,250 2,490 $ (3,112) 2,628
Total assets 177,693 170,817 77,112 425,622
Goodwill, net -- 2,786 4,602 7,388
14
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Income Taxes
Quarterly tax provisions are generally based upon an estimated annual
effective tax rate per taxable entity, including evaluations of possible
future events and transactions, and are subject to subsequent refinement or
revision. When the Company is unable to estimate a part of its annual
income or loss, or the related tax expense or benefit, the tax expense or
benefit applicable to that item is reported in the interim period in which
the income or loss occurs. During the quarter ended February 28, 2003, the
Wireless Group utilized certain of its gross deferred tax assets (including
net operating losses and other deferred assets), therefore, the valuation
allowance related to those utilized deferred tax assets has been removed,
which resulted in a decrease in the Company's annual effective tax rate for
the period.
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to the reported provision for (recovery of) income taxes is
as follows:
Three Months Ended
February 28,
2002 2003
------ -----
(As Restated)
Tax provision at Federal statutory rate $(2,644) (35.0)% $ 920 35.0%
State income taxes, net of Federal benefit (59) (0.8) 219 8.3
Increase (decrease) in beginning-of-the-year balance
of the valuation allowance for deferred tax assets 177 2.3 (439) (16.7)
Foreign tax rate differential 742 9.8 467 17.8
Non-deductible items, changes in rates and other, net 284 3.8 (127) (4.8)
------- -------- ------- -------
$(1,500) (19.9)% $ 1,040 39.6%
======= ======== ======== =======
Other is a combination of various factors for the three months ended
February 28, 2003, including changes in the taxable income or loss between
various tax entities with differing effective tax rates, changes in the
allocation and apportionment factors between taxable jurisdictions with
differing tax rates of each tax entity, changes in tax rates and other
legislation in the various jurisdictions, and other items.
The net change in the total valuation allowance for the three months ended
February 28, 2003, was a decrease $(439). A valuation allowance is provided
when it is more likely than not that some portion, or all, of the deferred
tax assets will not be realized. The Company has established valuation
allowances for net operating loss carryforwards as well as other deferred
tax assets of the Wireless Group. Based on the Company's ability to carry
back future reversals of deferred tax assets to taxes paid in current and
prior years and the Company's historical taxable income record, adjusted
for unusual items, management believes it is more likely than not that the
Company will realize the benefit of the net
16
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
deferred tax assets existing at February 28, 2003.
(9) Product Warranties and Product Repair Costs
The Company generally warrants its products against certain manufacturing
and other defects. The Company provides warranties for all of its products
ranging from 90 days to the lifetime of the product. Warranty expenses are
accrued at the time of sale based on the Company's estimated cost to repair
expected returns for products. This liability is based primarily on
historical experiences of actual warranty claims as well as current
information on repair costs. The warranty liability of $9,143 and $9,298,
is recorded in accrued expenses in the accompanying consolidated balance
sheet as of November 30, 2002 and February 28, 2003, respectively. In
addition, the Company records a reserve for product repair costs. This
reserve is based upon the quantities of defective inventory on hand and an
estimate of the cost to repair such defective inventory. The reserve for
product repair costs of $6,267 and $6,982 are recorded as a reduction to
inventory in the accompanying consolidated balance sheet as of November 30,
2002 and February 28, 2003, respectively. Warranty claims and product
repair costs expense for each of the fiscal quarters ended February 28,
2002 and 2003 were $1,741 and $1,958, respectively.
The following table provides the changes in the Company's product
warranties and product repair costs for 2002:
December 1, 2002 $ 15,410
Liabilities accrued for warranties issued during the
period 1,958
Warranty claims paid during the period (1,088)
----------
February 28, 2003 $ 16,280
=========
(10) New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (Statement 143). Statement 143 is effective for
fiscal years beginning after June 15, 2002, and this will be adopted by the
Company on December 1, 2002 (fiscal 2003) and establishes an accounting
standard requiring the recording of the fair value of liabilities
associated with the retirement of long-lived assets in the period in which
they are incurred. The adoption of Statement 143 did not have any impact on
its results of operations or its financial position as the Company had no
asset retirement obligations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long- Lived Assets" (Statement 144), which addresses
financial accounting and reporting for the
17
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
impairment or disposal of long-lived assets. This statement supersedes
Statement 121 while retaining the fundamental recognition and measurement
provisions of that statement. Statement 144 requires that a long-lived
asset to be abandoned, exchanged for a similar productive asset or
distributed to owners in a spin-off to be considered held and used until it
is disposed of. However, Statement 144 requires that management consider
revising the depreciable life of such long-lived asset. With respect to
long-lived assets to be disposed of by sale, Statement 144 retains the
provisions of Statement 121 and, therefore, requires that discontinued
operations no longer be measured on a net realizable value basis and that
future operating losses associated with such discontinued operations no
longer be recognized before they occur. Statement 144 is effective for all
fiscal quarters of fiscal years beginning after December 15, 2001. The
adoption of Statement 144 did not have any impact on the Company's
consolidated financial statements.
In April 2002, the FASB issued SFAS 145 "Rescission of SFAS Statements No.
4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections"
(Statement 145). Statement 145, as it pertains to the recission of
Statement 4, is effective for fiscal years beginning after May 15, 2002 and
is effective for transactions occurring after May 15, 2002 as it relates to
Statement 13. This Statement updates, clarifies and simplifies existing
accounting pronouncements by rescinding Statement 4, which required all
gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Opinion 30 will now be used to
classify those gains and losses. Adoption of this statement had no material
impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure". Statement 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally provided by
Statement 123, "Accounting for Stock- Based Compensation". Additionally,
Statement 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosure in both annual and interim financial statements about
the method of accounting for stock-based compensation and the effect of the
method used on reported results. The transitional requirements of Statement
148 will be effective for all financial statements for fiscal years ending
after December 15, 2002. The disclosure requirements shall be effective for
financial reports containing condensed financial statements for interim
periods beginning after December 31, 2002. The Company will adopt the
disclosure portion of this statement for the fiscal quarter ending May 31,
2003, as required. The application of this standard will have no impact on
the Company's consolidated financial position or results of operations.
18
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In February 2003, the EITF issued EITF Issue 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor", which was adopted by the Company during the quarter ended February
28, 2003. This EITF provides guidance on the income statement
classification of amounts received by a customer, including a reseller and
guidance regarding timing of recognition for volume rebates. Adoption of
this new standard, which was applied prospectively by the Company for new
arrangements, including modifications of existing arrangements, entered
into after December 31, 2002, did not have a material impact on the
Company's consolidated financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantors,
Including Guarantees of Indebtedness of Others". FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending
after December 15, 2002. The Company adopted FIN 45 during the quarter
ended February 28, 2003. The adoption of FIN 45 did not have a material
effect on the Company's consolidated financial position or results of
operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB No.
51". FIN 46 addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. FIN 46 is effective for
all new variable interest entities created or acquired after January 31,
2003. For variable interest entities created or acquired prior to February
1, 2003, the provisions of FIN 46 must be applied for the first interim
period beginning after June 15, 2003. Accordingly, the Company will adopt
this provision of FIN 46 during the quarter ended November 30, 2003. The
adoption of FIN 46 is being evaluated to determine what impact, if any, the
adoption of the provisions will have on the Company's financial condition
or results of operations.
(11) Financing Arrangements
The credit agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net
worth. Additionally, the agreement includes restrictions and
limitations on payments of dividends, stock repurchases and capital
expenditures.
19
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At November 30, 2002, the Company was not in compliance with certain of its
pre-tax income covenants. Furthermore, as of November 30, 2002, the Company
was also not in compliance with the requirement to deliver audited
financial statements 90 days after the Company's fiscal year-end, and as of
February 28, 2003, the requirement to deliver unaudited quarterly financial
statements 45 days after the Company's quarter end.
The Company has not received waivers for the November 30, 2002 violation of
a particular pre-tax income covenant, delivery of audited financial
statements 90 days after the Company's fiscal year-end or delivery of
unaudited quarterly financial statements 45 days after the quarter-end.
Accordingly, the Company's outstanding domestic obligation as of November
30, 2002, of $36,883, has been classified as current on the accompanying
consolidated financial statements. Subsequent to November 30, 2002, the
Company repaid its obligation of $36,883 in full resulting in domestic bank
obligations outstanding at February 28, 2003 of $0. Management is in the
process of requesting a waiver for the November 30, 2002 and February 28,
2003 violations. While the Company has historically been able to obtain
waivers for such violations, there can be no assurance that future
negotiations with its lenders would be successful or that the Company will
not violate covenants in the future, therefore, resulting in amounts
outstanding to be payable upon demand. This credit agreement has no cross
covenants with other credit facilities.
(12) Business Acquisition
On March 15, 2002, Code Systems, Inc. (Code), a wholly-owned subsidiary of
Audiovox Electronics Corp., purchased certain assets of Code-Alarm, Inc.,
an automotive security product company. The Company accounted for the
transaction in accordance with the purchase method of accounting. As a
result of the transaction, goodwill of $1,854 was recorded. An adjustment
to the allocation of the purchase price was made to a certain acquired
balance resulting in an increase to goodwill of $561 during the quarter
ended February 28, 2003.
(13) Guarantee of Debt
The Company has guaranteed, through August 31, 2003, the borrowings of one
of its 50%- owned equity investees (GLM) at a maximum of $300. During the
quarter ended February 28, 2003, the Company adopted FIN 45, "Guarantors
Accounting and Disclosure Requirements for Guarantors, Including Guarantees
of Indebtedness of Others" (FIN 45). In accordance with FIN 45, the Company
has not issued or modified this guarantee after December 31, 2002.
Accordingly, this guarantee has not been reflected on the accompanying
consolidated financial statements.
20
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Subsequent Events
In May 2003, the Company entered into an asset purchase agreement to buy
certain audio assets of Recoton Corporation. In accordance with the
agreement, the Company made a deposit of $2,000, which is currently being
held in escrow. The Company has obtained final approval of this purchase
from a bankruptcy court. This purchase amounted to approximately $40,000
plus the assumption of $5,000 in debt, not including related acquisition
costs.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company markets its products under the Audiovox brand name 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 75%-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
carriers overseas. Quintex is a small operation for the direct sale of handsets,
accessories and wireless telephone service. Quintex also receives residual fees
and activation commissions from the carriers. Residuals are paid by the carriers
based upon a percentage of usage of customers activated by Quintex for a period
of time (1-5 years). Quintex also sells a small volume of electronics products
not related to wireless which are categorized as "other".
The Electronics Group consists of three wholly-owned subsidiaries: Audiovox
Electronics Corporation (AEC), American Radio Corp. and Code Systems, Inc.
(Code) and three majority- owned subsidiaries, Audiovox Communications
(Malaysia) Sdn. Bhd., Audiovox Holdings (M) Sdn. Bhd. and Audiovox Venezuela,
C.A. The Electronics Group markets, both domestically and internationally,
automotive sound and security systems, electronic car accessories, home and
portable sound products, FRS radios, in-vehicle video systems, flat-screen
televisions, DVD players and navigation systems. Sales are made through an
extensive distribution network of mass merchandisers and others. In addition,
the Company sells some of its products directly to automobile manufacturers on
an OEM basis. American Radio Corp. is also involved on a limited basis in the
wireless marketplace. Wireless related sales are categorized as "other".
The Company allocates interest and certain shared expenses to the marketing
groups based upon both actual and estimated usage. General expenses and other
income items that are not readily allocable are not included in the results of
the two marketing groups.
Restatement of Consolidated Financial Statements
As discussed in Note 2 of the Notes to Consolidated Financial Statements,
the Company has restated its consolidated financial statements for fiscal 2000,
2001 and the first three quarters of fiscal 2002. These restatement adjustments
are the result of the misapplication of generally accepted accounting
principles. In addition, the Company has reclassified certain expenses from
operating expenses to cost of sales for the quarter ended February 28, 2002.
22
The net effect of the restatement adjustments on net loss for the quarter
ended February 28, 2002 is as follows:
First
Quarter
2002
Increase loss before cumulative effect of a change in
accounting for negative goodwill $(1,308)
Increase net loss (1,308)
Increase net loss per common share - diluted $ (0.06)
The following table provides additional unaudited information regarding the
effects of restatement adjustments on the Company's February 28, 2002 net loss:
(in thousands)
(Increase)
Decrease
----------
Restatement adjustments:
Timing of revenue $ (82)
Litigation (399)
Foreign currency translation (1,317)
Inventory pricing 387
Sales incentives 273
Operating expense reclassification to cost of sales (1) --
-------
Total adjustment to increase pre-tax income (loss) (1,138)
(Provision for) recovery of income taxes (170)
-------
Total increase on net loss $(1,308)
=======
(1) This adjustment represents a reclassification of warehousing and
technical support and general and administrative costs (which are
components of operating expenses) to cost of sales. This
reclassification did not have any effect on previously reported net
loss for the first quarter of fiscal 2002.
The following discussion addresses each of the restatement adjustments for
the corrections of accounting errors and the reclassification adjustment for the
corrections of accounting errors.
(a) Timing of revenue. During the first quarter of fiscal 2002, the Company
overstated net sales by $4,601 as the timing of revenue recognition was not
in accordance with the established shipping terms with certain customers.
SAB 101 specifically states that delivery generally is not considered to
have occurred unless the customer has taken title (which is in this
situation when the product was delivered to the customer's site).
Accordingly, the Company should have deferred revenue recognition until
delivery was made to the customer's site. In addition, during the first
quarter of fiscal 2002, gross profit was overstated by $99 and operating
expenses were overstated by $17.
23
(b) Litigation. During the first quarter of fiscal 2002, the Company
overestimated its provisions for certain litigation matters, thereby
overstating cost of sales by $176. Also, the Company understated operating
expenses by $497 in the first quarter of fiscal 2002 as a result of not
recording a settlement offer in the period the Company offered it.
During the first quarter of fiscal 2002, the Company understated operating
expenses by $78 as a result of inappropriately deferring costs related to
an insurance claim. The Company's insurance company refused to defend the
Company against a legal claim made against the Company. The Company took
legal action against the insurance company and was unsuccessful. The
Company was improperly capitalizing costs that were not probable of
recovery.
(c) Foreign currency translation. During the first quarter of fiscal 2002, the
Company did not properly account for a change in accounting for its
Venezuelan subsidiary as operating in a non-highly inflationary economy. In
prior periods, Venezuela was deemed to be a highly- inflationary economy in
accordance with certain technical accounting pronouncements. Effective
January 1, 2002, it was deemed that Venezuela should cease to be considered
a highly-inflationary economy, however, the Company did not account for
this change. The Company incorrectly recorded the foreign currency
translation adjustment in other income rather than as other comprehensive
income. As a result, the Company understated other expenses, net, by $1,360
for the first quarter of fiscal 2002. Also, the Company overstated
operating expenses by $43 for the first quarter of fiscal 2002.
(d) Inventory pricing. During the first quarter of fiscal 2002, the Company
overstated cost of sales related to an inventory pricing error that
occurred at its Venezuelan subsidiary. The Company was not properly pricing
its inventory at the lower of cost or market in accordance with generally
accepted accounting principles. As a result, the Company overstated cost of
sales by $387 for the first quarter of fiscal 2002.
(e) Sales incentives. During the first quarter ended February 28, 2002, the
Electronics segment underestimated accruals for additional sales incentives
(other trade allowances) that were not yet offered to its customers. As a
result, for the first quarter of fiscal 2002, the Company overstated net
sales by $442.
Furthermore, during the three months ended February 28, 2002, the
Electronics segment was also not reversing earned and unclaimed sales
incentives (i.e., cooperative advertising, market development and volume
incentive rebate funds) upon the expiration of the established claim
period. As a result, for the quarter ended February 28, 2002, the Company
understated net sales by $715.
(f) Income taxes. Income taxes were adjusted for the restatement adjustments
discussed above for each period presented.
The Company also applied income taxes to minority interest amounts during
the first quarter of fiscal 2002. As a result of these adjustments, the
Company understated the provision
24
for/recovery of income taxes by $170 for the quarter ended February 28,
2002.
(g) Operating expense reclassification. The Company reclassified certain costs
as operating expenses, which were included as a component of warehousing
and technical support and general and administrative costs, which should
have been classified as a component of cost of sales. The effect of this
reclassification for the quarter ended February 28, 2002 was to understate
cost of sales and overstate operating expenses by $4,823. This
reclassification did not have any effect on previously reported net income
or loss for any fiscal year or period presented herein. This
reclassification reduced gross margin by 2.6 percentage points for the
quarter ended February 28, 2002.
25
The following represents the effect of the restatement and reclassification
adjustments in the consolidated statements of operations for the quarter ended
February 28, 2002:
Fiscal 2002
For the Quarter Ended February 28,
----------------------------------------------------------------------
Restatement Reclassification
As Reported (1) Adjustments Adjustments As Restated
-------------- --------------- ---------------- ------------
Net sales $ 188,597 $ (4,328) (2)(8) - $ 184,269
Cost of sales 170,781 (5,058)(2)(6)7) $ 4,823 (3) 170,546
------------ ------------ ------------ ------------
Gross profit 17,816 730 (4,823) 13,723
------------ ------------ ------------ ------------
Operating expenses:
Selling 6,754 (3) (2) - 6,751
General and administrative 10,651 542 (2)(5)(6) (140) (3) 11,053
Warehousing and technical support 5,846 (21) (2) (4,683) (3) 1,142
------------ ------------ ------------ ------------
Total operating expenses 23,251 518 (4,823) 18,946
------------ ------------ ------------ ------------
Operating income (loss) (5,435) 212 - (5,223)
Total other income (expense), net (981) (1,350) (5) - (2,331)
------------ ------------ ------------ ------------
Loss before provision for (recovery of)
income taxes, minority interest and before
cumulative effect of a change in accounting
for negative goodwill (6,416) (1,138) - (7,554)
Provision for (recovery of) income taxes (1,670) 170 (4) - (1,500)
Minority interest 557 - - 557
------------ ------------ ------------ ------------
Loss before cumulative effect of a change in
accounting for negative goodwill (4,189) (1,308) - (5,497)
Cumulative effect of a change in accounting
for negative goodwill 240 - - 240
------------ ------------ ------------ ------------
Net loss $ (3,949) $ (1,308) - $ (5,257)
============ ============ ============ ============
Net loss per common share (basic) before
cumulative effect of a change in accounting
for negative goodwill $ (0.19) $ (0.06) - $ (0.25)
Cumulative effect of a change in accounting
for negative goodwill 0.01 - - 0.01
------------ ------------ ------------ ------------
Net loss per common share (basic) $ (0.18) $ (0.06) - $ (0.24)
============ ============ ============ ============
Net loss per common share (diluted) before
cumulative effect of a change in accounting
for negative goodwill $ (0.19) $ (0.06) - $ (0.25)
Cumulative effect of a change in accounting
for negative goodwill 0.01 - - 0.01
------------ ------------ ------------ ------------
Net loss per common share (diluted) $ (0.18) $ (0.06) - $ (0.24)
============ ============ ============ ============
Weighted average number of common shares
outstanding (basic) 21,967,263 21,967,263
============ ===========
Weighted average number of common shares
outstanding (diluted) 21,967,263 21,967,263
============ ===========
(1) Includes reclassification of sales incentives (previously reported in
operating expenses) pursuant to EITF 01-9, "Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's
Products)".
(2) Amounts reflect adjustments for (a) timing of revenue.
(3) Amounts reflect adjustments for (g) operating expense reclassification.
(4) Amounts reflect adjustments for (f) income taxes.
(5) Amounts reflect adjustments for (c) foreign currency translation.
(6) Amounts reflect adjustments for (b)litigation.
(7) Amounts reflect adjustments for (d) inventory pricing.
(8) Amounts reflect adjustments for (e) sales incentives.
26
Critical Accounting Policies
As disclosed in the annual report on Form 10-K for the fiscal year ended
November 30, 2002, the discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in conformity with accounting principles generally
accepted in the United States. The preparation of these financial statement
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses reported in those financial
statements. These judgments can be subjective and complex, and consequently,
actual results could differ from those estimates. Our most critical accounting
policies relate to revenue recognition; accounts receivable; sales incentives;
inventory; warranties and income taxes. Since November 30, 2002, there have been
no changes in our critical accounting policies and no other significant changes
to the assumptions and estimates related to them.
27
Results of Operations
The following table sets forth for the periods indicated certain
statements of operations data for the Company expressed as a percentage of net
sales:
Percentage of Net Sales
Three Months Ended
February 28, February 28,
2002 2003
------------- ------------
(As Restated)
Net sales:
Wireless
Wireless products 57.0% 70.9%
Activation commissions 3.9 1.8
Residual fees 0.4 0.2
Other -- 0.1
----- -----
Total Wireless 61.3 73.0
----- -----
Electronics
Mobile electronics 21.5 17.2
Consumer electronics 8.7 5.6
Sound 8.3 4.2
Other 0.2 --
----- -----
Total Electronics 38.7 27.0
----- -----
Total net sales 100.0 100.0
----- -----
Cost of sales 92.6 91.4
----- -----
Gross profit 7.4 8.6
Selling 3.7 2.5
General and administrative 6.0 4.1
Warehousing and technical support 0.6 0.5
----- -----
Total operating expenses 10.3 7.1
----- -----
Operating income (loss) (2.8) 1.5
Interest and bank charges (0.5) (0.3)
Equity in income in equity investments 0.2 0.1
Other, net (1.0) (0.4)
----- -----
Income (loss) before provision for (recovery of) income
taxes (4.1) 0.9
Provision for (recovery of) income taxes (0.8) 0.4
Minority interest 0.3 (0.1)
Change in accounting principle 0.1 --
----- -----
Net income (loss) (2.9)% 0.4 %
====== =====
28
Consolidated Results
Three months ended February 28, 2002 compared to three months ended February 28,
2003
The net sales and percentage of net sales by marketing group and product
line for the three months ended February 28, 2002 and February 28, 2003 are
reflected in the following table:
Three Months Ended
February 28, 2002 February 28, 2003
------------------- -------------------
(As Restated)
Net sales:
Wireless
Wireless products $105,009 57.0 % $210,574 70.9 %
Activation commissions 7,270 3.9 5,228 1.8
Residual fees 658 0.4 540 0.2
Other 54 -- 220 0.1
-------- ------- -------- -------
Total Wireless 112,991 61.3 216,562 73.0
-------- ------- -------- -------
Electronics
Mobile electronics 39,696 21.5 51,090 17.2
Consumer electronics 15,993 8.7 16,495 5.6
Sound 15,206 8.3 12,544 4.2
Other 383 0.2 127 --
-------- ------- -------- -------
Total Electronics 71,278 38.7 80,256 27.0
-------- ------- -------- -------
Total $184,269 100.0% $296,818 100.0%
======== ======= ======== =======
Net sales for the three months ended February 28, 2003 were $296,818, a
61.1% increase from net sales of $184,269 from 2002. Wireless Group sales were
$216,562 for the three months ended February 28, 2003, a 91.7% increase from
sales of $112,991 in 2002. Unit sales of wireless handsets increased 44.5% to
approximately 1,191,000 units for the three months ended February 28, 2003 from
approximately 824,000 units in 2002. In addition, the average selling price of
the Company's handsets increased to $171 per unit for the three months ended
February 28, 2003 from $119 per unit in 2002 as a result of new product
introductions. Wireless sales were impacted in 2002 by late introductions of new
products by its vendor, delays in acceptances testing by our customers and
slower growth in the wireless industry. This situation did not recur for the
three months ended February 28, 2003.
Electronics Group sales were $80,256 for the three months ended February
28, 2003, a 12.6% increase from sales of $71,278 in 2002. This increase was
largely due to increased sales in the mobile video and consumer electronics
product lines. Offsetting some of this increase was a decline in sound sales,
which continue to decline given the change in the marketplace as fully-featured
sound systems are being incorporated into vehicles at the factory rather than
being sold in the
29
aftermarket. This declining trend in sound systems is expected to continue
except in the satellite radio product line. Sales by the Company's international
subsidiaries decreased 58.4% for the three months ended February 28, 2003 to
approximately $2,396 due to a 97.4% decrease in Venezuela due to the temporary
shut-down of the operations attributable to political and economic instability
and a 25.0% decrease in Malaysia as a result of lower OEM sales.
Gross profit margin for the three months ended February 28, 2003 was 8.6%,
compared to 7.4% in 2002. This increase in profit margin resulted primarily from
lower inventory write-downs to market for the three months ended February 28,
2003. Specifically, inventory write-downs were $0 in 2003 compared to $1,040 in
2002. Consolidated gross margins were also adversely impacted by increased sales
incentives, principally in the Wireless Group. Trends will be discussed in
further detail in each individual marketing group MD&A discussion. There was
also a change in the mix in Wireless product sales to newer models, which carry
a higher gross margin. Wireless margins were impacted by late product
introductions by its suppliers in 2002, a situation that did not repeat in 2003.
New product historically is sold at a higher gross margin. This trend continues
to have a major effect on the gross margins of the Wireless Group. Margins for
the Electronics Group remained unchanged at 16.9%.
Operating expenses increased $2,061 to $21,007 for the three months ended
February 28, 2003, compared to $18,946 in 2002. As a percentage of net sales,
operating expenses decreased to 7.1% for the three months ended February 28,
2003 from 10.3% in 2002. Major components of the increase in operating expenses
were salaries due to Code Systems, Inc. and increased insurance and advertising
expenses, particularly with general liability insurance of $372. This increase
in operating expenses was partially offset by reductions in other expenses.
Operating income for the three months ended February 28, 2003 was $4,461,
compared to operating loss of $5,223 in 2002.
Net income for the three months ended February 28, 2003 was $1,208 compared
to net loss of $5,257 in 2002. Earnings per share for the three months ended
February 28, 2003 was $0.06, basic and $0.05 diluted compared to loss per share
of $0.24 for fiscal 2002, basic and diluted (as restated).
30
Wireless Results
The following table sets forth for the periods indicated certain statements
of operations data for Wireless expressed as a percentage of net sales:
Three Months Ended
February 28, 2002 February 28, 2003
(As Restated)
--------------------------- -----------------------
Net sales:
Wireless products $ 105,009 92.9% $ 210,574 97.3%
Activation commissions 7,270 6.4 5,228 2.4
Residual fees 658 0.6 540 0.2
Other 54 0.1 220 0.1
--------- ------ ---------- -------
Total net sales 112,991 100.0 216,562 100.0
Gross profit 1,613 1.4 11,818 5.5
Operating expenses
Selling 2,740 2.4 2,663 1.2
General and administrative 3,401 3.0 4,330 2.0
Warehousing and technical support 616 0.6 714 0.3
--------- ------ ---------- -------
Total operating expenses 6,757 6.0 7,707 3.6
--------- ------ ---------- -------
Operating income (loss) (5,144) (4.6) 4,111 1.9
Other expense (1,563) (1.4) (861) (0.4)
--------- ------ ---------- -------
Pre-tax income (loss) $ (6,707) (5.9)% $ 3,250 1.5 %
========= ====== ========== =======
Net sales were $216,562 for the three months ended February 28, 2003, an
increase of $103,571, or 91.7%, from 2002. Unit sales of wireless handsets
increased by 367,000 units for the three months ended February 28, 2003, or
44.5%, to approximately 1,191,000 units from 824,000 units in 2002. This
increase was attributable to increased sales of digital handsets for new product
introductions which were delayed in 2002, in addition to 2002 late acceptances
by our customers and lower demand for wireless products, a situation that did
not repeat in 2003. During 2003, we began selling a new digital model with a
color LCD. In addition, there was a $3,862 increase in sales incentives compared
to 2002. These programs are expected to continue and will either increase or
decrease based upon competition and customer and market requirements. The
average selling price of handsets increased to $171 per unit for the three
months ended February 28, 2003 from $122 per unit in 2002. This increase was due
to higher selling prices of the newly-introduced digital products. Gross profit
margins increased to 5.5% for the three months ended February 28, 2003 from 1.4%
in 2002, primarily due to the sales of new, higher margin products and lower
inventory write-downs. Inventory write-downs were $0 for the three months ended
February 28, 2003 compared to $1,040 in 2002. These write-downs were based upon
open purchase orders from customers and selling
31
prices subsequent to the balance sheet date as well as indications from our
customers based upon current negotiations. At November 30, 2002, the Company had
on hand 134,270 units of certain phone models, which, after write-down, were
valued at $40,859. As of February 28, 2003, 28,158 of these previously
written-down units remained in inventory which were valued at $7,298. The
Company expects that, due to market conditions and customer concentration, it
could experience additional write-downs in the future. Gross margins were
further impacted by reimbursement from a vendor for software upgrades performed
on inventory sold of $193 and $49 for the three months ended February 28, 2002
and 2003, respectively. Without this reimbursement, gross margins would have
been lower by 0.17% and 0.02% for the three months ended February 28, 2002 and
2003, respectively. The Company has an agreement with its vendor for additional
future price protection with respect to specific inventory items if needed.
During three months ended February 28, 2003, there was an increase of $3,862 in
sales incentives expense as a result of new product introductions, new market
areas for product sales and additional promotion of existing products, net of
reversals of $163, due to changes in the estimated amount due under accrued
sales incentive programs.
The Company expects, due to market conditions and customer concentration,
it could experience additional sales incentives expense in the future.
Operating expenses increased $950 for the three months ended February 28,
2003 from 2002. As a percentage of net sales, however, operating expenses
decreased to 3.6% during three months ended February 28, 2003 compared to 6.0%
in 2002. Selling expenses decreased $77 for the three months ended February 28,
2003 compared to 2002, primarily in commissions of $170, due to a reduction of
commissions paid to distributors in Mexico compared to last year. Travel and
entertainment decreased $78 due to fewer trade shows during the quarter. These
decreases were partially offset by increases in advertising and trade show
expense of $93 primarily due to increased sales promotions and an increase of
$65 in salesmen salaries from the hiring of additional salesmen in Quintex to
support additional sales programs. General and administrative expenses increased
$929 for the three months ended February 28, 2003 from 2002, primarily in
salaries of $185 due to increased bonus provision and new executive compensation
contract, insurance expense of $209 due to increased insurance premiums for
general liability and umbrella coverage, bad debt expense of $141 primarily due
to a customer who filed for bankruptcy. The Company does not consider this a
trend in the overall accounts receivable. Employee benefits increased $168 due
to increased costs under the health care plan and licensing of $126 due to a
2002 refund to battery recycling charges of $84 that did not repeat in 2003 and
an increase in the cost of CTIA Certification of telephones. Warehousing and
technical support expenses increased $98 for the three months ended February 28,
2003 from 2002, primarily in direct labor, payroll taxes and benefits of $204
due to additional employees for product testing and bonus accruals. This
increase was partially offset by decreases in travel of $41 due to less travel
by engineers and a decrease in the costs of buying offices of $65 as a result of
lower product purchases. Pre-tax income for the three months ended February 28,
2003 was $3,250, compared to pre-tax loss of $6,707 for fiscal 2002.
Management believes that the wireless industry is extremely competitive and
that this competition could affect gross margins and the carrying value of
inventories in the future as new competitors enter the marketplace. This
pressure from increased competition is further enhanced
32
by the consolidation of many of Wireless' customers into a smaller group,
dominated by only a few, large customers. Also, timely delivery and carrier
acceptance of new product could affect our quarterly performance. Our suppliers
have to continually add new products in order for Wireless to improve its
margins and gain market share. These new products require extensive testing and
software development which could delay entry into the market and affect our
sales in the future. In addition, given the anticipated emergence of new
technologies in the wireless industry, the Company will need to sell existing
inventory quantities of current technologies to avoid further write-downs to
market.
Electronics Results
The following table sets forth for the periods indicated certain statements
of income data for the Electronics Group expressed as a percentage of net sales:
Three Months Ended
February 28, 2002 February 28, 2003
------------------------- -------------------------
(As Restated)
Net sales:
Mobile electronics $ 39,696 55.7% $ 51,090 63.7%
Consumer electronics 15,993 22.4 16,495 20.6
Sound 15,206 21.3 12,544 15.6
Other 383 0.6 127 0.1
-------- ------ --------- ------
Total net sales 71,278 100.0 80,256 100.0
Gross profit 12,016 16.9 13,599 16.9
Operating expenses
Selling 3,349 4.7 3,800 4.7
General and administrative 5,322 7.5 5,795 7.2
Warehousing and technical support 483 0.7 642 0.8
-------- ------ --------- ------
Total operating expenses 9,154 12.8 10,237 12.7
-------- ------ --------- ------
Operating income 2,862 4.0 3,362 4.2
Other expense (1,518) (2.1) (872) (1.1)
-------- ------ --------- ------
Pre-tax income $ 1,344 1.9% $ 2,490 3.1%
======== ====== ========= ======
Net sales were $80,256 for the three months ended February 28, 2003, a
12.6% increase from net sales of $71,278 in 2002. Mobile and consumer
electronics' sales increased over last year, partially offset by a decrease in
sound and other. Mobile electronics increased $11,394 (28.7%) during 2003 from
2002. Sales of mobile video within the mobile electronics category increased
over 23.5% % for the three months ended February 28, 2003 from 2002. Consumer
electronics increased
33
$502 (3.1%) to $16,495 for the three months ended February 28, 2003 from $15,993
in 2002, primarily in sales of video-in-a-bag and portable DVD players. These
increases were partially offset by a decrease in the sound category of $2,662
(17.5%). Given the change in the marketplace, fully- featured sound systems are
being incorporated into vehicles at the factory rather than being sold in the
aftermarket. This declining trend in sound systems is expected to continue
except in the satellite radio product line. There was also an increase in sales
incentives of $619. Net sales in the Company's Malaysian subsidiary decreased
from last year by approximately $ 719 primarily from lower OEM business. The
Company's Venezuelan subsidiary experienced a decrease of $ 2,687 in sales from
last year, due to the temporary closing of the offices due to the impact of
economic and political instability in the country.
Gross profit margins remained unchanged at 16.9% for the three months ended
February 28, 2003, compared to 16.9% for 2002. The gross margin decreased in
Sound, offset by an increase in Mobile Electronics and international operations.
Also affecting margins was the integration of Code into the Electronics Group
during the second quarter of 2002. Code's gross margins (13.0%) were
significantly lower than other product lines in the Electronics Group. Lower
margins from Code were offset by higher margins in consumer and mobile
electronics. During the three months ended February 28, 2003, there was an
increase in sales incentives expense of $619, net of reversals of $731, due to
changes in the estimated amount due under accrued sales incentive programs.
Operating expenses increased $1,083 for the three months ended February 28,
2003, an 11.8% increase from operating expenses in 2002. As a percentage of net
sales, operating expenses decreased to 12.7% during three months ended February
28, 2003 compared to 12.8% in 2002. Selling expenses increased $451 during three
months ended February 28, 2003, primarily in commissions of $27 due to an
increase of $164 from Code Systems, which was offset by a $137 decrease in
commissionable sales in the video and consumer goods product categories, which
have a different commission rate structure, salaries of $254 primarily due to
$210 from Code and general increases in other areas, travel and entertainment of
$48 due to an increase of $60 from Code. These increases were partially offset
by a decrease in advertising and trade show expense of $47 due to less
advertising by the Company's international branches. General and administrative
expenses increased $473 from 2002, mostly in salaries of $464, $221 due to Code,
travel and entertainment of $66, $38 due to Code, office expenses of $50, $33
due to Code, insurance expense of $103 due to higher premiums on general
liability and Ocean Cargo as shipments and sales have increased, occupancy costs
of $69, $45 due to Code. These increases were partially offset by decreases in
professional fees of $470 due to a patent infringement fee of $497 during 2002
that did not recur in 2003 and a reduction in bad debt expense of $335 primarily
due to a 2002 customer write-off due to bankruptcy that did not recur. There was
also an increase in the corporate allocation of $166 for additional corporate
services. Warehousing and technical support increased $159 for the three months
ended February 28, 2003 from 2002, primarily in direct labor, payroll taxes and
benefits of $85 due increased headcount. There was also an increase in overseas
buying office expenses of $62 as a result of increased purchases. Pre-tax income
for the three months ended February 28, 2003 was $2,490, compared to $1,344 for
2002.
34
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 and general economic conditions. Also, all of its products are
subject to price fluctuations which could affect the carrying value of
inventories and gross margins in the future.
Other Income and Expense
Interest expense and bank charges increased $142 during three months ended
February 28, 2003 from three months ended February 28, 2002, primarily due to
interest paid on a state tax settlement.
Equity in income of equity investees increased by approximately $67 for the
three months ended February 28, 2003 compared to three months ended February 28,
2002. The majority of the increase was due to an increase in the equity income
of ASA due to increased sales and improvement in gross margins. Other expenses
decreased during 2003 compared to 2002. The foreign exchange losses were $795
for the three months ended February 28, 2003 and $1,910 three months ended
February 28, 2002. This decrease was due to the devaluation of 14% in 2003
versus 40% in 2002. During the first quarter of 2003, Venezuela fixed the
exchange rate of the Bolivar with the U.S. Dollar at 1,6000 Bolivars per Dollar
during the first quarter of 2003. We also had an increase in minority interest
expense of $937, primarily due to the effect of Toshiba's increased ownership in
ACC and profitable operations.
Provision for Income Taxes
The effective tax (recovery) rate for the three months ended February 28,
2003, was 39.6% compared to last year's (19.9)% for the comparable period.
During the quarter ended February 28, 2003, the valuation allowance relating to
the Wireless segment was reduced and the Company's mix of foreign and domestic
earnings resulted in a net increase in the Company's annual effective tax rate
for the period.
Liquidity and Capital Resources
The Company has historically financed its operations primarily through a
combination of available borrowings under bank lines of credit and debt and
equity offerings. As of February 28, 2003, the Company had working capital
(defined as current assets less current liabilities) of $292,986, which includes
cash of $43,133 compared with working capital of $292,687 at November 30, 2002,
which included cash of $2,758. Operating activities provided approximately
$77,181, primarily from collections of accounts receivable and receivable from
vendor and decreases in inventory, partially offset by decreases in accounts
payable and accrued expenses. Investing activities provided approximately $163,
primarily from the sale of property, plant and equipment, partially offset by
purchases of property, plant and equipment. Financing activities used
35
approximately $36,964, primarily from repayments of bank obligations.
The Company's principal source of liquidity is its revolving credit
agreement which expires July 27, 2004. The credit agreement provides for
$200,000 of available credit, including $15,000 for foreign currency borrowings.
The continued availability of this financing is dependent upon the Company's
operating results which would be negatively impacted by a decrease in demand for
the Company's products. The Company anticipates reducing its credit availability
from $200,000 to $175,000 as a result of the Company's working capital position
and current anticipated borrowing requirements.
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 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 $200,000, 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. In addition, the Company guarantees the borrowings of one of
its equity investees at a maximum of $300.
The credit agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net worth.
Additionally, the agreement includes restrictions and limitations on payments of
dividends, stock repurchases and capital expenditures.
At November 30, 2002, the Company was not in compliance with certain of its
pre-tax income covenants. Furthermore, as of November 30, 2002, the Company was
also not in compliance with the requirement to deliver audited financial
statements 90 days after the Company's fiscal year- end, and as of February 28,
2003, the requirement to deliver unaudited quarterly financial statements 45
days after the Company's quarter end.
The Company has not received waivers for the November 30, 2002 violation of
a particular pre-tax income covenant or delivery of audited financial statements
90 days after the Company's fiscal year-end or delivery of unaudited quarterly
financial statements 45 days after the quarter-end. Accordingly, the Company's
outstanding domestic obligation as of November 30, 2002 of $36,883, has been
classified as current on the accompanying consolidated financial statements.
Subsequent to November 30, 2002, the Company repaid its obligation of $36,883 in
full resulting in domestic bank obligations outstanding at February 28, 2003 of
$0. Management is in the process of requesting a waiver for the November 30,
2002 and February 28, 2003 violations. While the Company has historically been
able to obtain waivers for such violations, there can be no assurance that
future negotiations with its lenders would be successful or that the Company
will not violate covenants in the future, therefore, resulting in amounts
outstanding to be payable upon demand. This credit agreement has no cross
covenants with other credit facilities described below.
The Company also has revolving credit facilities in Malaysia to finance
additional working capital needs. The Malaysian credit facility is partially
secured by the Company under three standby
36
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 Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At February 28,
2003, such obligations and commitments are as follows:
Payments Due By Period
-----------------------------------------------------------------------------------
Contractual Cash Less than After
Obligations Total 1 Year 1-3 Years 4-5 Years 5 years
- ------------------------ ------- -------- --------- --------- -------
Capital lease obligations $ 14 068 $ 554 $ 1,671 $ 1,158 $10,685
Operating leases 9,119 2,442 4,665 1,693 319
------- ------- ------- ------- -------
Total contractual cash $23,187 $ 2,996 $ 6,336 $ 2,851 $11,004
obligations ======== ======= ======= ======= ========
Amount of Commitment
Expiration per period
--------------------------------------------------------------------------------------
Total
Other Commercial Amounts Less than Over
Commitments Committed 1 Year 1-3 Years 4-5 Years 5 years
----------- --------- -------- --------- --------- -------
Lines of credit $3,291 $3,291 -- -- --
Standby letters of credit 3,055 3,055 -- -- --
Guarantees 300 300 -- -- --
Commercial letters of
credit 2,683 2,683 -- -- --
------- ------- ---- ---- ----
Total commercial
commitments $9,329 $9,329 -- -- --
======= ======= ==== ==== ====
The Company has guaranteed, through August 31, 2003, the borrowings of one
of its 50%- owned equity investees (GLM) at a maximum of $300. During the
quarter ended February 28, 2003, the Company adopted FIN 45, "Guarantors
Accounting and Disclosure Requirements for Guarantors, Including Guarantees of
Indebtedness of Others" (FIN 45). In accordance with FIN 45, the Company has not
issued or modified this guarantee after December 31, 2002. Accordingly, this
guarantee has not been reflected on the accompanying consolidated financial
statements.
The Company regularly reviews its cash funding requirements and attempts to
meet those requirements through a combination of cash on hand, cash provided by
operations, available borrowings under bank lines of credit and possible future
public or private debt and/or equity offerings. At times, the Company evaluates
possible acquisitions of, or investments in, businesses
37
that are complementary to those of the Company, which transaction may requires
the use of cash. The Company believes that its cash, other liquid assets,
operating cash flows, credit arrangements, access to equity capital markets,
taken together, provide adequate resources to fund ongoing operating
expenditures. In the event that they do not, the Company may require additional
funds in the future to support its working capital requirements or for other
purposes and may seek to raise such additional funds through the sale of public
or private equity and/or debt financings as well as from other sources. No
assurance can be given that additional financing will be available in the future
or that if available, such financing will be obtainable on terms favorable to
the Company when required.
In February 2003, the Company entered into an agreement to buy a building
for expansion purposes for $3,480, made a deposit of $348 and expects to close
in the very near term.
In May 2003, the Company entered into an asset purchase agreement to buy
certain audio assets of Recoton Corporation. In accordance with the agreement,
the Company made a deposit of $2,000, which is currently being held in escrow.
Final approval of this purchase was obtained on June 3, 2003 from a bankruptcy
court. This purchase amounts to approximately $40,000 plus the assumption of
$5,000 in debt, not including related acquisition costs. The Company anticipates
using its existing cash and available financing to fund this acquisition.
Related Party Transactions
The Company has entered into several related party transactions which are
described below.
Leasing Transactions
During 1998, the Company entered into a 30-year capital lease for a
building with its principal stockholder and chief executive officer, which is
the headquarters of the Wireless operation. Payments on the lease were based
upon the construction costs of the building and the then-current interest rates.
The effective interest rate on the capital lease obligation is 8%. In connection
with the capital lease, the Company paid certain costs on behalf of its
principal stockholder and chief executive officer in the amount of $1,301. The
advance does not have a specified due date or interest rate. During 2001 and
2002, the entire balance of $1,301 was repaid to the Company.
During 1998, the Company entered into a sale/leaseback transaction with its
principal stockholder and chief executive officer for $2,100 of equipment, which
has been classified as an operating lease. The lease is a five-year lease with
monthly payments of $34. No gain or loss was recorded on the transaction as the
book value of the equipment equaled the fair market value.
The Company also leases certain facilities from its principal stockholder.
Rentals for such leases are considered by management of the Company to
approximate prevailing market rates. Total
38
lease payments required under the leases for the five-year period ending
February 28, 2008 are $2,795.
Amounts Due from Officers
A note due from an officer/director of the Company, which bore interest at
the LIBOR rate, to be adjusted quarterly, plus 1.25% per annum, was paid in full
during fiscal 2002. In addition, the Company has outstanding notes due from
various officers of the Company aggregating $235 as of November 30, 2002, which
have been included in prepaid expenses and other current assets on the
accompanying consolidated balance sheet. The notes bear interest at the LIBOR
rate plus 0.5% per annum. Principal and interest are payable in equal annual
installments beginning July 1, 1999 through July 1, 2003. In accordance with the
Sarbanes-Oxley Act of 2002, the Company will not alter the terms of the notes
and all amounts will be repaid in full in July 2003. In addition, no new notes
with officers or directors of the Company will be entered into.
Transactions with Toshiba
Inventory on hand at November 30, 2002 and February 28, 2003 purchased from
Toshiba Corporation (Toshiba), the 25% minority shareholder of ACC and major
supplier to ACC, approximated $138,467 and $67,041, respectively. As of November
30, 2002, the Company recorded receivables from Toshiba aggregating
approximately $12,219 for price protection and software upgrades. These amounts
were paid in full during the first quarter of 2003.
At November 30, 2002, the Company had on hand 504,020 units in the amount
of $91,226, which were purchased from Toshiba and have been recorded in
inventory and accounts payable on the accompanying consolidated balance sheet.
Of this accounts payable $56,417 was subject to an arrangement with Toshiba,
which provides for, among other things, extended payment terms. This arrangement
has since been modified in an effort to enhance the Company's relationship with
Toshiba. The payment terms are such that the payable is non-interest bearing.
The balance of $91,226 accounts payable is payable in accordance with the terms
established in the distribution agreement, which is 30 days. During the first
quarter of 2003, the Company paid this amount in full. At February 28, 2003, the
Company had $9,498 of inventory which was purchased from Toshiba and has been
recorded in inventory and accounts payable on the accompanying consolidated
balance sheet. Under the above arrangement, the Company is entitled to receive
price protection in the event the selling price to its customers is less than
the purchase price from Toshiba. The Company will record such price protection,
if necessary, at the time of the sale of the units. At November 30, 2002, the
Company had $4,960 in price protection which has been reflected as a reduction
to inventory. During the first quarter of 2003, $3,560 was recorded as a
reduction to cost of sales as related inventory was sold. The remaining $1,400
in price protection has been reflected as a reduction to the remaining inventory
cost at February 28, 2003.
39
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (Statement 143). Statement 143 is effective for fiscal
years beginning after June 15, 2002, and this will be adopted by the Company on
December 1, 2002 (fiscal 2003) and establishes an accounting standard requiring
the recording of the fair value of liabilities associated with the retirement of
long-lived assets in the period in which they are incurred. The adoption of
Statement 143 did not have any impact on its results of operations or its
financial position as the Company had no asset retirement obligations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long- Lived Assets" (Statement 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", while retaining
the fundamental recognition and measurement provisions of that statement.
Statement No. 144 requires that a long-lived asset to be abandoned, exchanged
for a similar productive asset or distributed to owners in a spin-off to be
considered held and used until it is disposed of. However, Statement No. 144
requires that management consider revising the depreciable life of such
long-lived asset. With respect to long-lived assets to be disposed of by sale,
Statement No. 144 retains the provisions of Statement No. 121 and, therefore,
requires that discontinued operations no longer be measured on a net realizable
value basis and that future operating losses associated with such discontinued
operations no longer be recognized before they occur. Statement No. 144 is
effective for all fiscal quarters of fiscal years beginning after December 15,
2001. The Company has determined that the effect of the adoption of Statement
No. 144 did not have a material effect on the Company's consolidated financial
statements.
In April 2002, the FASB issued SFAS 145 "Rescission of SFAS Statements No.
4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections" (Statement
145). Statement 145, as it pertains to the recission of Statement 4, is
effective for fiscal years beginning after May 15, 2002 and is effective for
transactions occurring after May 15, 2002 as it relates to Statement 13. This
Statement updates, clarifies and simplifies existing accounting pronouncements
by rescinding Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. Adoption of
this statement had no material impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally provided by SFAS
No. 123, "Accounting for Stock-Based Compensation". Additionally, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on
reported results. The transitional requirements of SFAS No. 148 will be
effective for all financial statements for fiscal
40
years ending after December 15, 2002. The disclosure requirements shall be
effective for financial reports containing condensed financial statements for
interim periods beginning after December 31, 2002. The Company will adopt the
disclosure portion of this statement for the fiscal quarter ending May 31, 2003,
as required. The application of this standard will have no impact on the
Company's consolidated financial position or results of operations.
In February 2003, the EITF issued EITF Issue 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor", which was adopted by the Company during the quarter ended February 28,
2003. This EITF provides guidance on the income statement classification of
amounts received by a customer, including a reseller and guidance regarding
timing of recognition for volume rebates. Adoption of this new standard, which
was applied prospectively by the Company for new arrangements, including
modifications of existing arrangements, entered into after December 31, 2002,
did not have a material impact on the Company's consolidated financial position
or results of operations.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantors, Including
Guarantees of Indebtedness of Others". FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company adopted
FIN 45 during the quarter ended February 28, 2003. The adoption of FIN 45 did
not have a material effect on the Company's consolidated financial position or
results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51".
FIN 46 addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim period beginning
after June 15, 2003. Accordingly, the Company will adopt this provision of FIN
46 during the quarter ended November 30, 2003. The adoption of FIN46 is being
evaluated to determine what impact, if any, the adoption of the provisions will
have on the Company's financial condition or results of operations.
Forward-Looking Statements
Except for historical information contained herein, statements made in this
release that would constitute forward-looking statements may involve certain
risks such as our ability to keep pace with technological advances, significant
competition in the wireless, mobile and consumer electronics
41
businesses, quality and consumer acceptance of newly-introduced products, our
relationships with key suppliers and customers, market volatility,
non-availability of product, excess inventory, price and product competition,
new product introductions, the uncertain economic and political climate in the
United States and throughout the rest of the world and the potential that such
climate may deteriorate further and other risks detailed in the Company's Form
10-K for the fiscal year ended November 30, 2002 and the Form 10-Q for the first
quarter ended February 28, 2002. These factors, among others, may cause actual
results to differ materially from the results suggested in the 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, availability and price volatility due to
market conditions
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports were filed on Form 8-K during the quarter ended February 28,
2003.
42
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: June 5, 2003
By:s/Charles M. Stoehr
-------------------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
43
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, John J. Shalam, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Audiovox Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d- 14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and,
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial date and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
44
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 5, 2003
s/John J. Shalam
- --------------------------------------------
John J. Shalam,
Chief Executive Officer
45
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Charles M. Stoehr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Audiovox Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d- 14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and,
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial date and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
46
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 5, 2003
s/Charles M. Stoehr
Charles M. Stoehr
Chief Financial Officer
47
CERTIFICATION PURSUANT TO 18U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the period ended
February 28, 2003 (the "Report") of Audiovox Corporation (the "Company"), as
filed with the Securities and Exchange Commission on the date hereof, I, John J.
Shalam, the Chief Executive Officer of the Company certify, to the best of my
knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
s/John J. Shalam
John J. Shalam
President and Chief Executive Officer
June 5, 2003
Exhibit 99.1
CERTIFICATION PURSUANT TO 18U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the period ended
February 28, 2003 (the "Report") of Audiovox Corporation (the "Company"), as
filed with the Securities and Exchange Commission on the date hereof, I, Charles
M. Stoehr, the Chief Financial Officer of the Company certify, to the best of my
knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
s/Charles M. Stoehr
Charles M. Stoehr
Chief Financial Officer
June 5, 2003
Exhibit 99.1