UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended November 30, 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 Number)
150 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 231-7750
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of each class: Which Registered
Class A Common Stock $.01 par value Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act:
None
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
requirement for the past 90 days.
Yes X No
----------- ----------
Indicate by check mark whether Registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2).
Yes X No
----------- ----------
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (sec 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
--------
The aggregate market value of the common stock held by non-affiliates of the
Registrant was $159,259,586 (based upon closing price on the Nasdaq Stock Market
on May 30, 2003).
The number of shares outstanding of each of the registrant's classes of common
stock, as of February 20, 2004 was:
Class Outstanding
Class A common stock $.01 par value 20,741,338
Class B common stock $.01 par value 2,260,954
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Proxy Statement relating to its 2004 Annual
Stockholders Meeting, to be filed subsequently-Part III.
2
Table of Contents
PART I .........................................................................................................4
Item 1 - Business........................................................................................4
Item 2 - Properties.....................................................................................26
Item 3 - Legal Proceedings..............................................................................26
Item 4 - Submission of Matters to a Vote of Security Holders............................................27
PART II ........................................................................................................27
Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters......................27
Item 6 - Selected Consolidated Financial Data...........................................................29
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations..........31
Item 7a - Quantitative and Qualitative Disclosures About Market Risk....................................69
Item 8 - Consolidated Financial Statements and Supplementary Data.......................................69
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........140
Item 9a - Controls and Procedures......................................................................141
PART III .......................................................................................................141
Item 10 - Directors and Executive Officers of the Registrant...........................................141
Item 11 - Executive Compensation.......................................................................142
Item 12 - Security Ownership of Certain Beneficial Owners and Management...............................142
Item 13 - Certain Relationships and Related Transactions...............................................142
Item 14 - Principal Accountant Fees and Services.......................................................142
PART IV .......................................................................................................142
Item 15 - Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K.................142
SIGNATURES......................................................................................................148
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PART I
Item 1 - Business
All tabular presentation is in thousands unless otherwise indicated.
(a) Restatement of Consolidated Financial Statements
Audiovox Corporation (Audiovox or the Company) has previously restated its
consolidated financial statements for the fiscal years ended November 30, 2000
and 2001 and for the fiscal quarters during the year ended November 30, 2001 and
the fiscal 2002 quarters ended February 28, 2002, May 31, 2002 and August 31,
2002. In addition, the Company previously reclassified certain expenses from
operating expenses to cost of sales for fiscal 2001 and for each of the quarters
in the nine months ended August 31, 2002. Please refer to the Company's
previously filed Form 10-K for the year ended November 30, 2002 for details.
(b) General Development of Business
The Company was incorporated in Delaware on April 10, 1987, as successor to
a business founded in 1960 by John J. Shalam, our President, Chief Executive
Officer and controlling stockholder. Its principal executive offices are located
at 150 Marcus Boulevard, Hauppauge, New York 11788, and the telephone number is
631-231-7750.
On July 8, 2003, the Company, through a newly-formed, wholly-owned
subsidiary, acquired in cash (i) certain accounts receivable, inventory and
trademarks from the U.S. audio operations of Recoton Corporation (the "U.S.
audio business") or (Recoton) and (ii) the outstanding capital stock of Recoton
German Holdings GmbH (the "international audio business"), the parent holding
company of Recoton Corporation's Italian, German and Japanese subsidiaries, for
$40,046, net of cash acquired, including transaction costs of $1.9 million. The
primary reason for this transaction was to expand the product offerings of
Audiovox and to obtain certain long-standing trademarks such as Jensen(R),
Acoustic Research(R) and others. The Company also acquired an obligation with a
German financial institution as a result of the purchase of the common stock of
Recoton German Holdings GmbH.
The Company designs and markets a diverse line of products and provides
related services throughout the world. These products and services include:
o handsets and accessories for wireless communications
o mobile entertainment and security products
o mobile electronic products and accessories
o consumer electronic products and accessories
The Company markets its products under the well-recognized Audiovox(R)
brand name and others, such as Jensen(R), Magnate(R), Mac Audio(R), Heco(R),
Acoustic Research(R) and Advent(R), as well as private labels through a large
and diverse distribution network both domestically and internationally. The
Company was a pioneer in the wireless industry, selling its first
vehicle-installed wireless telephone in 1984 as a natural expansion of its
automotive aftermarket products business. The Company's extensive distribution
network and its long-standing industry relationships have allowed the Company
4
to benefit from growing market opportunities in the wireless industry and to
exploit emerging niches in the consumer electronics business.
The Company operates in two primary markets:
o Wireless communications. The Wireless Group (Wireless), which accounts
for approximately 61% of revenues in fiscal 2003, sells wireless
handsets and accessories through domestic and international wireless
carriers and their agents, independent distributors and retailers.
o Mobile and consumer electronics. The Electronics Group (Electronics),
which accounts for approximately 39% of revenues in fiscal 2003, sells
autosound, mobile electronics and consumer electronics through
domestic and international distribution channels primarily to mass
merchants, power retailers, specialty retailers, new car dealers,
original equipment manufacturers (OEMs), independent installers of
automotive accessories and the U.S. military.
Since 2001, several factors have affected the Wireless Group. New
subscriber subscriptions have slowed, the consolidation within our wireless
customer base has created a more competitive market with a smaller number of
customers and there has been a slow down in the development of new technologies
which have slowed consumer demand from one technology to another. In addition,
testing for acceptances have become more complex which have caused a slow down
in product introductions. However new technology, such as camera phones, is
expected to have a favorable impact on the Wireless Group.
The Electronics Group has been positively influenced by an increase in the
sale of consumer and mobile electronics. Specifically, sales for portable DVD
players, DVD in a bag products, satellite radios and flat panel screens have
increased due to higher customer demand. In addition, the recent acquisitions of
Recoton trademarks (Jensen(R), Magnate(R), Mac Audio(R), Heco(R), Acoustic
Research(R) and Advent(R)) and Code-Alarm have contributed to the increase in
Electronic Group sales (see Note 6 to the consolidated financial statements) .
The following table shows net sales by group:
Percent
Change
2001 (1) 2002 2003 2001/2003
------- ------ ------ ----------
Wireless $ 979 $ 727 $ 806 (17.7)%
Electronics 298 373 518 73.8 %
------ ------ ------ -------
Total $1,277 $1,100 $1,324 3.7 %
====== ====== ====== =======
(1) See Note (2) of Notes to Consolidated Financial Statements.
To remain flexible and limit our research and fixed costs, the Company does
not manufacture its products. Instead, the Company has relationships with a
broad group of suppliers who manufacture its products. The Company works
directly with its suppliers in feature design, development and testing of all
5
of its products and performs certain software installations or upgrades for
wireless products and some assembly functions for its electronics products.
The Company's product development efforts focus on meeting changing
consumer demand for technologically-advanced, high-quality products, and the
Company consults with customers throughout the design and development process.
The Company stands behind all of its products by providing warranties and
end-user service support.
Strategy
The Company's objective is to leverage the well-recognized Audiovox(R)
brand name, which now includes Jensen(R), Acoustic Research(R) and Advent(R),
and its extensive international distribution network to capitalize on the
growing worldwide demand for wireless products and continue to provide
innovative mobile and consumer electronics products in response to consumer
demand. The key elements of the Company's strategy are:
Increase market penetration by enhancing and capitalizing on the
Audiovox(R) brand name. The Company believes that the "Audiovox(R)" brand
name, which includes Prestige(R), Pursuit(R), Rampage(TM), Jensen(R),
Magnate(R), Mac Audio(R), Heco(R), Acoustic Research(R) and Advent(R), is
one of its greatest strengths. During the past 43 years, the Company has
invested to establish the Audiovox(R) name as a well-known consumer brand
for wireless and electronics products. The Company's wireless handsets
generally bear the Audiovox(R) brand name or are co-branded with either a
wireless carrier or brand name of its supplier. To further benefit from the
Audiovox(R) name, the Company continues to introduce new products using its
brand name and licenses its brand name for selected consumer products.
Expand wireless technology offerings to increase market opportunities. The
Company intends to continue to offer an array of technologically-advanced
wireless products, including the planned introduction of wireless handsets
with video, cameras and enhanced Internet capabilities. The Company's wide
selection of wireless products will allow it to satisfy different carrier
demands, both domestically and internationally.
Capitalize on niche market opportunities in the electronics industry. The
Company intends to continue to use its extensive distribution and supply
networks to capitalize on niche market opportunities, such as navigation,
mobile video, satellite radio, DVD's, flat panel TV's, and vehicle tracking
systems, in the electronics industry. The Company believes that focusing on
high-demand, high-growth niche products results in better profit margins
and growth potential for its electronics business.
Continue to maintain an international presence. During fiscal 2003, the
Company expanded its international presence with its acquisition of
Recoton's European assets, and the Company intends to expand its
international business, both in the Wireless and Electronics Groups. The
Company plans to introduce new products compatible with international
wireless technologies, such as GSM (Global System for Mobile
Communications), CDMA (Code Division Multiple Access) and GPRS (General
Packet Radio Services) and expand the mobile electronics category.
6
Continue to outsource manufacturing to increase operating leverage. One of
the key components of the Company's business strategy is outsourcing the
manufacturing of its products. This allows the Company to deliver the
latest technological advances without the fixed costs associated with
manufacturing.
Continue to provide value-added services to customers and suppliers. The
Company believes that it provides key services, such as product design,
development and testing, sales support, product repair and warranty and
software upgrading, more efficiently than its customers and suppliers could
provide for themselves. The Company intends to continue to develop its
value- added services as the market evolves and customer needs change.
(c) Financial Information About Industry Segments
The Company's industry segments are the Wireless Group and the Electronics
Group. Net sales, income (loss) before provision for (recovery of) income taxes,
net income (loss) and total assets attributable to each segment for each of the
last three fiscal years are set forth in Note 19 of the Company's consolidated
financial statements included herein.
(d) Narrative Description of Business
Wireless Group
Wireless, which accounts for approximately 61% of the Company's revenues in
fiscal 2003, markets wireless handsets and accessories through domestic and
international wireless carriers and their agents, independent distributors and
retailers.
Wireless products
Wireless sells an array of digital handsets, hand-held computing devices
and accessories in a variety of technologies, principally CDMA. Digital products
represented 99% of Wireless' 2003 total unit sales. Wireless generally markets
its wireless products under the Audiovox(R) brand name or co-brands its products
with its carrier customers, such as Verizon Wireless and Bell Distribution, Inc.
or with the brand name of the supplier.
In addition to handsets, Wireless sells a complete line of accessories that
includes batteries, hands-free kits, battery eliminators, cases and data cables.
In fiscal 2004, Wireless intends to continue to broaden its digital product
offerings and introduce handsets with new features such as wireless handsets
with video, cameras and enhanced Internet capabilities.
Wireless distribution and marketing
Wireless sells wireless products to wireless carriers and the carrier's
respective agents, distributors and retailers. In addition, a majority of its
handsets are designed to meet carrier specifications. In fiscal 2001, the five
largest wireless customers were Verizon Wireless, PrimeCo Personal
Communications LP, Sprint Spectrum LP, Bell Distribution Inc. and Brightpoint,
Inc. One of these customers accounted for 44.8% of Wireless' net sales and 35.0%
of consolidated net sales for fiscal 2001. In fiscal 2002, the five largest
7
wireless customers (Verizon Wireless, Bell Distribution, Inc., Sprint Spectrum
LP, Telus Mobility and AllTel Communications) represented 71% of Wireless' net
sales and 47% of consolidated net sales during fiscal 2002. Three of these
customers accounted for 36%, 11% and 10%, respectively, of Wireless' net sales
for fiscal 2002. In fiscal 2003, the five largest wireless customers (Verizon
Wireless, Bell Distribution, Inc., Virgin Mobile, Sprint Spectrum LP, and US
Cellular) represented 72% of Wireless' net sales and 44% of consolidated net
sales during fiscal 2003. Three of these customers accounted for 34%, 15% and
12%, respectively, of Wireless' net sales for fiscal 2003.
In addition, Wireless promotes its products through trade and consumer
advertising, participation at trade shows and direct personal contact by its
sales representatives. Wireless also assists wireless carriers with their
marketing campaigns by scripting telemarketing presentations, funding
co-operative advertising campaigns, developing and printing custom sales
literature, logistic services, conducting in-house training programs for
wireless carriers and their agents and providing assistance in market
development.
Wireless operates approximately six retail facilities under the name
Quintex. In addition, Wireless licenses the trade name Quintex(R) to ten outlets
in selected markets in the United States. Wireless also serves as an agent (in
activating cell phone numbers) for the following carriers in selected areas:
Tmobile, Nextel, Suncom, NTelos, AT & T Wireless, Verizon Wireless, Sprint and
Sprint Spectrum LP. For fiscal 2003, revenues from Quintex were 4.8% of total
Wireless revenues and 2.9% of consolidated revenues.
Wireless' policy is to ship its products within 24 hours of a requested
shipment date from public warehouses in Florida, New York, California , New
Jersey, Canada and the Netherlands and from leased facilities located in New
York and California.
Wireless product development, warranty and customer service
Although Wireless does not have its own manufacturing facilities, it works
closely with both customers and suppliers in feature design, development and
testing of its products. In particular, Wireless:
o with its wireless customers, determines future market feature
requirements
o works with its suppliers to develop products containing those features
o participates in the design of the features and cosmetics of its
wireless products
o tests products in its own facilities to ensure compliance with
Audiovox(R) standards
o supervises testing of the products in its carrier markets to ensure
compliance with carrier specifications
Wireless' Hauppauge facility is ISO-9001:2000 certified, which requires it
to carefully monitor quality standards in all facets of its business.
Wireless believes customer service is an important tool for enhancing its
brand name and its relationship with carriers. In order to provide full service
to its customers, Wireless warranties its wireless products to the end-user for
periods ranging from up to one year for portable handsets to up to three years
for mobile car phones. To support its warranties, Wireless has approximately
8
2,600 independent warranty centers throughout the United States and Canada and
has experienced technicians in its warranty repair stations at its headquarters
facility. Wireless has experienced customer service representatives who interact
directly with both end-users and its customers. These representatives are
trained to respond to questions on handset operation and warranty and repair
issues.
Wireless suppliers
Wireless purchases its wireless products from several manufacturers located
in Pacific Rim countries, including Japan, China, South Korea, Taiwan and
Malaysia. In selecting its suppliers, Wireless considers quality, price,
service, market conditions and reputation. Wireless generally purchases its
products under short-term purchase orders and does not enter into long-term
contracts with its suppliers. Wireless considers its relations with its
suppliers to be good. Wireless believes that alternative sources of supply are
currently available, although there could be a time lag and increased costs if
it were to have an unplanned shift to a new supplier which could have a material
impact on the Company. One wireless vendor accounted for approximately 83% of
Wireless' 2003 purchases. In addition, approximately 15% of Wireless' 2003
purchases were from Toshiba, a related party (see Related Party Transaction of
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.)
Wireless competition
The market for wireless handsets and accessories is highly competitive and
is characterized by intense price competition, significant price erosion over
the life of a product whose life cycle has continued to shorten, demand for
value-added services, rapid technological development and industry consolidation
of both customers and manufacturers. Currently, Wireless' primary competitors
for wireless handsets include Motorola, LG, Nokia, Kyocera and Samsung.
Wireless also competes with numerous established and new manufacturers and
distributors, some of whom sell the same or similar products directly to its
customers. Historically, Wireless' competitors have also included some of its
own suppliers and customers. Many of Wireless' competitors offer more extensive
advertising and promotional programs than it does.
Wireless competes for sales to carriers, agents and distributors on the
basis of its products and services and price. As its customers are requiring
greater value-added logistic services, Wireless believes that competition will
continually be required to support an infrastructure capable of providing these
services. Wireless' ability to continue to compete successfully will largely
depend on its ability to perform these value-added services at a reasonable
cost.
Wireless' products compete primarily on the basis of value in terms of
price, features and reliability. There have been, and will continue to be,
several periods of extreme price competition in the wireless industry,
particularly when one or more of its competitors has sought to sell off excess
inventory by lowering its prices significantly or carriers canceling or
modifying sales programs.
As a result of global competitive pressures, there have been significant
consolidations in the domestic wireless industry which has caused extreme price
competition. These consolidations may result in greater competition for a
smaller number of large customers and may favor one or more of its competitors
over Wireless.
9
Electronics Group
Electronics Industry
The mobile and consumer electronics industry is large and diverse and
encompasses a broad range of products. There are many large manufacturers in the
industry, such as Sony, RCA, Panasonic, Kenwood, Motorola, Samsung and JVC, as
well as other large companies that specialize in niche products. The Electronics
Group participates in selected niche markets such as autosound, mobile video,
vehicle security and selected consumer electronics.
The introduction of new products and technological advancements drives
growth in the electronics industry. Some of these products include digital
satellite radio, portable DVD, home and mobile video systems, flat panel TV's,
navigation systems, MP3 players and two-way radios.
Electronics products
The Company's electronics products consist of three major categories:
mobile electronics, sound and consumer electronics.
Mobile electronics products include:
o mobile video products, including overhead and mobile entertainment
systems, video cassette and DVD players
o automotive security and remote start systems
o automotive power accessories
o navigation systems
Sound products include:
o autosound products, such as radios, speakers, amplifiers, CD changers
and satellite radios
Consumer electronics include:
o home and portable stereos
o two-way radios
o LCD televisions
o DVD players
o MP3 players
o cordless telephones
The Electronics Group markets its products under the Audiovox(R) brand
name, as well as several other Audiovox-owned or usage right trade names that
include Prestige(R), Pursuit(R), Jensen(R), Acoustic Research(R), Advent(R),
Rampage(TM) and Code-Alarm. In addition, sales by the Company's Malaysian,
Venezuelan and American Radio subsidiaries fall under the Electronics Group. The
10
Electronics Group's sales by product category were as follows:
Percent
Change
2001 (1) 2002 2003 2001/2003
------- -------- -------- ---------
(millions)
Mobile electronics $ 157.7 $ 229.3 $ 294.5 86.7%
Sound 57.5 56.3 78.4 36.3
Consumer electronics 80.3 86.5 144.3 79.7
Other 2.2 0.6 0.5 (77.3)
------- -------- -------- ------
Total $ 297.7 $ 372.7 $ 517.7 73.9%
======== ======== ======== ======
(1) See Note (2) of Notes to Consolidated Financial Statements.
The increase in Electronic's sales reflects new product introductions in
the mobile and consumer electronics categories. In addition, sound sales have
increased as a result of the Recoton acquisition, offset by a continuing trend
in lower sales for full-featured sound systems as automakers are incorporating
these products at the factory instead of as an aftermarket option.
In the future, the Electronics Group will continue to focus its efforts on
new technologies to take advantage of market opportunities created by the
digital convergence of data, communications, navigation and entertainment
products.
Licensing
In the late 1990's, the Company began to license its brand name for use on
selected products, such as home and portable stereo systems. Actual sales of
licensed products are not included in the Company's reported net sales. However,
licensed customers have reported sales of $52.4 million in licensed goods in
2003 compared to $43.6 million in 2002 for which the Company received license
fees. License sales promote the Audiovox(R) brand name without adding any
significant costs. License fees are recognized on a per unit basis upon sale to
the end-user and are recorded in other income. License fees in fiscal 2003
approximated $1,116 compared to approximately $922 in fiscal 2002.
Electronics distribution and marketing
The Electronics Group sells its electronics products to:
o mass merchants
o chain stores
o specialty retailers
o distributors
o new car dealers
o the U.S. military
The Electronics Group also sells its products under OEM arrangements with
domestic and/or international subsidiaries of automobile manufacturers such as
11
Ford Corporation, Daimler Chrysler, General Motors Corporation and Nissan. OEM
projects accounted for approximately 10% of the Electronics Group's sales in
2003 versus 14.0% in 2002. These projects require a close partnership with the
customer as the Electronics Group develops products to their specific
requirements. Three of the largest auto makers, General Motors, Daimler Chrysler
and Ford require QS registration for all of their vendors. The Electronics
Group's Hauppauge facility is both QS 9000 and ISO 9001 registered. In addition,
Audiovox Electronics is Q1 rated for the Ford Motor Company.
In fiscal 2001, the Electronics Group's five largest customers (Wal-Mart,
Target, Ford, KMart and Circuit City) represented 27.0% of the Electronics
Group's net sales and 6.3% of consolidated net sales. In fiscal 2002, the
Electronics Group's five largest customers (Circuit City, Target, Walmart, Sam's
Wholesale Club and Gulf States Toyota) represented 25% of the Electronics
Group's net sales and 8% of the consolidated net sales. In fiscal 2003, the
Electronics Group's five largest customers (Target, Circuit City, Best Buy,
Costco Wholesale and Wal Mart) represented 34% of the Electronics Group's net
sales and 13% of consolidated net sales.
As part of the Electronics Group's sales process, the Electronics Group
provides value-added management services including:
o product design and development
o engineering and testing
o technical and sales support
o electronic data interchange (EDI)
o product repair services and warranty
o nationwide installation network
The Electronics Group has flexible shipping policies designed to meet
customer needs. In the absence of specific customer instructions, the
Electronics Group ships its products within 24 to 48 hours from the receipt of
an order. The Electronics Group makes shipments from public warehouses in
Virginia, Nevada, Florida, New Jersey, California and Venezuela and from leased
facilities located in New York, Venezuela, Malaysia and Germany.
Electronics product development, warranty and customer service
The Electronics Group works closely with its customers and suppliers in the
design, development and testing of its products. For the Electronics Group's OEM
automobile customers, the Electronics Group performs extensive validation
testing to ensure that its products meet the special environmental and
electronic standards of the manufacturer. The Electronics Group also performs
final assembly of products in its Hauppauge and Europe locations. The
Electronics Group's product development cycle includes:
o working with key customers and suppliers to identify consumer trends
and potential demand
o working with the suppliers to design and develop products to meet
those demands
o evaluating and testing the products in our own facilities to ensure
compliance with our standards
o performing software design and validation testing
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The Electronics Group provides a warranty to the end-users of its
electronics products, generally ranging from 90 days up to the life of the
vehicle for the original owner on some of its automobile-installed products. To
support its warranties, the Electronics Group has independent warranty centers
throughout the United States, Canada, Europe, Venezuela and Malaysia. At its
Hauppauge facility, the Electronics Group has a customer service group that
provides product information, answers questions and serves as a technical
hotline for installation help for both end-users and its customers.
The Electronics Group Hauppauge facility is QS-9000:1998 (ISO-9001:1994)
ISO-14001/EN ISO 14001 certified, which requires it to carefully monitor quality
standards in all facets of its business.
Electronics suppliers
The Electronics Group purchases its electronics products from manufacturers
located in several Pacific Rim countries, including Japan, China, South Korea,
Taiwan, Singapore and Malaysia. The Electronics Group also uses several
manufacturers in the United States for cruise controls, mobile video and power
amplifiers. In selecting its manufacturers, the Electronics Group considers
quality, price, service, market conditions and reputation. The Electronics Group
maintains buying offices or inspection offices in Taiwan, South Korea, China and
Hong Kong to provide local supervision of supplier performance such as price
negotiations, delivery and quality control. The Electronics Group generally
purchases its products under short-term purchase orders and does not have
long-term contracts with its suppliers. The Electronics Group believes that
alternative sources of supply are currently available, although there could be a
time lag and increased costs if it were to have an unplanned shift to a new
supplier which may have a material impact on the Company.
The Electronics Group considers relations with its suppliers to be good. In
addition, the Electronics Group believes that alternative sources of supply are
generally available within 120 days.
Electronics competition
The Electronics Group's business is highly competitive across all of its
product lines and competes with a number of well-established companies that
manufacture and sell similar products. The Electronics Group's mobile
electronics products compete against factory-supplied radios (including General
Motors, Ford and Daimler Chrysler), security and mobile video systems . The
Electronics Group's mobile electronics products also compete in the automotive
aftermarket against major companies such as Sony, Panasonic, Kenwood, Alpine and
Pioneer. The Electronics Group's consumer electronics product lines compete
against major consumer electronic companies, such as JVC, Sony, Panasonic,
Motorola, RCA, Samsung and AIWA. Brand name, design, features and price are the
major competitive factors across all of its product lines.
(e) Financial Information About Foreign and Domestic Operations and Export
Sales
The amounts of net sales and long-lived assets, attributable to each of the
Company's geographic segments for each of the last three fiscal years are set
forth in Note 19 to the Company's consolidated financial statements included
herein. During fiscal 2001, 2002 and 2003, the Company exported approximately
$215, $233 and $249 million, respectively, in product sales.
13
Trademarks
The Company markets products under several trademarks, including
Audiovox(R), Prestige(R), Pursuit(R), Rampage(TM), Jensen(R), Acoustic
Research(R), Code-Alarm(R), Car Link(R), Movies 2 Go(R) and Advent(R). The
trademark Audiovox(R) is registered in approximately 67 countries. The Company
believes that these trademarks are recognized by customers and are therefore
significant in marketing its products.
(f) Availability of Reports
We make available financial information, news releases and other
information on our Web site at www.audiovox.com. There is a direct link from the
Web site to a third party Securities and Exchange Commissions (SEC) filings Web
site, where our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and any amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available free of charge as soon as reasonably practicable after we
file such reports and amendments with, or furnish them to the SEC. In addition,
the Company has adopted a code of ethics which is available free of charge upon
request. Any such request should be directed to the attention of: Chris Lis
Johnson, Company Secretary, 150 Marcus Boulevard, Hauppauge, New York 11788,
(631) 231-7750.
Other Matters
Equity Investments
The Company has investments in unconsolidated joint ventures which were
formed to market its products in specific market segments or geographic areas.
The Company seeks to blend its financial and product resources with local
operations to expand its distribution and marketing capabilities. The Company
believes its joint ventures provide a more cost-effective method of focusing on
specialized markets. The Company does not participate in the day-to-day
management of these joint ventures.
The Company's significant joint ventures are:
Percentage Formation
Venture Ownership Date Function
Distribution of products for marine,
Audiovox Specialized van, RV and other specialized
Applications 50.0% 1997 vehicles.
Bliss-Tel Company, 20.0% 1997 Distribution of wireless products and
Ltd. accessories in Thailand.
Employees
The Company employs approximately 1,000 people. The Company's headcount has
been relatively stable for the past several years, but will change based upon
economic conditions within the two groups.
14
The Company considers its relations with its employees to be good. No employees
are covered by collective bargaining agreements.
Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are listed below. All
officers of the Company are elected by the Board of Directors to serve one-year
terms. There are no family relationships among officers, or any arrangement or
understanding between any officer and any other person pursuant to which the
officer was selected. Unless otherwise indicated, positions listed in the table
have been held for more than five years.
Name Age Current Position
John J. Shalam 70 President, Chief Executive Officer and
Chairman of the Board of Directors
Philip Christopher 55 Executive Vice President and a Director
Charles M. Stoehr 57 Senior Vice President, Chief Financial Officer
and a Director
Patrick M. Lavelle 52 Senior Vice President and a Director
Ann M. Boutcher 53 Vice President, Marketing and a Director
Richard A. Maddia 45 Vice President, MIS and a Director
Paul C. Kreuch, Jr.* 65 Director
Dennis F. McManus* 53 Director
Irving Halevy* 87 Director
Peter A. Lesser* 68 Director
*Member of the Audit and Compensation Committees
John J. Shalam has served as President, Chief Executive Officer and as
Director of Audiovox or its predecessor since 1960. Mr. Shalam also serves as
President and a Director of most of Audiovox's operating subsidiaries. Mr.
Shalam is on the Board of Directors of the Electronics Industry Association and
is on the Executive Committee of the Consumer Electronics Association.
Philip Christopher, our Executive Vice President, has been with Audiovox
since 1970 and has held his current position since 1983. Before 1983, he served
as Senior Vice President of Audiovox. Mr. Christopher is Chief Executive Officer
of Audiovox's wireless subsidiary, Audiovox Communications Corp. From 1973
through 1987, he was a Director of our predecessor, Audiovox Corp. Mr.
15
Christopher serves on the Executive Committee of the Cellular Telephone Industry
Association.
Charles M. Stoehr has been our Chief Financial Officer since 1979 and was
elected Senior Vice President in 1990. Mr. Stoehr has been a Director of
Audiovox since 1987. From 1979 through 1990, he was a Vice President of
Audiovox.
Patrick M. Lavelle has been a Vice President of the Company since 1980 and
was appointed Senior Vice President in 1991. He was elected to the Board of
Directors in 1993. Mr. Lavelle is Chief Executive Officer and President of the
Company's subsidiary, Audiovox Electronics Corp. Mr. Lavelle is also a member of
the Board of Directors and Executive Committee of the Consumer Electronics Board
and serves as Chairman of its Mobile Electronics Division.
Ann M. Boutcher has been our Vice President of Marketing since 1984. Ms.
Boutcher's responsibilities include the development and implementation of our
advertising, sales promotion and public relations programs. Ms. Boutcher was
elected to the Board of Directors in 1995.
Richard A. Maddia has been our Vice President of Information Systems since
1992. Prior thereto, Mr. Maddia was Assistant Vice President, MIS. Mr. Maddia's
responsibilities include development and maintenance of information systems. Mr.
Maddia was elected to the Board of Directors in 1996.
Paul C. Kreuch, Jr. was elected to the Board of Directors in February 1997.
Mr. Kreuch is a Managing Director of WJM Associates, Inc., a leading executive
development firm. Prior career responsibilities include Executive Vice President
of NatWest Bank, N.A. from 1993 to 1996, and, before that, President of National
Westminster Bank, USA.
Dennis F. McManus was elected to the Board of Directors in March 1998. Mr.
McManus is currently the Vice President - New Product Marketing at the LSSi
Corporation. Prior to that Mr. McManus had been self-employed as a
telecommunications consultant. Before that, he was employed by NYNEX Corp. for
over 27 years, most recently as a Senior Vice President and Managing Director.
Mr. McManus held this position from 1991 through December 31, 1997.
Irving Halevy served on the Board of Directors from 1987 to 1997 and was
re-elected to the Board of Directors in 2001. Mr. Halevy is a retired professor
of Industrial Relations and Management at Fairleigh Dickinson University where
he taught from 1952 to 1986. He was also a panel member of the Federal Mediation
and Conciliation Service.
Peter A. Lesser is the President of X-10 (USA), Inc., a wholesaler of
electronic home control and security systems. Mr. Lesser is founder of and has
also served as a director and stockholder of X-10 Limited, the Hong Kong parent
company of X-10- (USA), Inc. since 1979. He is a Member-at-Large of the
Executive Board of the Consumer Electronics Association. From 1997 through 1999,
Mr. Lesser served as the President of the Security Industry Association.
All of our executive officers hold office at the discretion of the Board of
Directors.
16
Cautionary Factors That May Affect Future Results
We have identified certain risk factors that apply to either Audiovox as a
whole or one of our specific business units. You should carefully consider each
of the following risk factors and all of the other information included or
incorporated by reference in this Form 10-K. If any of these risks, or other
risks not presently known to us or that we currently believe not to be
significant, develop into actual events, then our business, financial condition,
liquidity, or results of operations could be materially adversely affected. If
that happens, the market price of our common stock would likely decline, and you
may lose all or part of your investment.
We May Not Be Able to Compete Successfully in the Highly Competitive Wireless
Industry.
The market for wireless handsets and accessories is highly competitive and
is characterized by:
o intense price competition
o shorter product life cycles
o significant price erosion over the life of a product
o inventory write-downs
o industry consolidation
o rapid technological development
o the demand by wireless carriers for value-added services provided by
their suppliers
Our primary competitors for wireless handsets currently are Motorola, LG,
Nokia, Kyocera and Samsung. In addition, we compete with numerous other
established and new manufacturers and distributors, some of whom sell the same
or similar products directly to our customers. Historically, our competitors
have also included some of our own suppliers and customers. Many of our
competitors offer more extensive advertising and promotional programs than we
do.
During the last decade, there have been several periods of extreme price
competition, particularly when one or more or our competitors has sought to sell
off excess inventory by lowering its prices significantly. In particular, when
technologies changed in 2000 from analog to digital, several of our larger
competitors lowered their prices significantly to reduce their inventories,
which required us to similarly reduce our prices. These price reductions had a
material adverse effect on our profitability. There can be no assurance that our
competitors will not do this again, because, among other reasons, many of them
have significantly greater financial resources than we do and can withstand
substantial price competition. Since we sell products that tend to have low
gross profit-margins, price competition has had, and may in the future have, a
material adverse effect on our financial performance.
The Electronics Business Is Highly Competitive; Our Electronics Business Also
Faces Significant Competition from Original Equipment Manufacturers (OEMs).
The market for electronics is highly competitive across all three of our
product lines. We compete against many established companies who have
substantially greater resources than us. In addition, we compete directly with
OEMs, including divisions of well-known automobile manufacturers, in the
autosound, auto security, mobile video and accessories industry. Most of these
17
companies have substantially greater financial and other resources than we do.
We believe that OEMs have increased sales pressure on new car dealers with whom
they have close business relationships to purchase OEM-supplied equipment and
accessories. OEMs have also diversified and improved their product lines and
accessories in an effort to increase sales of their products. To the extent that
OEMs succeed in their efforts, this success would have a material adverse effect
on our sales of automotive entertainment and security products to new car
dealers.
Wireless Carriers and Suppliers May Not Continue to Outsource Value-Added
Services; We May Not Be Able to Continue to Provide Competitive Value-Added
Services.
Wireless carriers purchase from us, rather than directly from our
suppliers, because, among other reasons, we provide added services valued by our
customers. In order to maintain our sales levels, we must continue to provide
these value-added services at reasonable costs to our carrier-customers and
suppliers, including:
o product sourcing
o product distribution
o marketing
o custom packaging
o warranty support
o programming wireless handsets
o testing for carrier system acceptance
Our success depends on the wireless equipment manufacturers, wireless
carriers, network operators and resellers continuing to outsource these
functions rather than performing them in-house. To encourage the use of our
services, we must keep our prices reasonable. If our internal costs of supplying
these services increase, we may not be able to raise our prices to pass these
costs along to our customers and suppliers. As a result of the consolidations in
the telecommunications industry, wireless carriers, which are the largest
customers of our wireless business, may attempt to perform these services
themselves. Alternatively, our customers and suppliers may transact business
directly with each other rather than through us. If our customers or suppliers
begin to perform these services internally or do business directly with each
other, it could have a material adverse effect on our sales and our profits.
Our Success Depends on Our Ability to Keep Pace with Technological Advances in
the Wireless Industry.
Rapid technological change and frequent new product introductions
characterize the wireless product market. Our success depends upon our ability
to:
o identify the new products necessary to meet the demands of the
wireless marketplace and
o locate suppliers who are able to manufacture those products on a
timely and cost-effective basis.
Since we do not make any of our own products and do not conduct our own
research, we cannot assure you that we will be able to source the products that
advances in technology require to remain competitive. Furthermore, the
introduction or expected introduction of new products or technologies may
18
depress sales of existing products and technologies. This may result in
declining prices and inventory obsolescence. Since we maintain a substantial
investment in product inventory, declining prices and inventory obsolescence
could have a material adverse effect on our business and financial results. (see
further discussions in Business Overview Page 32).
As a result of the emergence of the digital market, which resulted in the
reduction of selling prices of analog hand-held phones, we recorded an analog
inventory write-down to market of $13.5 million in fiscal 2001. This write-down
had a material adverse effect on our profitability. As a result of increasing
pricing pressures and a surplus of supply created by other manufacturers also
attempting to sell off analog inventories, there was a drop off in demand for
analog products. The write-down was based upon the drop in demand, as carriers
no longer promoted analog product and notified the Company that previous
indications for orders of analog phones were no longer viable. Also during 2001,
the Company recorded an additional inventory write-down to market of $7,150
associated with older digital products as newer products were being introduced.
During fiscal 2002 and 2003, Wireless recorded inventory write-downs of
$13.8 and $2.8 million, respectively, due to more current technological advances
in the market. These write-downs were made based upon open purchase orders from
customers and selling prices subsequent to the respective balance sheet dates as
well as indications from customers based upon the then current negotiations.
There can be no assurance that this will not occur again given the emergence of
new technologies.
We Depend on a Small Number of Key Customers For a Large Percentage of Our
Sales.
The wireless industry is characterized by a small number of key customers.
Specifically, 70%, 71% and 72% of our wireless sales were to five wireless
customers in fiscal 2001, 2002 and 2003, respectively. The loss of one or more
of these customers would have a material impact on our business.
We Do Not Have Long-term Sales Contracts with Any of Our Customers.
Sales of our wireless products are made by written purchase orders and are
terminable at will by either party. The unexpected loss of all or a significant
portion of sales to any one of our large customers could have a material adverse
effect on our performance. Sales of our electronics products are made by
purchase order and are terminated at will at the option of either party. We do
not have long-term sales contracts with any of our customers. The unexpected
loss of all or a significant portion of sales to any one of these customers
could result in a material adverse effect on our performance.
We Could Lose Customers or Orders as a Result of Consolidation in the Wireless
Telecommunications Carrier Industry.
As a result of global competitive pressures, there has been significant
consolidation in the wireless industry which has caused extreme price
competition. Future consolidations could cause us to lose business if any of the
new consolidated entities do not perform as they expect to because of
integration or other problems. In addition, these consolidations will result in
a smaller number of wireless carriers, leading to greater competition in the
wireless handset market and may favor one or more of our competitors over us.
This could also lead to fluctuations in our quarterly results and carrying value
of our inventory. If any of these new entities orders less product from us or
19
elects not to do business with us or demands pricing changes in order to
compete, it would have a material adverse effect on our business. In fiscal
2003, the five largest wireless customers (Verizon Wireless, Bell Distribution,
Inc., Virgin Mobile, Sprint Spectrum LP and US Cellular) represented 72% of
Wireless' net sales and 44% of consolidated net sales during fiscal 2003. Three
customers each accounted for 34%, 15% and 12%, respectively, of Wireless' net
sales for fiscal 2003.
Sales in Our Electronics Business Are Dependent on New Products and Consumer
Acceptance.
Our electronics business depends, to a large extent, on the introduction
and availability of innovative products and technologies. Significant sales of
new products in niche markets, such as navigation, portable DVD players and
mobile video systems, have fueled the recent growth of our electronics business.
If we are not able to continually introduce new products that achieve consumer
acceptance, our sales and profit margins will decline.
Since We Do Not Manufacture Our Products, We Depend on Our Suppliers to Provide
Us with Adequate Quantities of High Quality Competitive Products on a Timely
Basis.
We do not manufacture our products. We do not have long-term contracts but
have exclusive distribution arrangements with certain suppliers. The suppliers
can only sell their products through the Company for a given geographic or
designated market area. Most of our products are imported from suppliers under
short-term purchase orders. Accordingly, we can give no assurance that:
o our supplier relationships will continue as presently in effect
o our suppliers will be able to obtain the components necessary to
produce high-quality, technologically-advanced products for us
o we will be able to obtain adequate alternatives to our supply sources
should they be interrupted
o if obtained, alternatively sourced products of satisfactory quality
would be delivered on a timely basis, competitively priced, comparably
featured or acceptable to our customers
o exclusive geographic or market area distribution agreements will be
renewed
Because of the increased demand for wireless and consumer electronics
products, there have been, and still could be, industry-wide shortages of
components. As a result, on occasion our suppliers have not been able to produce
the quantities of these products that we desire. Our inability to supply
sufficient quantities of products that are in demand could reduce our
profitability and have a material adverse effect on our relationships with our
customers. If any of our supplier relationships were terminated or interrupted,
we could experience an immediate or long-term supply shortage, which could have
a material adverse effect on us. It is likely that our supply of wireless
products would be interrupted before we could obtain alternative products.
Because We Purchase a Significant Amount of Our Products from Suppliers in
Pacific Rim Countries, We Are Subject to the Economic Risks Associated with
Changes in the Social, Political, Regulatory and Economic Conditions Inherent in
These Countries.
We import most of our products from suppliers in the Pacific Rim. Countries
in the Pacific Rim have experienced significant social, political and economic
upheaval over the past several years. Because of the large concentrations of our
20
purchases in Pacific Rim countries, particularly Japan, China, South Korea,
Taiwan and Malaysia, any adverse changes in the social, political, regulatory
and economic conditions in these countries may materially increase the cost of
the products that we buy from our foreign suppliers or delay shipments of
products, which could have a material adverse effect on our business. In
addition, our dependence on foreign suppliers forces us to order products
further in advance than we would if our products were manufactured domestically.
This increases the risk that our products will become obsolete or face selling
price reductions before we can sell our inventory.
We Plan to Expand the International Marketing and Distribution of Our Products,
Which Will Subject Us to Additional Business Risks.
As part of our business strategy, we intend to increase our international
sales, although we cannot assure you that we will be able to do so. Conducting
business outside of the United States subjects us to significant additional
risks, including:
o export and import restrictions, tax consequences and other trade
barriers
o currency fluctuations
o greater difficulty in accounts receivable collections
o economic and political instability
o foreign exchange controls that prohibit payment in U.S. dollars
o increased complexity and costs of managing and staffing international
operations
For instance, our international sales have been affected by political
unrest and currency fluctuation in Venezuela. Any of these factors could have a
material adverse effect on our business, financial condition and results of
operations.
Fluctuations in Foreign Currencies Could Have a Material Adverse Impact on Our
Business.
We cannot predict the effect of exchange rate fluctuations on our future
operating results. Also, due to the short-term nature of our supply
arrangements, the relationship of the U.S. dollar to foreign currencies will
impact price quotes when negotiating new supply arrangements denominated in U.S.
dollars. As a result, we could experience declining selling prices in our market
without the benefit of cost decreases on purchases from suppliers or we could
experience increasing costs without an ability to pass the costs to the
customers. We cannot assure you that we will be able to effectively limit our
exposure to foreign currencies. Foreign currency fluctuations could cause our
operating results to decline and have a material adverse effect on our ability
to compete. Many of our competitors manufacture products in the United States or
outside the Pacific Rim, which could place us at a competitive disadvantage if
the value of the Pacific Rim currencies increased relative to the currency in
the countries where our competitors obtain their products.
Trade Sanctions Against Foreign Countries or Foreign Companies Could Have a
Material Adverse Impact on Our Business.
As a result of trade disputes, the United States and foreign countries have
occasionally imposed tariffs, regulatory procedures and importation bans on
certain products, including wireless handsets that have been produced in foreign
countries. Trade sanctions or regulatory procedures involving a country in which
21
we conduct a substantial amount of business could have a material adverse effect
on our operations. Some of the countries we purchase products from are: China,
Japan, South Korea, Taiwan and Malaysia. China and Japan have been affected by
such sanctions in the past. In addition, the United States has imposed, and may
in the future impose, sanctions on foreign companies for anti-dumping and other
violations of U.S. law. If sanctions were imposed on any of our suppliers or
customers, it could have a material adverse effect on our operations.
We May Not Be Able to Sustain Our Recent Growth Rates or Maintain Profit
Margins.
Sales of our wireless products, a large portion of our business that
operates on a high-volume, low-margin basis, have varied significantly over the
past several years, from approximately $423 million in fiscal 1998 to
approximately $1.4 billion for fiscal 2000 back to approximately $806 million in
2003. Sales of our electronics products also increased significantly from
approximately $182 million for fiscal 1998 to approximately $518 million for
fiscal 2003. We may not be able to continue to achieve this overall revenue
growth rate or maintain profit margins because, among other reasons, of
increased competition and technological changes, which can be seen in the
decline of our Wireless Group. In addition, we expect that our operating
expenses will continue to increase as we seek to expand our business, which
could also result in a reduction in profit margins if we do not concurrently
increase our sales proportionately.
If Our Sales During the Holiday Season Fall below Our Expectations, Our Annual
Results Could Also Fall below Expectations.
Seasonal consumer shopping patterns significantly affect our business. We
generally make a substantial amount of our sales and net income during
September, October and November, our fourth fiscal quarter. We expect this trend
to continue. December is also a key month for us, due largely to the increase in
promotional activities by our customers during the holiday season. If the
economy faltered in these periods, if our customers altered the timing or
frequency of their promotional activities or if the effectiveness of these
promotional activities declined, particularly around the holiday season, it
could have a material adverse effect on our annual financial results.
A Decline in General Economic Conditions Could Lead to Reduced Consumer Demand
for the Discretionary Products We Sell.
Consumer spending patterns, especially discretionary spending for products
such as consumer electronics and wireless handsets, are affected by, among other
things, prevailing economic conditions, wage rates, inflation, consumer
confidence and consumer perception of economic conditions. A general slowdown in
the U.S. economy or an uncertain economic outlook could have a material adverse
effect on our sales.
We Depend Heavily on Existing Management and Key Personnel and Our Ability to
Recruit and Retain Qualified Personnel.
Our success depends on the continued efforts of John J. Shalam, Philip
Christopher, C. Michael Stoehr and Patrick Lavelle, each of whom has worked with
Audiovox for over two decades, as well as our other executive officers and key
22
employees. We only have one employment contract, with Philip Christopher and
none with any other executive officers or key employees. The loss or
interruption of the continued full-time service of certain of our executive
officers and key employees could have a material adverse effect on our business.
In addition, to support our continued growth, we must effectively recruit,
develop and retain additional qualified personnel both domestically and
internationally. Our inability to attract and retain necessary qualified
personnel could have a material adverse effect on our business.
We Are Responsible for Product Warranties and Defects.
Even though we outsource manufacturing, we provide warranties for all of
our products for which we have provided an estimated liability. Therefore, we
are highly dependent on the quality of our suppliers. The warranties for our
electronics products range from 90 days to the lifetime of a vehicle for the
original owner. The warranties for our current wireless products generally range
from 12 to 15 months. In addition, if we are required to repair a significant
amount of product, the value of the product could decline while we are repairing
the product.
Our Capital Resources May Not Be Sufficient to Meet Our Future Capital and
Liquidity Requirements.
We believe that we currently have sufficient resources to fund our existing
operations for the foreseeable future through our cash flows and borrowings
under our credit facility. However, we may need additional capital to operate
our business if:
o market conditions change
o our business plans or assumptions change
o we make significant acquisitions
o we need to make significant increases in capital expenditures or
working capital
The Company's principal source of liquidity expires in July 2004, and the
Company is currently in negotiations with the bank to extend this facility. We
cannot assure you that we would be able to raise additional capital on favorable
terms, if at all. If we could not obtain sufficient funds to meet our capital
requirements, we would have to curtail our business plans. We may also raise
funds to meet our capital requirements by issuing additional equity, which could
be dilutive to our stockholders, though there can be no assurance that we would
be able to do this.
Restrictive Covenants in Our Credit Facility May Restrict Our Ability to
Implement Our Growth Strategy, Respond to Changes in Industry Conditions, Secure
Additional Financing and Make Acquisitions.
Our credit facility contains restrictive covenants that:
o require us to attain specified pre-tax income
o limit our ability to incur additional debt
o require us to achieve specific financial ratios
o restrict our ability to make capital expenditures or acquisitions
23
If our business needs require us to take on additional debt, secure
financing or make significant capital expenditures or acquisitions, and we are
unable to comply with these restrictions, we would be forced to negotiate with
our lenders to waive these covenants or amend the terms of our credit facility.
At May 31, 2001, November 30, 2001 and the first quarter ended February 28,
2002, the Company was not in compliance with certain of its pre-tax income
covenants. The Company received a waiver for the November 30, 2001 pre-tax
income violation subsequent to its issuance of the November 30, 2001 financial
statements. In addition, the Company received waivers for the May 31, 2001 and
February 28, 2002 violations.
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 and had not received a waiver. The Company
subsequently obtained a waiver for the November 30, 2002 and February 28, 2003
violations. The Company was in compliance with all its bank covenants at
November 30, 2003. 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.
Achieving pre-tax income is significantly dependant upon the timing of
customer acceptance of new technologies, customer demand and the ability of our
vendors to supply sufficient quantities to fulfill anticipated customer demand,
among other factors.
There Are Claims of Possible Health Risks from Wireless Handsets.
Claims have been made alleging a link between the non-thermal
electromagnetic field emitted by wireless handsets and the development of
cancer, including brain cancer. The television program 20/20 on ABC reported
that several of the handsets available on the market, when used in certain
positions, emit radiation to the user's brain in amounts higher than permitted
by the Food and Drug Administration. The scientific community is divided on
whether there is any risk associated with the use of wireless handsets and, if
so, the magnitude of the risk. Unfavorable publicity, whether or not warranted,
medical studies or findings or litigation could have a material adverse effect
on our growth and financial results.
In the past, several plaintiffs' groups have brought class actions against
wireless handset manufacturers and distributors, including us, alleging that
wireless handsets have caused cancer. To date, none of these actions has been
successful. However, actions based on these or other claims may succeed in the
future and have a material adverse effect on us.
Several Domestic and Foreign Governments Are Considering, or Have Recently
Adopted, Legislation That Restricts the Use of Wireless Handsets While Driving.
Several foreign governments have adopted, and a number of U.S. state and
local governments are considering or have recently enacted, legislation that
24
would restrict or prohibit the use of a wireless handset while driving a vehicle
or, alternatively, require the use of a hands-free telephone. For example, Ohio
and New York have adopted statutes that restricts the use of wireless handsets
or requires the use of a hands-free kit while driving. Widespread legislation
that restricts or prohibits the use of wireless handsets while operating a
vehicle could have a material adverse effect on our future growth.
Our Stock Price Could Fluctuate Significantly.
The market price of our common stock could fluctuate significantly in
response to various factors and events, including:
o operating results being below market expectations
o announcements of technological innovations or new products by us or
our competitors
o loss of a major customer or supplier
o changes in, or our failure to meet, financial estimates by securities
analysts
o industry developments
o economic and other external factors
o period-to-period fluctuations in our financial results
o financial crises in foreign countries
o general downgrading of our industry sector by securities analysts
In addition, the securities markets have experienced significant price and
volume fluctuations over the past several years that have often been unrelated
to the operating performance of particular companies. These market fluctuations
may also have a material adverse effect on the market price of our common stock.
Our Securities Will Continue to be Listed on the Nasdaq National Market Pursuant
to Exceptions.
Following the Company's hearing with the Nasdaq related to its late filing
of certain annual and quarterly forms with the SEC, the Company was notified
that it must become timely in its filings and continue in the future to be
timely to insure its continued listing on the Nasdaq National Market.
John J. Shalam, Our President and Chief Executive Officer, Owns a Significant
Portion of Our Common Stock and Can Exercise Control over Our Affairs.
Mr. Shalam beneficially owns approximately 54% of the combined voting power
of both classes of common stock. This will allow him to elect our Board of
Directors and, in general, to determine the outcome of any other matter
submitted to the stockholders for approval. Mr. Shalam's voting power may have
the effect of delaying or preventing a change in control of Audiovox.
We have two classes of common stock: Class A common stock is traded on the
Nasdaq Stock Market under the symbol VOXX, and Class B common stock, which is
not publicly traded and substantially all of which is beneficially owned by Mr.
Shalam. Each share of Class A common stock is entitled to one vote per share and
each share of Class B common stock is entitled to ten votes per share. Both
classes vote together as a single class, except in certain circumstances, for
the election and removal of directors and as otherwise may be required by
Delaware law. Since our charter permits
25
shareholder action by written consent, Mr. Shalam may be able to take
significant corporate actions without prior notice and a shareholder meeting.
Item 2 - Properties
As of November 30, 2003, the Company leased a total of twenty-nine
operating facilities located in eleven states. The leases have been classified
as operating leases, with the exception of one, which is recorded as a capital
lease. Wireless utilizes eight of these facilities located in California, New
York, Virginia and Canada. The Electronics Group utilizes twenty-one of these
facilities located in California, Florida, Georgia, Massachusetts, New York,
Ohio, Tennessee, Texas and Michigan. These facilities serve as offices,
warehouses, distribution centers or retail locations for both Wireless and
Electronics. Additionally, the Company utilizes public warehouse facilities
located in Norfolk, Virginia and Sparks, Nevada for its Electronics Group and in
Miami, Florida, Toronto, Canada, Farmingdale, New York, Rancho Dominguez,
California and Tilburg, Netherlands for its Wireless Group. The Company also
leases facilities in Germany and Venezuela for its Electronics Group.
Item 3 - Legal Proceedings
The Company is currently, and has in the past been, a party to routine
litigation incidental to its business. From time to time, the Company receives
notification of alleged violations of registered patent holders' rights. The
Company has either been indemnified by its manufacturers in these matters,
obtained the benefit of a patent license or has decided to vigorously defend
such claims.
On September 17, 2003, Audiovox Electronics Corporation ("AEC") settled the
action for patent infringement that was instituted by Nissho Iwai American
Corporation against AEC in the United State District Court for the Southern
District of New York. Pursuant to the settlement Nissho granted AEC a
non-exclusive license for a payment covering any alleged past infringements and
a per unit payment for future infringement. Neither party to the lawsuit
admitted any liability or any merit to the allegations of either party.
The Company and Audiovox Communications Corp. ("ACC"), along with other
manufacturers of wireless phones and cellular service providers, were named as
defendants in two class action lawsuits alleging non-compliance with FCC ordered
emergency 911 call processing capabilities. These lawsuits were consolidated and
transferred to the United States District Court for the Northern District of
Illinois, which in turn referred the cases to the Federal Communications
Commission ("FCC") to determine if the manufacturers and service providers are
in compliance with the FCC's order on emergency 911 call processing
capabilities. The Company and ACC intend to vigorously defend this matter.
However, no assurances regarding the outcome of this matter can be given at this
point in the litigation.
In June 2003, Audiovox Communications Corp. settled the litigation it had
instituted against Northcoast Communications, LLC ("Northcoast"). ACC received a
partial payment of its claimed amount from Northcoast. In addition, Northcoast
withdrew its counterclaims with prejudice. A Stipulation of Discontinuance with
prejudice was filed in the Supreme Court of the State of New York, County of
Suffolk.
26
During 2001, the Company, along with other suppliers, manufacturers and
distributors of hand-held wireless telephones, was named as a defendant in five
class action lawsuits alleging damages relating to exposure to radio frequency
radiation from hand-held wireless telephones. These class actions have been
consolidated and transferred to a Multi-District Litigation Panel before the
United States District Court of the District of Maryland. On March 5, 2003,
Judge Catherine C. Blake of the United States District Court for the District of
Maryland granted the defendants' consolidated motion to dismiss these
complaints. Plaintiffs have appealed to the United States Circuit Court of
Appeals, Fourth Circuit. The appeal pending before the United States Circuit
Court of Appeals, Fourth Circuit in the consolidated class action lawsuits
(Pinney, Farina, Gilliam, Gimpelson and Naquin) against ACC and other suppliers,
manufacturers and distributors as well as wireless carriers of hand-held
wireless telephones alleging damages relating to risk of exposure to radio
frequency radiation from the wireless telephones has not yet been heard. It is
anticipated that the appeal will be heard in May 2004.
The Company had been the subject of an administrative agency investigation
involving alleged reimbursement of a fixed nominal amount of federal campaign
contributions during the years 1995 and 1996. During the third quarter of fiscal
2003, the Company entered into a Conciliation Agreement and paid a civil penalty
in the amount of $620.
During the third quarter of fiscal 2003, a certain Venezuelan employee, who
is also a minority shareholder in Audiovox Venezuela, submitted a claim to the
Venezuela Labor Court for severance compensation of approximately $560. The
Court approved the claim and it was paid and expensed by Audiovox Venezuela in
the third quarter of fiscal 2003. The Company is challenging the payment of this
claim and will seek reimbursement from the Venezuelan shareholder or the
Company's insurance carrier.
The Company does not expect the outcome of any pending litigation,
separately and in the aggregate, to have a material adverse effect on its
business, consolidated financial position or results of operations.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2003.
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
Summary of Stock Prices and Dividend Data
The Class A Common Stock of Audiovox are traded on the Nasdaq Stock Market
under the symbol VOXX. No dividends have been paid on the Company's common
stock. The Company is restricted by agreements with its financial institutions
from the payment of common stock dividends while certain loans are outstanding
(see Liquidity and Capital Resources of Management's Discussion and Analysis).
There are approximately 617 holders of record of our Class A Common Stock and
27
four holders of Class B Convertible Common Stock.
Class A Common Stock Average
Daily
Trading
Fiscal Period High Low Volume
2002
First Quarter 8.25 6.00 117,420
Second Quarter 8.93 6.50 82,356
Third Quarter 9.05 5.95 91,708
Fourth Quarter 11.53 6.30 71,940
2003
First Quarter 11.60 7.77 167,418
Second Quarter 9.70 6.10 95,459
Third Quarter 14.03 9.15 123,680
Fourth Quarter 14.90 11.00 95,333
We have not paid or declared any cash dividends on our common stock. We
have retained, and currently anticipate that we will continue to retain, all of
our earnings for use in developing our business. Future cash dividends, if any,
will be paid at the discretion of our Board of Directors and will depend, among
other things, upon our future operations and earnings, capital requirements and
surplus, general financial condition, contractual restrictions and such other
factors as our Board of Directors may deem relevant.
Equity Compensation Table
The following table sets forth information regarding the Company's equity
compensation plans in effect as of November 30, 2003:
Number of securities
remaining available for
future issuance under
Number of securities to Weighted average equity compensation
be issued upon exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights first reporting column)
- ------------- --------------------- -------------------- -----------------------
Equity compensation plans
approved by security
holders 2,569,864 $11.77 234,253
Equity compensation plans
not approved by security
holders (a) 150,000 11.12 --
--------- ------ -------
Total 2,719,864 $11.76 234,253
========= ====== =======
(a) Represents 30,000 stock options issued to outside directors and 120,000
warrants issued to outside legal counsel. See Note 16 of Notes to
Consolidated Financial Statements.
28
Item 6 - Selected Consolidated Financial Data
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements, the notes to
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", which are included elsewhere in
this report. The consolidated statements of operations data for each of the five
fiscal years in the period ended November 30, 2003, and the consolidated balance
sheet data as of the end of each such fiscal year, are derived from our audited
consolidated financial statements (in thousands except per share data).
29
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Event" and Note 2, "Restatement of Consolidated
Financial Statements", and Note 22, "Unaudited Quarterly Financial Data" of
Notes to Consolidated Financial Statements for more detailed information
regarding the restatement of our consolidated financial statements for the
fiscal years ended November 30, 2000 and 2001 and restated unaudited quarterly
data for fiscal quarters during the year ended November 30, 2001 and the fiscal
2002 quarters ended February 28, 2002, May 31, 2002 and August 31, 2002. The
Company did not restate the year ended November 30, 1999 as any restatement
amounts applicable to that year were not material and were recorded in fiscal
2000.
Years Ended November 30,
-------------------------------------------------------------------------------
1999 2000 (1) 2001 (1) 2002 2003
---- -------- -------- ---- ----
Consolidated Statement of
Operations Data
Net sales (2)(3) $ 1,149,537 $ 1,670,291 $ 1,276,591 $ 1,100,382 $ 1,323,902
Operating income 38,237 39,629 (9,236) (14,076) 21,803
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting for negative
goodwill 27,246 25,303 (7,198) (14,280) 11,239
Extraordinary item -- 2,189 -- -- --
Cumulative effect of a change in
accounting for negative goodwill -- -- -- 240 --
Net income (loss) 27,246 27,492 (7,198) (14,040) 11,239
Income (loss) per common share
before extraordinary item and
cumulative effect of a change in
accounting for negative goodwill:
Basic 1.43 1.19 (0.33) (0.65) 0.51
Diluted 1.39 1.12 (0.33) (0.65) 0.51
Net income (loss) per common share:
Basic 1.43 1.29 (0.33) (0.64) 0.51
Diluted 1.39 1.22 (0.33) (0.64) 0.51
Consolidated Balance Sheet Data
Total assets $ 486,220 $ 517,586 $ 544,497 $ 551,235 579,703
Working capital 272,081 305,369 284,166 292,687 304,354
Long-term obligations, less current
installments 122,798 23,468 10,040 18,250 29,639
Stockholders' equity 216,744 330,766 323,220 309,513 325,728
(1) See Note (2) of Notes to Consolidated Financial Statements.
(2) Effective March 1, 2002, the Company adopted Emerging Issues Task Force
(EITF) Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer". Upon adoption of this Issue, the Company reclassified its sales
incentives offered to its customers from selling expenses to net sales. For
purposes of comparability, these reclassifications have been reflected
retroactively for all periods presented.
30
(3) In fiscal 2001, the Company adopted the provisions of EITF Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs", which requires the
Company to report all amounts billed to a customer related to shipping and
handling as revenue. The Company has reclassified such billed amounts,
which were previously netted in cost of sales, to net sales. Gross profit
has remained unchanged by this adoption. For purposes of comparability,
these reclassifications have been reflected retroactively for all periods
presented.
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking Statements
This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Words such as "may,"
"believe," "estimate," "expect," "plan," "intend," "project," "anticipate,"
"continues," "could," "potential," "predict" and similar expressions may
identify forward- looking statements. The Company has based these
forward-looking statements on its current expectations and projections about
future events, activities or developments. The Company's actual results could
differ materially from those discussed in or implied by these forward-looking
statements. Forward-looking statements include statements relating to, among
other things:
o growth trends in the wireless, mobile and consumer electronic
businesses
o technological and market developments in the wireless, automotive,
mobile and consumer electronics businesses
o liquidity
o availability of key employees
o expansion into international markets
o the availability of new consumer electronic products
o the availability of new wireless 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 impact of future selling prices on Company profitability and inventory
carrying value
o significant competition in the wireless, automotive, mobile 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 changes in the Company's business operations
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
31
o changes in regulations and tariffs
o seasonality and cyclicality
o inventory obsolescence and availability
o consolidations in the wireless and retail industries, causing a
decrease in the number of carriers and retail stores that carry our
products
o changes in global or local economic conditions
Restatement of Consolidated Financial Statements
The Company has previously restated its consolidated financial statements
for the fiscal years ended November 30, 2000 and 2001 and for the fiscal
quarters during the year ended November 30, 2001 and the fiscal 2002 quarters
ended February 28, 2002, May 31, 2002 and August 31, 2002. In addition, the
Company previously reclassified certain expenses from operating expenses to cost
of sales for fiscal 2001 and for each of the quarters in the nine months ended
August 31, 2002. Please refer to the Company's previously filed Form 10-K for
the year ended November 30, 2002 for details.
Business Overview
The Company markets its products under the Audiovox(R) brand name and other
brand names such as Jensen(R), Acoustic Research(R) and Advent(R), 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 Mobile Communications Corp. (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 primarily in the CDMA (Code Division Multiple
Access) market. Based on unit sales, ACC has a substantial share of the CDMA
market, which is directly impacted by new product introductions and high
customer concentration (see Cautionary Factors that May Affect Future Results).
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" sales.
The Electronics Group consists of four wholly-owned subsidiaries: Audiovox
Electronics Corporation (AEC), American Radio Corp., Code Systems, Inc. (Code)
and Audiovox Europe Holdings GmbH (Audiovox Europe) 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, two-way 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 and these sales are
categorized as "other".
32
The Company allocates interest and certain shared expenses, including
treasury, legal, human resources and information systems, 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.
From fiscal 1999 through 2003, several major events and trends have
affected the Company's results and financial conditions. Such events and trends
are discussed below.
Handset sales in our Wireless Group increased from 6.1 million units in
fiscal 1999 to an all-time high of 8.9 million units in fiscal 2000 as a result
of the introduction of digital technology, reduced cost of service plans and
expanded feature options which attracted more subscribers to the carriers
systems. During 2001 through 2003, as a result of the change in technology from
analog to digital, the consolidation of our carrier customer base and increased
price competition from our competitors, the Wireless Group's overall growth was
impacted. Further during this period, the addition of several new competitors
had an effect on the Company's sales. These factors resulted in a reduction of
our net sales to 4.7 million units in 2003. This overall trend in our wireless
business from 1999 was impacted by:
o the introduction of digital technology, which has allowed carriers to
significantly increase subscriber capacity
o reduced cost of service and expanded feature options
o consolidation of carrier customers
o price competition
o increased competition
o shortened product life cycle
o product testing and acceptance complexity
In fiscal 2001, 2002 and 2003, the Company recorded inventory write-downs
to market of $20,650, $13,823 and $2,817, respectively. These write-downs were
primarily due to increased pricing pressures, competition and changing
technologies. Wireless' gross profit margins were negatively impacted by 2.1,
1.9 and 0.3 percentage points, respectively, as a result of these write-downs.
As the life cycle for wireless products shortens, the timing of product testing
and acceptance for new wireless technology has become critical. Complex wireless
technology has caused delays in product testing and acceptance which may result
in delayed product introductions. This trend of product testing, competition,
price erosion, and changing technologies will continue to affect the overall
wireless business segment.
In fiscal 2001, 2002 and 2003, Wireless recorded $12,555, $3,216 and
$1,137, respectively, into income due to reversals of previously established
sales incentive accruals. Wireless' gross profit margins were positively
impacted by 1.3, 0.4 and 0.1 percentage points, respectively, as a result of
these reversals. See further discussion in critical accounting policies.
In our Electronics Group, sales were $239.6 million in 1999 and $517.7
million in 2003. During this period, the Company's sales were impacted by the
following items:
o the growth of our consumer electronic products business from $38.2
million in fiscal 1999 to $144.3 million in fiscal 2003 was a result
33
of the introduction of new consumer goods
o the introduction of mobile video entertainment systems and other new
technologies
o growth of OEM business o acquisition of Recoton in fiscal 2003 and the
formation of Audiovox Europe
Both of the Company's segments, Electronics and Wireless, are influenced by
the introduction of new products and changes in technology (see Cautionary
Factors That May Affect Future Results: Our success depends on our ability to
keep pace with technological advances in the wireless industry).
During fiscal 2002 and 2003, the Company introduced several new products in
our Electronics segment, which included an extended line of portable DVD
products for the consumer market, new flat panel TV's and satellite radios. In
our Wireless group, the technology has evolved to new 1X technology, color view
screens and camera phones, PDA's with built-in wireless capabilities and certain
1X phones have the availability to utilize the new GPS locator systems. As a
result of the continuous introduction of new products, the Company must sell
existing older models prior to new product introduction or the value of the
inventory may be impacted (see Critical Accounting Policies - Inventory, MD&A
Discussions).
Gross margins in the Company's electronics business have decreased to 16.6%
for fiscal 2003 from 18.1% in 2000 due to increased sales to mass merchants and
a change in the product mix, partially offset by higher margins in mobile video
products, other new technologies and products and the growth of the
international business.
In fiscal 2001, 2002 and 2003, Electronics recorded $298, $716 and $886,
respectively, into income upon the expiration of unclaimed sales incentive
accruals. As a result, Electronics' gross profit margins were positively
impacted by 0.1, 0.2 and 0.2 percentage points, respectively.
The Company's total operating expenses have increased at a slower rate than
sales since 1999. Total consolidated operating expenses were $96.4 million in
1999 and $102.4 million in 2003. In fiscal 2003, operating expenses have
increased 6.2% since 1999, compared to sales growth of 15.2% since 1999. The
Company has invested in management information systems and its operating
facilities to increase its efficiency.
During fiscal 2002, the Company's financial position was improved by the
sale of 20% of its previously 95%-owned subsidiary, ACC, to Toshiba for $27.2
million. This sale was offset by the Recoton acquisition in fiscal 2003 which
approximated $40.0 million, net of cash acquired.
All financial information, except share and per share data, is presented in
thousands.
Critical Accounting Policies and Estimates
General
The consolidated financial statements of the Company are prepared in
conformity with accounting principles generally accepted in the United States of
America. As such, the Company is required to make certain estimates, judgments
34
and assumptions that management believes are reasonable based upon the
information available. These estimates and assumptions, which can be subjective
and complex, affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. As a result, actual results could differ from such
estimates and assumptions. The significant accounting policies which the Company
believes are the most critical to aid in fully understanding and evaluating the
reported consolidated financial results include the following:
Revenue Recognition
The Company recognizes revenue from product sales at the time of passage of
title and risk of loss to the customer either at FOB Shipping Point or FOB
Destination, based upon terms established with the customer. Any customer
acceptance provisions, which are related to product testing, are satisfied prior
to revenue recognition. There are no further obligations on the part of the
Company subsequent to revenue recognition except for returns of product from the
Company's customers. The Company does accept returns of products, if properly
requested, authorized, and approved by the Company. The Company records an
estimate of returns of products to be returned by its customers. Management
continuously monitors and tracks such product returns and records the provision
for the estimated amount of such future returns, based on historical experience
and any notification the Company receives of pending returns. The Electronics
segment's selling price to its customers is a fixed amount that is not subject
to refund or adjustment or contingent upon additional rebates.
The Wireless segment has sales agreements with certain customers that
provide for a rebate of the selling price to such customers if the particular
product is subsequently sold at a lower price to the same customer or to a
different customer. The rebate period extends for a relatively short period of
time. Historically, the amounts of such rebates paid to customers have not been
material. The Company estimates the amount of the rebate based upon the terms of
each individual arrangement, historical experience and future expectations of
price reductions, and the Company records its estimate of the rebate amount at
the time of the sale.
Sales Incentives
Both of the Company's segments, Wireless and Electronics, offer sales
incentives to its customers in the form of (1) co-operative advertising
allowances; (2) market development funds and (3) volume incentive rebates. The
Electronics segment also offers other trade allowances to its customers. The
terms of the sales incentives vary by customer and are offered from time to
time. Except for other trade allowances, all sales incentives require the
customer to purchase the Company's products during a specified period of time.
All sales incentives require the customer to claim the sales incentive within a
certain time period. Although all sales incentives require customers to claim
the sales incentive within a certain time period (referred to as the "claim
period"), the Wireless segment historically has settled sales incentives claimed
after the claim period has expired if a customer demands payment. The sales
incentive liabilities are settled either by the customer claiming a deduction
against an outstanding account receivable owed to the Company by the customer or
by the customer requesting a check from the Company. The Company is unable to
demonstrate that an identifiable benefit of the sales incentives has been
received as such, all costs associated with sales incentives are classified as a
reduction of net sales. The following is a summary of the various sales
incentive programs offered by the Company and the related accounting policies:
35
Co-operative advertising allowances are offered to customers as
reimbursement towards their costs for print or media advertising in which our
product is featured on its own or in conjunction with other companies' products
(e.g., a weekly advertising circular by a mass merchant). The amount offered is
either based upon a fixed percentage of the Company's sales revenue or is a
fixed amount per unit sold to the customer during a specified time period.
Market development funds are offered to customers in connection with new product
launches or entering into new markets. Those new markets can be either new
geographic areas or new customers. The amount offered for new product launches
is based upon a fixed percentage of the Company's sales revenue to the customer
or is a fixed amount per unit sold to the customer during a specified time
period. The Company accrues the cost of co-operative advertising allowances and
market development funds at the later of when the customer purchases our
products or when the sales incentive is offered to the customer.
Volume incentive rebates offered to customers require that minimum
quantities of product be purchased during a specified period of time. The amount
offered is either based upon a fixed percentage of the Company's sales revenue
to the customer or is a fixed amount per unit sold to the customer. Certain of
the volume incentive rebates offered to customers include a sliding scale of the
amount of the sales incentive with different required minimum quantities to be
purchased. The customer's achievement of the sales threshold and consequently
the measurement of the total rebate for the Wireless segment cannot be
reasonably estimated. Accordingly, the Wireless segment recognizes a liability
for the maximum potential amount of the rebate with the exception of certain
volume incentive rebates that include very aggressive tiered levels of volume
purchases. For volume incentive rebates that include very aggressive tiered
levels of volume purchase, the Wireless segment recognizes a liability for the
rebate as the underlying revenue transactions that result in progress by the
customer toward earning the rebate or refund on a program by program basis are
recognized. The Electronics segment makes an estimate of the ultimate amount of
the rebate their customers will earn based upon past history with the customer
and other facts and circumstances. The Electronics segment has the ability to
estimate these volume incentive rebates, as there does not exist a relatively
long period of time for a particular rebate to be claimed, the Electronics
segment does have historical experience with these sales incentive programs and
the Electronics segment does have a large volume of relatively homogenous
transactions. Any changes in the estimated amount of volume incentive rebates
are recognized immediately using a cumulative catch-up adjustment.
With respect to the accounting for co-operative advertising allowances,
market development funds and volume incentive rebates, there was no impact upon
the adoption of EITF 01-9, "Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of Vendor's Products)" (EITF 01-9), as the
Company's accounting policy prior to March 1, 2002 was consistent with its
accounting policy after the adoption of EITF 01-9.
Other trade allowances are additional sales incentives that the Company
provides to the Electronics segment customers subsequent to the related revenue
being recognized. In accordance with EITF 01-9, the Company records the
provision for these additional sales incentives at the later of when the sales
incentive is offered or when the related revenue is recognized. Such additional
sales incentives are based upon a fixed percentage of the selling price to the
customer, a fixed amount per unit, or a lump-sum amount.
36
The accrual for sales incentives at November 30, 2002 and 2003 was $12,151
and $21,894, respectively. The Company's sales incentive liability may prove to
be inaccurate, in which case the Company may have understated or overstated the
provision required for these arrangements. Therefore, although the Company makes
its best estimate of its sales incentive liability, many factors, including
significant unanticipated changes in the purchasing volume of its customers and
the lack of claims made by customers of offered and accepted sales incentives,
could have significant impact on the Company's liability for sales incentives
and the Company's reported operating results.
For the fiscal years ended November 30, 2001, 2002 and 2003, reversals of
previously established sales incentive liabilities amounted to $14,369, $4,716
and $2,940, respectively. These reversals include unearned sales incentives and
unclaimed sales incentives. Unearned sales incentives are volume incentive
rebates where the customer did not purchase the required minimum quantities of
product during the specified time. Volume incentive rebates for both segments
are reversed into income in the period when the customer did not purchase the
required minimum quantities of product during the specified time. Unearned sales
incentives for fiscal years ended November 30, 2001, 2002 and 2003 amounted to
$9,051, $1,354 and $1,310, respectively. Unclaimed sales incentives are sales
incentives earned by the customer but the customer has not claimed payment of
the earned sales incentive from the Company. Unclaimed sales incentives for
fiscal years ended November 30, 2001, 2002 and 2003 amounted to $5,318, $3,362
and $1,630, respectively.
The accrual for earned but unclaimed sales incentives is reversed by
Wireless only when management is able to conclude, based upon an individual
judgment of each sales incentive, that it is remote that the customer will claim
the sales incentive. The methodology applied for determining the amount and
timing of reversals for the Wireless segment is disciplined, consistent and
rational. The methodology is not systematic (formula based), as the Company
makes an estimate as to when it is remote that the sales incentive will not be
claimed. Reversals by the Wireless segment of unclaimed sales incentives have
historically occurred in varying periods up to 12 months after the recognition
of the accrual. In deciding on whether to reverse the sales incentive liability
into income, the Company makes an assessment as to the likelihood of the
customer ever claiming the funds after the claim period has expired and
considers the specific facts and circumstances pertaining to the individual
sales incentive. The factors considered by management in making the decision to
reverse accruals for unclaimed sales incentives include (i) past practices of
the customer requesting payments after the expiration of the claim period; (ii)
recent negotiations with the customer for new sales incentives; (iii) subsequent
communications with the customer with regard to the status of the claim; and
(iv) recent activity in the customer's account.
The Electronics segment reverses earned but unclaimed sales incentives upon
the expiration of the claim period. The Company believes that the reversal of
earned but unclaimed sales incentives for Electronics upon the expiration of the
claim period is a disciplined, rational, consistent and systematic method of
reversing unclaimed sales incentives. For the Electronics segment, the majority
of sales incentive programs are calendar-year programs. Accordingly, the program
ends on the month following the fiscal year end and the claim period expires one
year from the end of the program.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and
37
adjusts credit limits based upon payment history and the customer's current
credit worthiness, as determined by a review of their current credit
information. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that have been
identified. The Company's reserve for estimated credit losses at November 30,
2003 was $6,947. While such credit losses have historically been within
management's expectations and the provisions established, the Company cannot
guarantee that it will continue to experience the same credit loss rates that
have been experienced in the past. Since the Company's accounts receivable are
concentrated in a relatively few number of customers, a significant change in
the liquidity or financial position of any one of these customers could have a
material adverse impact on the collectability of the Company's accounts
receivables and future operating results.
Inventories
The Company values its inventory at the lower of the actual cost to
purchase (primarily on a weighted moving average basis) and/or the current
estimated market value of the inventory less expected costs to sell the
inventory. The Company regularly reviews inventory quantities on-hand and
records a provision for excess and obsolete inventory based primarily on open
purchase orders from customers and selling prices subsequent to the balance
sheet date as well as indications from customers based upon the then current
negotiations. As demonstrated in recent years, demand for the Company's products
can fluctuate significantly. A significant sudden increase in the demand for the
Company's products could result in a short-term increase in the cost of
inventory purchases while a significant decrease in demand could result in an
increase in the amount of excess inventory quantities on-hand. In addition, the
Company's industry is characterized by rapid technological change and frequent
new product introductions that could result in an increase in the amount of
obsolete inventory quantities on-hand. In such situations, the Company generally
does not obtain price protection from its vendors, however, on occasion, the
Company has received price protection which reduces the cost of inventory. Since
price protection reduces the cost of inventory, as the Company sells the
inventory for which it has received price protection, the amount is reflected as
a reduction to cost of sales. There can be no assurances that the Company will
be successful in negotiating such price protection from its vendors in the
future.
The Company has, on occasion, performed upgrades on certain inventory on
behalf of its vendors. The reimbursements the Company receives to perform these
upgrades are reflected as a reduction to the cost of inventory and is recognized
as a reduction to cost of sales as the related inventory is sold. Additionally,
the Company's estimates of excess and obsolete inventory may prove to be
inaccurate, in which case the Company may have understated or overstated the
provision required for excess and obsolete inventory. In the future, if the
Company's inventory is determined to be overvalued, it would be required to
recognize such costs in its cost of goods sold at the time of such
determination. Likewise, if the Company does not properly estimate the lower of
cost or market of its inventory and it is therefore determined to be
undervalued, it may have over-reported its cost of goods sold in previous
periods and would be required to recognize such additional operating income at
the time of sale. Therefore, although the Company makes every effort to ensure
the accuracy of its forecasts of future product demand, any significant
unanticipated changes in demand or technological developments could have a
significant impact on the value of the Company's inventory and its reported
operating results.
38
The Company maintains a significant investment in inventory and, therefore,
is subject to the risk of losses on write-downs to market and inventory
obsolescence. The Company decided to substantially exit the analog phone line of
business to reflect the shift in the wireless industry from analog to digital
technology and recorded a charge of approximately $13,500 during the second
quarter of 2001 to reduce its carrying value of its analog inventory to
estimated market value. During the fourth quarter of 2001, Wireless recorded
inventory write-downs to market of $7,150 as a result of the reduction of
selling prices primarily related to digital hand-held phones during the first
quarter of 2002 in anticipation of new digital technologies. During the year
ended November 30, 2002, Wireless recorded inventory write-downs to market of
$13,823.
During fiscal 2003, Wireless recorded inventory write-downs of $2,817 based
upon open purchase orders from customers and selling prices subsequent to the
respective balance sheet dates as well as indications from our customers based
upon current negotiations. It is reasonably possible that additional write-downs
to market may be required in the future given the continued emergence of new
technologies, however, no estimate can be made of such write-downs. At November
30, 2003, Wireless had on hand approximately 15,600 units of previously
written-down inventory, with an extended value of approximately $800.
For certain inventory items, the Company is entitled to receive price
protection in the event the selling price to its customers is less than the
purchase price from the manufacturer. The Company records such price protection,
as necessary, at the time of the sale of the units. For fiscal 2001, 2002 and
2003, price protection of $ 4,550, $27,683 and $13,031, respectively, was
recorded as a reduction to cost of sales as the related inventory was sold. (see
Cautionary Factors That May Affect Future Results: Our success depends on our
ability to keep pace with technological advances in the wireless industry.)
Goodwill and Other Intangible Assets
Goodwill and Other Intangible assets consist of the excess cost over fair
value of assets acquired and (goodwill) and other intangible assets (patents and
trademarks). Goodwill, which includes equity investment goodwill, is calculated
as the excess of the cost of purchased businesses over the value of their
underlying net assets. Goodwill and other intangible assets that have an
indefinite life are not amortized.
On an annual basis, we test goodwill and other intangible assets for
impairment. To determine the fair value of these intangible assets, there are
many assumptions and estimates used that directly impact the results of the
testing. We have the ability to influence the outcome and ultimate results based
on the assumptions and estimates we choose. To mitigate undue influence, we set
criteria that are reviewed and approved by various levels of management.
Additionally, we evaluate our recorded intangible assets with the assistance of
a third-party valuation firm, as necessary.
Warranties
The Company offers warranties of various lengths depending upon the
specific product. The Company's standard warranties require the Company to
repair or replace defective product returned to the Company by both end users
39
and its customers during such warranty period at no cost to the end users or
customers. The Company records an estimate for warranty related costs based upon
its actual historical return rates and repair costs at the time of sale, which
are included in cost of sales. The estimated liability for future warranty
expense amounted to $12,006 at November 30, 2003, which has been included in
accrued expenses and other current liabilities. While the Company's warranty
costs have historically been within its expectations and the provisions
established, the Company cannot guarantee that it will continue to experience
the same warranty return rates or repair costs that have been experienced in the
past. A significant increase in product return rates, or a significant increase
in the costs to repair the Company's products, could have a material adverse
impact on its operating results for the period or periods in which such returns
or additional costs materialize.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
This Statement establishes financial accounting and reporting standards for the
effects of income taxes that result from an enterprise's activities during the
current and preceding years. It requires an asset and liability approach for
financial accounting and reporting of income taxes.
The realization of tax benefits of deductible temporary differences and
operating loss or tax credit carryforwards will depend on whether the Company
will have sufficient taxable income of an appropriate character within the
carryback and carryforward period permitted by the tax law to allow for
utilization of the deductible amounts and carryforwards. Without sufficient
taxable income to offset the deductible amounts and carryforwards, the related
tax benefits will expire unused. The Company has evaluated both positive and
negative evidence in making a determination as to whether it is more likely than
not that all or some portion of the deferred tax asset will not be realized.
Effective May 29, 2002, the Company's ownership in the Wireless Group was
decreased to 75% (see Note 3). As such, the Company no longer files a
consolidated U.S. Federal tax return. As a result, the realizability of the
Wireless Group's deferred tax assets are assessed on a stand-alone basis. The
Company's Wireless Group has incurred cumulative losses in recent years, and
therefore based upon these cumulative losses and other material factors
(including the Wireless Group's inability to reasonably and accurately estimate
future operating and taxable income based upon the volatility of their
historical operations), the Company has determined that it is more likely than
not that some of the benefits of the Wireless Group's deferred tax assets and
carryforwards will expire unused. Accordingly, the Company recorded an
additional valuation allowance of $13,090 during fiscal year ended November 30,
2002 related to the Wireless Group's deferred tax assets. During the fiscal year
ended November 30, 2003, the valuation allowance was reduced by $641 due to a
reduction in various temporary differences.
Furthermore, the Company provides tax reserves for Federal, state and
international exposures relating to potential tax examination issues, planning
initiatives and compliance responsibilities. The development of these reserves
requires judgments about tax issues, potential outcomes and timing and is a
subjective critical estimate.
40
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
Years Ended November 30,
---------------------------
2001 (1) 2002 2003
------ ------ ------
Net sales (2):
Wireless
Wireless products 74.3% 63.7% 59.4%
Activation commissions 2.1 2.2 1.3
Residual fees 0.2 0.2 0.2
Other 0.1 0.1 --
------ ------ ------
Total Wireless 76.7 66.1 60.9
------ ------ ------
Electronics
Mobile electronics 12.4 20.8 22.2
Sound 4.5 5.1 5.9
Consumer electronics 6.3 7.9 10.9
Other 0.1 0.1 0.1
------ ------ ------
Total Electronics 23.3 33.9 39.1
------ ------ ------
Total net sales 100.0 100.0 100.0
Cost of sales (94.4) (93.2) (90.6)
------ ------ ------
Gross profit 5.6 6.8 9.4
Selling (2.4) (2.7) (2.8)
General and administrative (3.6) (5.0) (4.5)
Warehousing and technical support (0.3) (0.4) (0.5)
------ ------ ------
Total operating expenses (6.3) (8.1) (7.8)
------ ------ ------
Operating income (loss) (0.7) (1.3) 1.6
Interest and bank charges (0.5) (0.4) (0.3)
Equity in income in equity investments 0.3 0.2 0.2
Gain on issuance of subsidiary shares -- 1.3 --
Other, net -- (0.4) 0.1
------ ------ ------
Income (loss) before provision for (recovery of) income
taxes, minority interest and cumulative effect (0.9) (0.6) 1.6
Provision for (recovery of) income taxes (0.3) 1.2 0.7
Minority interest 0.1 0.4 --
Cumulative effect -- -- --
------ ------ ------
Net income (loss) (0.6)% (1.3)% 0.9 %
======= ======= ======
(1) See Note (2) of Notes to Consolidated Financial Statements.
(2) Effective March 1, 2002, the Company adopted Emerging Issues Task Force
(EITF) Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer". Upon adoption of this Issue, the Company reclassified its sales
incentives offered to its customers from selling expenses to net sales.
41
Previously reported operating income (loss) has remained unchanged by this
adoption. For purposes of comparability, these reclassifications have been
reflected retroactively for all periods presented.
The net sales and percentage of net sales by product line and marketing
group for the fiscal years ended November 30, 2001, 2002 and 2003 are reflected
in the following table. Certain reclassifications and recaptionings have been
made to the data for periods prior to fiscal 2003 in order to conform to fiscal
2003 presentation.
Fiscal Years Ended November 30,
---------------------------------------------------------------------------
2001 (1) 2002 2003
----------------------- --------------------- ---------------------
Net sales:
Wireless
Products $ 948,921 74.3% $ 700,658 63.7% $ 787,297 59.4%
Activation commissions 26,879 2.1 24,393 2.2 16,652 1.3
Residual fees 2,396 0.2 2,187 0.2 2,261 0.2
Other 692 0.1 420 0.1 -- --
---------- ------ ---------- ------ ---------- ------
Total Wireless 978,888 76.7 727,658 66.1 806,210 60.9
---------- ------ ---------- ------ ---------- ------
Electronics
Mobile electronics 157,706 12.4 229,327 20.8 294,519 22.2
Sound 57,456 4.5 56,281 5.1 78,413 5.9
Consumer electronics 80,380 6.3 86,472 7.9 144,240 10.9
Other 2,160 0.1 644 0.1 520 0.1
---------- ------ ---------- ------ ---------- ------
Total Electronics 297,702 23.3 372,724 33.9 517,692 39.1
---------- ------ ---------- ------ ---------- ------
Total $1,276,591 100.0% $1,100,382 100.0% $1,323,902 100.0%
========== ====== ========== ====== ========== ======
(1) See Note (2) of Notes to Consolidated Financial Statements.
Management Key Indicators
Management reviews the following financial and non-financial indicators to
assess the performance of the Company's operating results:
o Net Sales by product class - Management reviews this indicator in
order to determine sales trends for certain product classes as this
indicator is directly impacted by unit sales and new product
introductions.
o Gross profit margin - This indicator allows management to assess the
effectiveness of product introductions, timing of product acceptances
and significance of inventory write- downs.
o Operating Expenses as a % of net sales - This indicator is reviewed to
determine the efficiency of operating expenses in relation to the
Company's operations and identify significant fluctuations or possible
future trends.
o Inventory and Accounts Receivable turnover - Inventory purchases and
accounts receivable collections are two significant liquidity factors
42
that determine the Company's ability to fund current operations and
determine if additional borrowings may be necessary for future capital
outlays.
o Major acquisitions and transactions- Management consistently monitors
the aforementioned key indicators as well as economic and industry
conditions during consideration of major acquisitions and
transactions, such as the recent Recoton acquisition.
Fiscal 2002 Compared to Fiscal 2003
Consolidated Results
Net Sales
Consolidated net sales for fiscal 2003 increased $223,520 or 20.3% to
$1,323,902 as compared with $1,100,382 in fiscal 2002 and were impacted by a
$135 increase in sales incentives expense.
Wireless Group sales were $806,210 in fiscal 2003, a 10.8% increase from
sales of $727,658 in fiscal 2002. Unit sales of wireless handsets decreased 5.9%
to approximately 4,657,000 units in fiscal 2003 from approximately 4,950,000
units in fiscal 2002. However, the average selling price of the Company's
handsets increased to $163 per unit in fiscal 2003 from $136 per unit in fiscal
2002 due to higher selling prices of new product introductions.
Electronics Group sales were $517,692 in fiscal 2003, a 38.9% increase from
sales of $372,724 in fiscal 2002. This increase was largely due to increased
sales in the mobile video and consumer electronics product lines as a result of
new product introductions in digital video. Furthermore, this increase was also
due to the addition of $26,377 in sales by Audiovox Europe (see Note 6) from the
Recoton acquisition. Sound sales increased as a result of the Jensen(R),
Magnate(R), Mac Audio(R), Heco(R), Acoustic Research(R) and Advent(R),
trademarks which was acquired during the Recoton acquisition. This increase in
sound was partially offset by a change in the marketplace as fully-featured
sound systems are being incorporated into vehicles at the factory rather than
being sold in the aftermarket. This declining trend in fully-featured sound
systems is expected to continue except in the satellite radio product line.
Excluding Audiovox Europe, sales by the Company's international subsidiaries
decreased $12,128 or 55.2% in fiscal 2003 due to a 68.1% decrease in Venezuela
due to the temporary shut-down of the operations attributable to political and
economic instability and a 41.6% decrease in Malaysia as a result of lower OEM
sales.
Gross Profit
Gross profit margin for fiscal 2003 was 9.4%, compared to 6.8% in fiscal
2002. This increase in profit margin resulted primarily from lower Wireless
inventory write-downs and a change in the mix of sales from Wireless to
Electronics, which carries a higher gross margin. Margins for the Wireless Group
increased to 4.7% from 2.0% due to lower inventory write-downs as a result of
maintaining lower inventory levels and improved inventory management.
Specifically, Wireless inventory write-downs were $2,817 for fiscal 2003
compared to $13,823 in fiscal 2002. During fiscal 2003, there was no significant
impact to our gross profit margins on the subsequent sale of previously
written-down inventory. Margins for the Electronics Group increased to 16.6%
from 16.1% due to margins achieved from Audiovox Europe from the sale of
Magnate(R), Mac Audio(R), Heco(R), Acoustic Research(R) and Advent(R) products.
Consolidated gross margins were also adversely impacted by late wireless product
43
introductions and increased sales incentives. Further trends in the operations
will be discussed in detail in each individual marketing group MD&A discussion.
Operating Expenses
Operating expenses increased $13,728 to $102,403 in fiscal 2003, compared
to $88,675 in fiscal 2002. As a percentage of net sales, operating expenses
decreased to 7.8% in fiscal 2003 from 8.1% in fiscal 2002. Major components of
this increase were a $2,848 increase in advertising due to an increase in
general promotions to support the growing business and $7,755 of operating
expenses for Audiovox Europe which was acquired in the third quarter of fiscal
2003. In addition, direct labor costs increased $1,771 as a result of increased
production, primarily in the Electronics Group, and employee benefits increased
$2,785 due to a payment made to certain Venezuela executives, increased profit
sharing accruals and health care costs. The above increases were offset by a
$4,318 decrease in bad debt expense, primarily as a result of recoveries of
former customers and improved credit worthiness of current customers as compared
to the prior year. Operating income for fiscal 2003 was $21,803, compared to an
operating loss of $14,076 in 2002.
Net Income (Loss)
As a result of new product introductions, a growing economy and improved
gross profit margins, net income for fiscal 2003 was $11,239 compared to a net
loss of $14,040 in fiscal 2002. Net income per share for fiscal 2003 was $0.51,
basic and diluted compared to a net loss per share of $0.64 for fiscal 2002,
basic and diluted.
Wireless Results
The following table sets forth for the fiscal years indicated certain
statements of operations data for Wireless expressed as a percentage of net
sales:
2002 2003
--------------------- ---------------------
Net sales:
Wireless products $ 700,658 96.3% $ 787,297 97.7%
Activation commissions 24,393 3.3 16,652 2.1
Residual fees 2,187 0.3 2,261 0.2
Other 420 0.1 -- --
--------- ------ ---------- -------
Total net sales 727,658 100.0 806,210 100.0
Gross profit 14,291 2.0 37,977 4.7
Operating expenses
Selling 11,148 1.5 10,959 1.4
General and administrative 21,522 3.0 16,773 2.1
Warehousing and technical support 2,593 0.4 2,827 0.3
--------- ------ ---------- -------
Total operating expenses 35,263 4.9 30,559 3.8
--------- ------ ---------- -------
Operating income (loss) (20,972) (2.9) 7,418 0.9
Other expense (3,934) (0.5) (1,801) (0.2)
--------- ------ ---------- -------
Pre-tax income (loss) $ (24,906) (3.4)% $ 5,617 0.7%
========= ======= =========== =======
44
Wireless is composed of ACC and Quintex, both subsidiaries of the Company.
Net Sales
Net sales increased $78,552, or 10.8%, to $806,210 from fiscal 2002. Unit
sales of wireless handsets decreased by approximately 293,000 units in fiscal
2003, or 5.9%, to approximately 4,657,000 units from 4,950,000 units in fiscal
2002. This decrease in unit sales was attributable to late introductions of new
product and slower growth in the wireless industry, however, the average selling
price of handsets increased to $163 per unit in fiscal 2003 from $136 per unit
in fiscal 2002. This increase was due to higher selling prices of the
newly-introduced digital flip phones with color screens, web-browsing and camera
capability. The Company expects selling prices for digital phones to increase as
enhancements in digital technology expand digital phone capabilities.
There was a decrease in sales incentives expense of $7,780, net of
reversals of $1,137 as a result of late product introductions as compared to the
prior year offset by a reduction in reversals for unclaimed sales incentives. In
the prior year, the Company introduced a new phone which had a sales incentive
program with a large customer that resulted in an increase of approximately
$18,000 in sales incentives. Reversals for unclaimed sales incentives decreased
$1,902 as compared to the prior year due to an increase in claims of earned
sales incentives from larger customers as compared to the prior year as the
Company has focused more emphasis on this area. These sales incentive programs
are expected to continue as the Company introduces new technology and products.
Also, sales incentives will either increase or decrease based upon our
competition and our customer demands.
Gross Profit
Gross profit margins increased to 4.7% as compared to 2.0% in 2002 as a
result of the introduction of higher margin products, decreased sales incentive
programs, lower inventory write-downs and decreased temporary personnel costs.
During fiscal 2003, as compared to fiscal 2002, there was a decrease of $7,780
in sales incentive expense as a result of fewer new product introductions, net
of reversals of $1,137.
For fiscal 2002, gross margins were negatively impacted by inventory
write-downs of $13,823 or 1.9% compared to $2,817 or 0.3% in 2003. The
write-downs recorded in 2003 were based upon open purchase orders from customers
and selling prices as well as indications from our customers based upon current
negotiations. The decrease in inventory write-downs was primarily due to
Wireless maintaining lower inventory levels in fiscal 2003, which consisted
primarily of newer products as compared to fiscal 2002. As compared to fiscal
2002, which had several products near the end of their respective life cycle,
fiscal 2003 inventory levels consists primarily of newly-introduced products
which achieved higher margins as compared to the prior year. At November 30,
2003, the Company had on hand approximately 15,600 units of previously
written-down inventory which, after write-down, had an approximate extended
value of $800. The Company plans to sell these items to its existing customers
during the next year. A majority of the units that were previously written-down
in fiscal 2002 have been sold. The remaining balance of inventory previously
written-down in fiscal 2002 is not material and will be sold in the next fiscal
year. None of this inventory was scrapped. The Company expects that as new
products are introduced, existing models on hand are effected by price
45
competition from our competitors and demand by our customers, it could
experience additional write- downs in the future.
Temporary personnel costs decreased $1,904 due to Wireless maintaining less
inventory on hand during fiscal 2003, which resulted in fewer software upgrades
being performed as compared to the prior year. Gross margins were favorably
impacted by reimbursement from a vendor for software upgrades performed on
inventory sold of $1,331 and $557 for fiscal 2002 and 2003, respectively.
Without this reimbursement, gross margins would have been lower by 0.2% and 0.1%
for fiscal 2002 and 2003, respectively. In addition, the Company has recorded
price protection of $27,683 and $13,031 for fiscal 2002 and 2003, respectively,
from a vendor for certain inventory, recorded as a reduction to cost of sales as
the related inventory was sold. Without this price protection, gross profit
margins would have been lower by 4.5% and 1.6% for fiscal 2002 and 2003,
respectively.
Operating Expenses
Operating expenses decreased $4,704 in fiscal 2003 from fiscal 2002. As a
percentage of net sales operating expenses decreased to 3.8% during fiscal 2003
compared to 4.8% in fiscal 2002. Excluding the $3,200 bonus provision recorded
in connection with the Toshiba transaction in 2002 (see Note 3) and $3,492
decrease in bad debt expense (see discussion below), operating expenses would
have increased $1,988 or 7.0% in fiscal 2003 from fiscal 2002.
Selling expenses decreased $189 in fiscal 2003 compared to fiscal 2002,
primarily as a result of:
o Decline in commissions of $651 due to lower commissionable sales, as a
result of a decrease in Quintex sales and restructuring of commission
deals with salesmen.
o As a result of restructuring the above commission deals, base salaries
of salesman increased $299.
o Trade show expenses increased $158 as the Wireless group was attending
more shows and promotions as new products were being introduced.
General and administrative expenses decreased $4,749 in fiscal 2003
compared to the prior year, primarily as a result of:
o A $3,022 decrease in officer's salaries primarily due to a
non-recurring bonus provision and new executive compensation contract
in connection with the Toshiba transaction in 2002 (see Note 3).
o Bad debt expense decreased $3,492 primarily due to the recovery of a
previously charged bad debt and a customer who filed for bankruptcy in
2002, which did not recur in fiscal 2003. The Company does not
consider this decrease in bad debt expense to be a trend in the
overall accounts receivable.
46
o The above decreases were offset by a $947 increase in employee
benefits due to increased profit sharing accruals and costs under the
employee health care plan.
o Taxes and licenses increased $371 primarily due to a 2002 battery
recycling refund that did not repeat in 2003.
o Additionally, insurance expense increased $409 as a result of higher
premiums for general and umbrella insurance policies as a result of
the increase in sales and business activity.
Warehousing and technical support expenses increased $234 for fiscal 2003
from 2002, primarily as a result of:
o Increases in direct labor, payroll taxes and benefits of $470 due to
additional personnel in engineering for product development, testing
and warranty call center for customer service as products have become
more complex.
o The above increase was partially offset by a decrease in overseas
buying offices of $263 due to non-usage of the Korean buying office.
Numerous other individually insignificant fluctuations account for the remaining
net change in operating expenses.
Pre-tax Income (Loss)
As a result of the increase in sales due to new product introductions, less
inventory write-downs and a reduction in operating expenses, pre-tax income for
fiscal 2003 was $5,617, compared to a pre-tax loss of $24,906 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. The Company
competes against suppliers with significantly greater financial resources and
who are able to offer more extensive advertising and greater promotions than the
Company does. This pressure from increased competition is further enhanced 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.
47
Electronics Results
The following table sets forth for the fiscal years indicated certain
statements of income data for the Electronics Group expressed as a percentage of
net sales:
2002 2003
--------------------- ---------------------
Net sales:
Mobile electronics $ 229,327 61.5% $294,519 56.9%
Sound 56,281 15.1 78,413 15.1
Consumer electronics 86,472 23.2 144,240 27.9
Other 644 0.2 520 0.1
--------- ------ --------- -------
Total net sales 372,724 100.0 517,692 100.0
Gross profit 60,037 16.1 85,985 16.6
Operating expenses
Selling 15,944 4.3 22,159 4.3
General and administrative 23,300 6.2 30,981 6.0
Warehousing and technical support 1,137 0.3 2,760 0.5
--------- ------ --------- -------
Total operating expenses 40,381 10.8 55,900 10.8
--------- ------ --------- -------
Operating income 19,656 5.3 30,085 5.8
Other expense (1,927) (0.5) (545) (0.1)
--------- ------ --------- -------
Pre-tax income $ 17,729 4.8% $ 29,540 5.7%
========= ====== ========== =======
Net Sales
Net sales increased $144,968, or 38.9%, to $517,692 from net sales of
$372,724 in fiscal 2002. Sales of Audiovox Europe accounted for $26,377, or
18.2%, of this increase as a result of the Recoton acquisition (see Note 6).
Mobile electronics sales increased $65,192 (28.4%) during 2003 from 2002. Sales
of Mobile Video within the Mobile Electronics category increased over 38% in
fiscal 2003 from fiscal 2002 as a result of the introduction of new video
digital product, satellite radio and navigation products. Consumer Electronics
increased $57,768 (66.8%) to $144,240 in fiscal 2003 from $86,472 in fiscal
2002, primarily in sales of DVD/video-in-a-bag and portable DVD players. Sound
sales also increased as a result of the Jensen(R), Magnate(R), Mac Audio(R),
Heco(R), Acoustic Research(R) and Advent(R), trademarks which usage right was
acquired during the Recoton acquisition. This increase in sound was partially
offset by a change in the marketplace as fully-featured sound systems are being
incorporated into vehicles at the factory rather than being sold in the
aftermarket. This declining trend in fully-featured sound systems is expected to
continue, offset by the Jensen acquisitions and increased sales in the satellite
radio product line.
There was an increase in sales incentives expense of $7,915, net of
reversals of $1,803, to $14,080, due to higher sales volume. The increase in
48
sales resulted in an increase in sales incentives as many sales incentive
programs are based on a percentage of sales. These sales incentive programs are
expected to continue and will either increase or decrease based upon competition
and customer demands. Net sales in the Company's Malaysian subsidiary decreased
$4,844 (41.6%) from last year primarily from lower OEM business. The Company's
Venezuelan subsidiary experienced a decrease of $6,160 (68.1%) 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. These decreases were offset
by additional sales from Audiovox Europe of $26,377 since the acquisition of
Recoton on July 8, 2003.
Gross Profit
Gross profit margins increased to 16.6% in fiscal 2003 from 16.1% in fiscal
2002. This increase was due to margins achieved in Audiovox Europe from
Jensen(R), Magnate(R), Mac Audio(R), Heco(R), Acoustic Research(R) and Advent(R)
products as well as an increase in Code-Alarm margins due to a decline in
production and warranty costs. This increase was offset by an increase in the
sales of video products sold through consumer channels, which carry a lower
gross margin as opposed to other product lines. In addition, there was a $7,915
increase in sales incentive expense, net of reversals of $1,803, due to higher
sales volume.
Operating Expenses
Operating expenses increased $15,519 in fiscal 2003, a 38.4% increase
compared to fiscal 2002. The AEC group (Audiovox Electronics, Code-Alarm and
American Radio) accounted for $7,735 or 49.8% of the fiscal 2003 increase. The
international group (Audiovox Europe, Malaysia and Venezuela) accounted for
$7,784 or 50.2% of the fiscal 2003 increase which was primarily due to the
Recoton acquisition. As a percentage of net sales, operating expenses remained
consistent at 10.8%.
Selling expenses increased $6,215 during fiscal 2003 of which $3,761 and
$2,454 was attributable to the AEC group and international group, respectively.
o The increase for the AEC group was primarily due to increases of
$1,359 in commissions due to an increase in commissionable sales and
salesman salaries, payroll taxes and benefits of $1,161 as a result of
higher employee wages and the hiring of additional employees. In
addition, advertising expense increased $827 as a result of general
promotions in an effort to support the growing business.
o The increase for the international group was due to approximately
$2,640 of Audiovox Europe expenses offset by a $186 decrease in
Malaysia and Venezuela. Audiovox Europe expenses were primarily
comprised of $1,285 in commissions, $241 of salesman salaries and $951
of advertising due to the operations of Recoton, which was acquired
during the third quarter of fiscal 2003. The decrease in Malaysia and
Venezuela was mainly due to a $130 decrease in commissions as a result
of a decline in commissionable sales.
General and administrative expenses increased $7,681 during fiscal 2003 of
which $2,405 and $5,276 was attributable to the AEC group and international
group, respectively.
o The increase for the AEC group was primarily due to an increase of
49
$1,647 in salaries and payroll taxes as a result of hiring additional
employees and increase in employee wages to support the increased
business. Corporate allocations increased $666 and insurance expense
increased $248 due to higher premiums as a result of increased
business activities. In addition, higher costs for the employee health
care plan and increased profit sharing accruals caused employee
benefits to increase $582. The above increases were partially offset
by a $974 decrease in bad debt expense due to the bad debt recovery in
fiscal 2003 of a 2002 customer write-off. The Company does not
consider this decrease in bad debt expense to be a trend in the
overall accounts receivable.
o The increase for the international group was due to $4,533 of Audiovox
Europe expenses and a $743 increase in Malaysia and Venezuela
expenses. Audiovox Europe expenses were primarily comprised of $1,793
in salaries and related payroll taxes, $570 of office expenses, $765
of occupancy costs and $356 of depreciation as a result of the Recoton
acquisition. The increase in Malaysia and Venezuela expenses was
primarily due to an increase in Venezuela's employee benefits of
$1,129 due to a payment made to certain Venezuela executives as a
result of restructuring actions for claims made and for further
potential termination claims. The above increase was partially offset
by a $190 decrease in salaries due to employee terminations in
Venezuela.
Warehouse and technical support increased $1,623 or 142.7%. This increase
was primarily due to a $1,385 increase in direct labor and payroll taxes due to
the hiring of additional employees and includes $583 of Audiovox Europe
expenses. In addition, the increase in warehouse and technical support is due to
the hiring of additional engineers as the increase in sales volume has resulted
in the Company providing added customer service. Furthermore, overseas buying
office expenses increased $472 as a result of increased costs associated with
operating this office.
Numerous other individually insignificant fluctuations account for the
remaining net change in operating expenses.
Pre-tax Income (Loss)
As a result of increased sales due to new product introductions and the
Recoton acquisition, increased gross profit, offset by increased operating
expenses, pre-tax income for fiscal 2003 was $29,540, compared to $17,729 for
fiscal 2002.
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.
Consolidated Other Income and Expense
Interest expense and bank charges increased $383 during fiscal 2003 from
fiscal 2002, primarily due to interest incurred on German debt acquired as a
result of the Recoton acquisition, offset by lower average borrowings from the
Company's primary credit facility during fiscal 2003.
50
Equity in income of equity investees increased $1,500 for fiscal 2003
compared to fiscal 2002. The majority of the increase was due to an increase in
the equity income of ASA as a result of improved gross margins achieved in
marine industry sales.
Other expenses decreased as a result of foreign exchange translation in our
Venezuelan subsidiary due to the decreased devaluation of the Venezuelan
currency against the U.S. Dollar as compared to fiscal 2002. Specifically,
foreign exchange losses were $850 in fiscal 2003 compared to $2,819 in 2002. In
addition, in fiscal 2002, the Company recorded an other-than-temporary
impairment for investment in common stock of Shintom Co., Ltd. of $1,158
compared to $21 in fiscal 2003. Included in other expenses for fiscal 2003 is a
$620 settlement of an administrative agency investigation involving alleged
reimbursement of a fixed nominal amount of federal campaign contributions during
the years 1995 through 1996.
In fiscal 2002, the Company also recognized a gain of $14,269 on the sale
of ACC shares to Toshiba (Note 3) which did not recur in fiscal 2003.
Minority interest income decreased $5,445 compared to fiscal 2002,
primarily due to Wireless recording net income in fiscal 2003 as compared to a
net loss in fiscal 2002.
Consolidated Provision for Income Taxes
The effective tax rate for 2002 was an expense of 202.0% as compared to the
effective tax rate for 2003 which was an expense of 44.7%. The decrease in the
effective tax rate is principally due to the Company recording an additional
valuation allowance for wireless deferred taxes in fiscal 2002, which did not
recur in fiscal 2003. Effective May 29, 2002, the Company's ownership in the
Wireless Group was decreased to 75% (see Note 3). As such, the Company now files
two consolidated U.S. Federal tax returns, one for the Wireless Group and one
for the Electronics Group. As a result, the realizability of the Wireless
Group's deferred tax assets are assessed on a stand-alone basis. The Company's
Wireless Group has incurred cumulative losses in recent years and therefore
based upon these cumulative losses and other material factors (including the
Wireless Group's inability to reasonably and accurately estimate future
operating and taxable income based upon the volatility of their historical
operations), the Company has determined that it is more likely than not that
some of the benefits of the Wireless Group's deferred tax assets and
carryforwards will expire unused, accordingly, the Company has recorded an
additional valuation allowance of $13,090 during fiscal year ended November 30,
2002 related to the Wireless Group's deferred tax assets. The valuation
allowance relates principally to the deferred tax assets of the Wireless
segment, which has recorded cumulative losses in recent years, and to certain
state net operating losses which the Company has determined are more likely than
not to expire unused. During November 30, 2003, the valuation allowance was
reduced by $641 due to a reduction in various temporary differences.
51
Fiscal 2001 Compared to Fiscal 2002
Consolidated Results
Net Sales
Net sales for fiscal 2002 were $1,100,382, a 13.8% decrease from net sales
of $1,276,591 in fiscal 2001. Wireless Group sales were $727,658 in fiscal year
2002, a 25.7% decrease from sales of $978,888 in fiscal 2001. Unit sales of
wireless handsets decreased 29.3% to approximately 4,950,000 units in fiscal
2002 from approximately 7,000,000 units in fiscal 2001. However, the average
selling price of the Company's handsets increased to $136 per unit in fiscal
2002 from $127 per unit in fiscal 2001 as a result of new product introductions.
Wireless sales were impacted by late introductions of new products by its
vendor, delays in acceptances testing by our customers and slower growth in the
wireless industry.
Electronics Group sales were $372,724 in fiscal 2002, a 25.2% increase from
sales of $297,702 in fiscal 2001. This increase was largely due to increased
sales in the mobile video and consumer electronics product lines as newer
digital video products were offered to our customers. Offsetting some of this
increase were 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 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 21.5% in
fiscal 2002 to approximately $21,971 due to a 39.2% decrease in Venezuela due to
political and economic instability and a 7.4% decrease in Malaysia as a result
of lower OEM sales. Sales were also impacted by increased sales incentives of
$23,035, primarily in the Wireless Group.
Gross Profit
Gross profit margin for fiscal 2002 was 6.8%, compared to 5.6% in fiscal
2001. However, this increase in profit margin resulted primarily from lower
inventory write-downs to market of $6,827 in 2002 compared to 2001. During
fiscal 2002, there was no significant impact to our gross profit margins on the
subsequent sale of previously written-down inventory. There was also a change in
the mix of sales from Wireless product sales to Electronics product sales, which
carry a higher gross margin. Wireless margins were impacted by late product
introductions by its suppliers. This trend of late product introductions
continues to have a major effect on the gross margins of the Wireless Group.
Margins declined to 16.1% from 16.5% in the Electronics Group. Consolidated
gross margins were also adversely impacted by increased sales incentives,
principally in the Wireless Group. Further trends in the operations will be
discussed in detail in each individual marketing group MD&A discussion.
Operating Expenses
Operating expenses increased $8,049 to $88,675 in fiscal 2002, compared to
$80,626 in fiscal 2001. As a percentage of net sales, operating expenses
increased to 8.1% in fiscal 2002 from 6.3% in fiscal 2001. Major components of
this increase were compensation expenses of $3,200 related to the sale of ACC
shares to Toshiba and the impact of Code acquisition (Note 6 of Notes to
Consolidated Financial Statements) of $1,852. Additionally, bad debt expenses
increased $2,948 principally in the Wireless Group as a result of economic
52
conditions in South America and increased insurance expense, particularly with
general liability insurance, of $1,167. This increase in operating expenses was
partially offset by reductions in employee benefits expense of $1,332 due to
reduced bonuses and lower health care costs. Operating loss for fiscal 2002 was
$14,076, compared to operating loss of $9,236 in 2001.
Net Loss
Net loss for fiscal 2002 was $14,040 compared to net loss of $7,198 in
fiscal 2001. Loss per share for fiscal 2002 was $0.64, basic and diluted
compared to $0.33 for fiscal 2001, basic and diluted.
Wireless Results
The following table sets forth for the fiscal years indicated certain
statements of operations data for Wireless expressed as a percentage of net
sales:
2001 (1) 2002
--------------------- ----------------------
Net sales:
Wireless products $ 948,921 96.9% $ 700,658 96.3%
Activation commissions 26,879 2.8 24,393 3.3
Residual fees 2,396 0.2 2,187 0.3
Other 692 0.1 420 0.1
---------- ------ ---------- --------
Total net sales 978,888 100.0 727,658 100.0
Gross profit 21,980 2.2 14,291 2.0
Operating expenses
Selling 13,108 1.3 11,148 1.5
General and administrative 16,077 1.6 21,522 3.0
Warehousing and technical support 2,761 0.3 2,593 0.4
---------- ------ ---------- --------
Total operating expenses 31,946 3.2 35,263 4.9
---------- ------ ---------- --------
Operating loss (9,966) (1.0) (20,972) (2.9)
Other expense (7,690) (0.8) (3,934) (0.5)
---------- ------- ---------- --------
Pre-tax loss $ (17,656) (1.8)% $ (24,906) (3.4)%
========== ======= ========== ========
(1) See Note (2) of Notes to Consolidated Financial Statements.
Wireless is composed of ACC and Quintex, both subsidiaries of the Company.
Net Sales
Net sales were $727,658 in fiscal 2002, a decrease of $251,230, or 25.7%,
from fiscal 2001. Unit sales of wireless handsets decreased by 2,050,000 units
in fiscal 2002, or 29.3%, to approximately 4,950,000 units from 7,000,000 units
in fiscal 2001. This decrease was attributable to decreased sales of digital
handsets due to delayed new product introductions, longer testing cycles
53
required by our customers and overall lower demand for wireless products. The
average selling price of handsets, however, increased to $136 per unit in fiscal
2002 from $127 per unit in fiscal 2001. This increase was due to higher selling
prices of the newly-introduced 1X digital products.
Sales incentives expense increased $20,845 (net of reversals) compared to
2001 due to increased sales incentive programs and a reduction in the reversals
for unclaimed sales incentives. In connection with the introduction of the new
1X phones, one sales incentive program with a large customer resulted in an
increase of $18,000 in sales incentives. The reversals for unclaimed sales
incentives decreased by $2,374 in fiscal 2002 compared to fiscal 2001 for
Wireless due to more of the Company's larger customers claiming earned sales
incentives as compared to prior periods. These sales incentive programs are
expected to continue and will either increase or decrease based upon competition
and customer demands.
Gross Profit
Gross profit margins remained essentially unchanged at 2.0% vs. 2.2% in
2001 due to the sales of new, higher margin products and lower inventory
write-downs, offset by increased sales incentive programs. The Company expects
due to market conditions, competition and customer concentration, it could
experience increased sales incentives expense in the future. Inventory
write-downs were $20,650 in 2001 compared to $13,823 in 2002. The write-downs
recorded in 2002 were a result of the reduction of selling prices primarily
related to older model, digital hand-held phones and other wireless products in
anticipation of newer digital technologies. At November 30, 2002, the Company
had on hand approximately 630,000 units of previously written-down inventory
which, after write-down, had an extended value of approximately $84,638. The new
technology that was introduced during the second quarter of 2002 was 1XXT and
GPS phones. In addition to inventory write-downs recorded in previous quarters,
the Company determined the valuation of the older technology digital models on
hand as of November 30, 2002 by reviewing open purchase orders from customers
and selling prices subsequent to the balance sheet date as well as indications
from customers based upon current negotiations. A majority of the units that
were previously written-down in fiscal 2001 have been sold. The remaining
balance of inventory previously written-down in fiscal 2001 is not material and
none of this inventory was scrapped. The Company expects that, due to market
conditions and customer consolidation, it could experience additional
write-downs in the future.
Gross margins were favorably impacted by reimbursement from a vendor for
software upgrades performed on inventory sold of $1,615 and $1,331 for fiscal
2001 and 2002, respectively. Without this reimbursement, gross margins would
have been lower by 0.1% and 0.2% for fiscal 2001 and 2002, respectively. The
Company has received price protection of $4,550 and $32,643 for fiscal 2001 and
2002, respectively, from a vendor for certain inventory, of which $4,550 and
$27,683 was recorded as a reduction to cost of sales, as related inventory was
sold. The other $4,960 in price protection for 2002 has been reflected as a
reduction to the remaining inventory cost. Without this price protection, gross
profit margins would have been lower by 0.5% and 4.5% for fiscal 2001 and 2002,
respectively. The Company has an agreement with its vendor for additional future
price protection with respect to specific inventory items, if needed.
54
Operating Expenses
Operating expenses increased $3,317 in fiscal 2002 from fiscal 2001. As a
percentage of net sales operating expenses increased to 4.8% during fiscal 2002
compared to 3.3% in fiscal 2001.
Selling expenses decreased $1,960 in fiscal 2002 from fiscal 2001,
primarily in commissions of $2,246 from reduced sales in Mexico, $587 from
reduced sales in Europe and the balance from lower over-all commissionable
sales. Travel and entertainment decreased $126 due to a reduction in the sales
force and less international travel. These decreases were partially offset by
increases in advertising and trade show expense of $498 primarily due to
increased sales promotions and broadcast media advertising of $274. Numerous
other individually insignificant fluctuations account for the remaining net
change in selling expenses.
General and administrative expenses increased $5,445 in fiscal 2002 from
fiscal 2001, primarily in salaries of $2,818 due to $3,200 bonus payments
associated with the Toshiba transaction (Note 3), insurance expense of $681 due
to increased insurance premiums for general liability coverage, occupancy costs
of $128 due to increased rent, real estate taxes and utilities, bad debt expense
of $2,853 primarily due to two accounts in Venezuela and Argentina as a result
of the political and economic conditions and one account in the United States
for slow payment. The Company does not consider this a trend in the overall
accounts receivable. Depreciation and amortization increased $236 due to
purchase of additional testing equipment as new 1X product is being introduced.
These increases were partially offset by decreases in travel and entertainment
of $193 due to less salesmen traveling as a result of lower sales and a reduced
budget for travel and entertainment, employee benefits of $634 as a result of
reduction in profit bonus and reductions in health plan costs due to improved
claim experience and licenses of $466 due to a non-recurring licensing fee.
Warehousing and technical support expenses decreased $168 in fiscal 2002
from fiscal 2001, primarily in direct labor, taxes and benefits of $130 and
overseas buying offices of $107 due to lower expenses in the buying offices in
South Korea as a result of reduced sales. These decreases were partially offset
by an increase in travel of $69 due to increased travel for product compliance
testing. Numerous other individually insignificant fluctuations in various
categories account for the remaining net change in operating expenses.
Pre-tax Loss
Pre-tax loss for fiscal 2002 was $24,906, compared to $17,656 for fiscal
2001.
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 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. 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.
55
Electronics Results
The following table sets forth for the fiscal years indicated certain
statements of income data for the Electronics Group expressed as a percentage of
net sales:
2001 (1) 2002
--------------------- ----------------------
Net sales:
Mobile electronics $ 157,706 53.0% $ 229,327 61.5%
Sound 57,456 19.3 56,281 15.1
Consumer electronics 80,380 27.0 86,472 23.2
Other 2,160 0.7 644 0.2
---------- ------- ---------- -------
Total net sales 297,702 100.0 372,724 100.0
Gross profit 49,088 16.5 60,037 16.1
Operating expenses
Selling 14,449 4.9 15,944 4.3
General and administrative 19,547 6.6 23,300 6.2
Warehousing and technical support 1,134 0.3 1,137 0.3
---------- ------- ---------- -------
Total operating expenses 35,130 11.8 40,381 10.8
---------- ------- ---------- -------
Operating income 13,958 4.7 19,656 5.3
Other expense (178) (0.1) (1,927) (0.5)
---------- ------- ---------- -------
Pre-tax income $ 13,780 4.6% $ 17,729 4.8%
========== ======= ========== ======
(1) See Note (2) of Notes to Consolidated Financial Statements.
Net Sales
Net sales were $372,724 in fiscal 2002, a 25.2% increase from net sales of
$297,702 in fiscal 2001. Mobile and consumer electronics' sales increased over
last year, partially offset by a decrease in Sound and other. Mobile electronics
increased $71,621 (45.4%) during 2002 from 2001. Sales of Mobile Video within
the Mobile Electronics category increased over 59% in fiscal 2002 from fiscal
2001 as a result of the introduction of new video digital product, satellite
radio and navigation products. Consumer Electronics increased $6,092 (7.6%) to
$86,472 in fiscal 2002 from $80,380 in fiscal 2001, primarily in sales of
video-in-a-bag and portable DVD players. These increases were partially offset
by a decrease in the sound category, particularly AV and Prestige(R) audio
lines. Given 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.
Sales incentives expense increased $2,190 (net of reversals) due to an
increase in sales as compared to the prior year in the consumer goods category,
56
which requires more promotion support. As many sales incentive programs are
based on a percentage of sales, the increase in sales resulted in an increase in
sales incentives.
Net sales in the Company's Malaysian subsidiary decreased from last year by
approximately $933 (7.4%) primarily from lower OEM business. The Company's
Venezuelan subsidiary experienced a decrease of $5,823 (39.2%) in sales from
last year, primarily from lower OEM business and the impact of economic and
political instability in the country.
Gross Profit
Gross profit margins decreased to 16.1% in fiscal 2002 from 16.5% in fiscal
2001 despite an increase in sales. The gross margin decreased in Sound,
partially offset by an increase in Mobile Electronics and international
operations. Also affecting margins was the integration of Code-Alarm into the
Electronics Group (see Note 6). During 2002, the Company was in the process of
converting Code from their own domestic manufacturing to having products
produced by overseas vendors. As a result, Code's gross margins were
significantly lower than other product lines in the Electronics Group. Lower
margins from Code were partially offset by higher margins in new models of
consumer and mobile electronics. This integration of Code has been completed.
Operating Expenses
Operating expenses increased $5,251 in fiscal 2002, a 14.9% increase from
operating expenses in fiscal 2001. As a percentage of net sales, operating
expenses decreased to 10.8% during fiscal 2002 compared to 11.8% in fiscal 2001.
Selling expenses increased $1,495 during fiscal 2002, primarily in
commissions of $911 due to increased commissionable sales in the video and
consumer goods product categories, which has a different commission rate
structure and grew faster than other product groups, salaries of $598 primarily
due to Code, a new company, newly hired international salesmen and travel and
entertainment of $144 due to increased travel to support increased business both
in the Segment's core business and its two subsidiaries, American Radio and
Code. These increases were partially offset by decreases of $262 in advertising
and trade shows.
General and administrative expenses increased $3,753 from fiscal 2001,
mostly in salaries of $1,713 primarily due to Code, increased bonuses due to
sales increases and increased head count, travel and entertainment of $234 due
to additional business and acquisitions, office expenses of $122 due to
increased use of employment agencies, for additional staff to support sales
growth, equipment repair of $101 due to increased maintenance of office
equipment, insurance expense of $378 due to higher premiums on general liability
and Ocean Cargo as shipments and sales have increased, professional fees of $589
due to litigation expenses related to royalties and other matters and increased
use of consulting services related to a new customer's navigation system,
occupancy costs of $260 due to relocation of the display department to another
separate facility, bad debt expense of $311 due to non- payment by an
international customer, which is not indicative of a trend, and depreciation and
amortization of $163 due to general expansion of the facilities to support the
growing operations. These increases were partially offset by decreases in
equipment rentals of $111 due to the elimination of certain office machines.
57
Warehousing and technical support expenses remained essentially unchanged
at $1,137 in fiscal 2002 from fiscal 2001 compared to $1,134 in fiscal 2002.
Pre-tax Income
Pre-tax income for fiscal 2002 was $17,729, compared to $13,780 for fiscal
2001.
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.
Consolidated Other Income and Expense
Interest expense and bank charges decreased $1,703 during fiscal 2002 from
fiscal 2001, primarily due to lower interest rates on lower borrowing levels.
Equity in income of equity investees decreased by approximately $1,807 for
fiscal 2002 compared to fiscal 2001. The majority of the decrease was due to a
decrease in the equity income of ASA due to a general slow down in the market
for their products.
Other expenses increased as a result of foreign exchange translation in our
Venezuelan subsidiary as a result of the devaluation of the Venezuelan currency
against the U.S. Dollar and the effects of the change from hyper-inflationary
accounting for foreign exchange translation to non-hyper-inflationary accounting
in fiscal 2002. During fiscal 2001, the Company accounted for foreign exchange
translation in its Venezuelan subsidiary under hyper-inflationary method. The
foreign exchange losses were $333 in 2001 and $2,819 in 2002.
In addition, in fiscal 2002, the Company recorded an other-than-temporary
impairment for investment in common stock of Shintom Co., Ltd. of $1,158 and
recognized a gain of $14,269 on the sale of ACC shares to Toshiba (Note 3).
Consolidated Provision for Income Taxes
The effective tax rate for 2001 was a (benefit) of (31.6%) as compared to
the effective tax rate for 2002 which was an expense of 202.0%. The increase in
the effective tax rate is principally due to the increase in valuation
allowance, relating to various deferred tax assets. Effective May 29, 2002, the
Company's ownership in the Wireless Group was decreased to 75% (see Note 3). As
such, the Company now files two consolidated U.S. Federal tax returns, one for
the Wireless Group and one for the Electronics Group. As a result, the
realizability of the Wireless Group's deferred tax assets are assessed on a
stand-alone basis. The Company's Wireless Group has incurred cumulative losses
in recent years and therefore based upon these cumulative losses and other
material factors (including the Wireless Group's inability to reasonably and
accurately estimate future operating and taxable income based upon the
volatility of their historical operations), the Company has determined that it
is more likely than not that some of the benefits of the Wireless Group's
deferred tax assets and carryforwards will expire unused, accordingly, the
58
Company has recorded an additional valuation allowance of $13,090 during fiscal
year ended November 30, 2002 related to the Wireless Group's deferred tax
assets. The increase in the valuation allowance relates principally to the
deferred tax assets of the Wireless segment, which has recorded cumulative
losses in recent years, and to certain state net operating losses which the
Company has determined are more likely than not to expire unused.
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. The amount of financing is dependent primarily on the
collection of accounts receivable and purchase of inventory. As of November 30,
2003, the Company had working capital of $304,354, which includes cash of $4,702
compared with working capital of $292,687 at November 30, 2002, which includes
cash of $2,758.
Operating activities provided cash of $24,070 and $28,996 in fiscal 2002
and 2003, respectively. Net income provided $11,239 for operating activities in
fiscal 2003.
The following significant fluctuations in the balance sheet impacted cash
flow from operations:
o Decrease in inventory as a result of increased inventory turnover,
which approximated 4.7 during fiscal 2003 compared to 4.0 in fiscal
2002. The increased turnover is a result of improved management of
Wireless inventory and increased sales. Although this is a favorable
condition, the Company cannot guarantee this to be a trend in the
future.
o The above increase in cash flow was partially offset by an increase in
accounts receivable due to increased sales and accounts receivable
purchased in connection with the Recoton acquisition. Accounts
receivable turnover improved to 5.8 during fiscal 2003 compared to 5.2
in the prior year. While collections of accounts receivable and credit
quality of customers has improved, the Company does not expect this to
be a trend as accounts receivable collections are often impacted by
general economic conditions. In addition, cash flow from operating
activities was reduced due to a decrease in accounts payable.
Investing activities used $40,319, primarily as a result of the following:
o On July 8, 2003, the Company, through a newly-formed, wholly-owned
subsidiary, acquired in cash (i) certain accounts receivable,
inventory and trademarks from the U.S. audio operations of Recoton
Corporation (the "U.S. audio business") and (ii) the outstanding
capital stock of Recoton German Holdings GmbH (the "international
audio business"), the parent holding company of Recoton Corporations
Italian, German and Japanese subsidiaries, for $40,046, net of cash
acquired, including transaction costs of $1.9 million (see Note 6).
o In June 2003 the Company purchased a building for expansion purposes
for $3,513, which includes closing costs.
o The Company sold accounts receivable, inventory and related
intangibles to an equity investee (see Note 6) for $3,600.
59
Financing activities provided $12,965, primarily due to debt proceeds
received as a result of the Recoton acquisition (see Note 6), offset by net
repayments of bank obligations.
The Company's Board of Directors approved the repurchase of 1,563,000
shares of the Company's Class A common stock in the open market under a share
repurchase program (the Program). No shares were purchased under the Program
during fiscal 2003. As of November 30, 2002 and 2003, 1,072,737 shares were
repurchased under the Program at an average price of $7.93 per share for an
aggregate amount of $8,511.
The Company's principal source of liquidity is its revolving credit
agreement, which expires July 27, 2004. The Company is currently negotiating
with the bank to extend this agreement for an additional three years. At
November 30, 2003, the credit agreement provided for $150,000 of available
credit, including $10,000 for foreign currency borrowings. An amendment to the
credit agreement reduced its credit availability from $200,000 to $150,000
during the third quarter of 2003 as a result of the Company's working capital
position and current anticipated borrowing requirements. The foreign currency
borrowing sublimit was simultaneously reduced from $15,000 to $10,000.
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 are
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 $150,000, subject to certain conditions, based upon a formula taking
into account the amount and quality of its accounts receivable and inventory.
The credit agreement 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, 2003, the amount of
unused available credit is $109,184. The credit agreement also allows for
commitments up to $50,000 in forward exchange contracts. 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.
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 and had not received a waiver. Accordingly,
the Company recorded its outstanding domestic bank obligations of $36,883 in
current liabilities at November 30, 2002.
Subsequent to November 30, 2002, the Company repaid its fiscal 2002
obligation of $36,883 in full and borrowed additional funds during the fourth
quarter of fiscal 2003, resulting in domestic bank obligations outstanding at
November 30, 2003 of $31,709. The Company subsequently obtained a waiver for the
November 30, 2002 and February 28, 2003 violations. The Company was in
compliance with all its bank covenants at November 30, 2003. 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.
60
The Company also has revolving credit facilities in Malaysia and Germany to
finance additional working capital needs. 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. As of November 30, 2003, the
available line of credit for direct borrowing, letters of credit, bankers'
acceptances and other forms of credit approximated $3,600. The Malaysian credit
facilities are partially secured by the Company under three standby letters of
credit of $800 each and are payable on demand or upon expiration of the standby
letters of credit, which expire in January, July and July 2004, respectively.
The German credit facility consists of accounts receivable factoring up to
16,000 Euros and a working capital facility, secured by accounts receivable and
inventory, up to 5,000 Euros. The facilities are renewable on an annual basis.
On September 2, 2003, the Company's subsidiary, Audiovox Europe Holdings GmbH.
borrowed 12 million Euros under a new term loan agreement to reimburse for
acquisition costs with Recoton (see Note 12).
At November 30, 2003, the Company had additional outstanding standby
letters of credit for insurance purposes aggregating $678 which expire on
various dates from May to July 2004.
The Company has guaranteed the borrowings of one of its 50%-owned equity
investees (GLM) at a maximum of $300. During the quarter ended May 31, 2003, the
Company adopted FIN 45, "Guarantors Accounting and Disclosure Requirements for
Guarantors, Including Guarantees of Indebtedness of Others" (FIN 45). The
Company has not modified this guarantee after December 31, 2002. No liability
has been recorded for this guarantee on the accompanying consolidated financial
statements.
The Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At November 30,
2003, such obligations and commitments are as follows:
Payments Due By Period
-------------------------------------------------
Less
than 1-3 4-5 Over
Contractual Cash Obligations Total 1 Year Years Years 5 Years
- ---------------------------- ------- ------- ------- ------- -------
Capital lease obligations (1) $13,652 $ 553 $ 1,113 $ 1,157 $10,829
Operating leases (2) 14,340 3,946 6,040 4,166 188
------- ------- ------- ------- -------
Total contractual cash $27,992 $ 4,499 $ 7,153 $ 5,323 $11,017
obligations ======= ======= ======= ======= =======
61
Amount of Commitment
Expiration per period
--------------------------------------------------
Total Less
Other Commercial Amounts than 1-3 4-5 Over
Commitments Committed 1 Year Years Years 5 years
- ------------------- --------- ------- ------- ------- ----
Lines of credit (3) $ 39 940 $39,940 -- -- --
Standby letters of credit (3) 3,078 3,078 -- -- --
Guarantees (4) 300 300 -- -- --
Debt (5) 21,722 3,433 $ 5,258 $13,031 --
Commercial letters of credit(3) 2,541 2,541 -- -- --
------- ------- ------- ------- ----
Total commercial $67,581 $49,292 $ 5,258 $13,031 --
commitments ======== ======== ======= ======= ====
(1) Refer to Note 17 of Notes to Consolidated Financial Statements.
(2) Refer to Note 17 of Notes to Consolidated Financial Statements.
(3) Refer to Note 18 of Notes to Consolidated Financial Statements.
(4) Refer to Note 21 of Notes to Consolidated Financial Statements.
(5) Refer to Notes 12 and 13 of Notes to 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 that are complementary
to those of the Company, which transaction may require 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.
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
62
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.
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 and has been extended for an additional two years. 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 lease payments required under the
leases for the five-year period ending November 30, 2008 are $5,224.
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, at November 30, 2002, the Company had
outstanding notes due from various officers of the Company aggregating $235,
which have been included in prepaid expenses and other current assets on the
accompanying consolidated balance sheet. The notes bore interest at the LIBOR
rate plus 0.5% per annum. Principal and interest were payable in equal annual
installments beginning July 1, 1999 through July 1, 2003. The notes have been
paid in full. In addition, no new notes with officers or directors of the
Company have been entered into.
Transactions with Shintom and TALK
In April 2000, Audiovox Japan (AX Japan), a wholly-owned subsidiary,
purchased land and a building (the Property) from Shintom Co., Ltd. (Shintom)
for 770,000,000 Yen (approximately $7,300) and entered into a leaseback
agreement whereby Shintom leased the Property from AX Japan for a one-year
period. The lease was being accounted for as an operating lease by AX Japan.
Shintom is a stockholder who owns all of the outstanding preferred stock of the
Company and is a manufacturer of products purchased by the Company through its
previously-owned equity investee, TALK Corporation (TALK). The Company currently
holds stock in Shintom and has previously invested in Shintom convertible
debentures.
The purchase of the Property by AX Japan was financed with a 500,000,000
Yen ($4,671) subordinated loan obtained from Vitec Co., Ltd. (Vitec), a
150,000,000 Yen loan ($1,397) from Pearl First (Pearl) and a 140,000,000 Yen
loan ($1,291) from the Company. The land and building were included in property,
plant and equipment, and the loans were recorded as notes payable on the balance
sheet as of November 30, 2001 . Changes arising from the fluctuations in the Yen
exchange rate were reflected as a component of accumulated other comprehensive
loss. Vitec is a major supplier to Shintom, and Pearl is an affiliate of Vitec.
The loans bore interest at 5% per annum, and principle is payable in equal
monthly installments over a six-month period beginning six months subsequent to
the date of the loans. The loans from Vitec and Pearl were subordinated
completely to the loan from the Company and, in liquidation, the Company
receives payment first.
63
Upon the expiration of six months after the transfer of the title to the
Property to AX Japan, Shintom had the option to repurchase the Property or
purchase all of the shares of stock of AX Japan. This option could be extended
for one additional six month period. The option to repurchase the building was
at a price of 770,000,000 Yen plus the equity capital of AX Japan (which in no
event can be less than 60,000,000 Yen) and could only be made if Shintom settles
any rent due AX Japan pursuant to the lease agreement. The option to purchase
the shares of stock of AX Japan was at a price not less than the aggregate par
value of the shares and, subsequent to the purchase of the shares, AX Japan must
repay the outstanding loan due to the Company. If Shintom did not exercise its
option to repurchase the Property or the shares of AX Japan, or upon occurrence
of certain events, AX Japan could dispose of the Property as it deemed
appropriate. The events which result in the ability of AX Japan to be able to
dispose of the Property include Shintom petitioning for bankruptcy, failing to
honor a check, failing to pay rent, etc. If Shintom failed, or at any time
became financially or otherwise unable to exercise its option to repurchase the
Property, Vitec had the option to repurchase the Property or purchase all of the
shares of stock of AX Japan under similar terms as the Shintom options.
AX Japan had the option to delay the repayment of the loans for an
additional six months if Shintom extended its options to repurchase the Property
or stock of AX Japan. In September 2000, Shintom extended its option to
repurchase the Property and AX Japan delayed its repayment of the loans for an
additional six months.
In March 2001, upon the expiration of the additional six-month period, the
Company and Shintom agreed to extend the lease for an additional one-year
period. In addition, Shintom was again given the option to purchase the Property
or shares of stock of AX Japan after the expiration of a six-month period or
extend the option for one additional six-month period. AX Japan was also given
the option to delay the repayment of the loans for an additional six months if
Shintom extended its option for an additional six months.
In October 2002, the Company sold all of its shares in Audiovox Japan (AX
Japan), a wholly- owned subsidiary of the Company, to RMS Co., Ltd., an
unrelated party to the Company. The purchase price of the shares was 60,000 Yen.
As a result of this transaction, the purchaser repaid in full 113,563 Yen which
represented the full balance of amounts then owed to the Company by AX Japan.
The agreement required the purchaser to immediately change the name of AX Japan
to RMS Co., Ltd., and the Company resigned from all officer and Board of
Directors positions. The Company has no further relationship or obligations,
whether contingent or direct, to RMS Co., Ltd., formerly known as AX Japan.
As a result of the completion of this transaction, all assets and
liabilities of AX Japan have been removed from the accompanying consolidated
balance sheet as of November 30, 2002, specifically, the land and the building
and the notes payable for the Vitec Co., Ltd (Vitec) 150,000 Yen loan and the
Pearl First (Pearl) a 140,000 Yen loan. As a result of this transaction, the
Company recovered in Yen its initial investment in AX Japan as well as its loan
to finance the purchase of the land and building. However, the Company
recognized a $338 loss on the sale of its shares in AX Japan, as the sales price
was less than the value of the net assets of AX Japan sold to Vitec.
Contributing to the loss on sale were foreign currency loss and other expenses
that will not be recovered. The loss on the sale of the shares of AX Japan has
been included in other net on the accompanying consolidated statements of
operations for the year ended November 30, 2002.
64
The Company engages in transactions with Shintom and TALK. TALK, which
holds world-wide distribution rights for product manufactured by Shintom, has
given the Company exclusive distribution rights on all wireless personal
communication products for all countries except Japan, China, Thailand and
several mid-eastern countries. Through October 2000, the Company held a 30.8%
interest in TALK. The Company no longer holds an equity interest in TALK.
Transactions with Shintom and TALK include financing arrangements and
inventory purchases which approximated 1.5%, 0.7% and 0.1% for the years ended
November 30, 2001, 2002 and 2003, respectively, of total inventory purchases. At
November 30, 2001, 2002 and 2003, the Company had recorded $331, $0 and $6,
respectively, of liability due to TALK for inventory purchases included in
accounts payable. At November 30, 2001, 2002 and 2003, the Company had recorded
a receivable from TALK in the amount of $265, $13 and $0, respectively, a
portion of which is payable with interest, which is reflected in receivable from
vendors on the accompanying consolidated financial statements. During 2002, the
Company recorded an impairment charge of $1,158 on the 634,666 Shintom shares
owned at November 30, 2002.
Transactions with Toshiba
On March 31, 1999, Toshiba purchased 5% of the Company's subsidiary, ACC, a
supplier of wireless products for $5,000 in cash. The Company then owned 95% of
ACC; prior to the transaction ACC was a wholly-owned subsidiary. In February
2001, the Board of Directors of ACC, declared a dividend payable to its
shareholders, Audiovox Corporation, a then 95% shareholder, and Toshiba, a then
5% shareholder. ACC paid Toshiba its share of the dividend, which approximated
$1,034 in the first quarter of 2001. The dividend equaled 5.0% of ACC's prior
year net income. There were no dividends declared during 2002, due to the net
loss of ACC during 2001. During the second quarter of 2002, Toshiba purchased an
additional 20% of ACC. Under the terms of the transaction, Toshiba acquired, in
exchange for $23,900 cash, the additional shares of ACC. In addition, Toshiba
paid $8,100 in exchange for an $8,100 convertible subordinated note (the Note)
due from ACC. The Note bears interest at a per annum rate equal to 1 3/4% and
interest is payable annually on May 31st of each year, commencing May 31, 2003.
The unpaid principal amount shall be due and payable, together with all unpaid
interest on May 31, 2007 which will automatically renew for an additional five
years. In accordance with the provisions of the Note, Toshiba may, at any time,
convert the balance of the Note into additional shares of ACC in order to
maintain a 25% maximum interest in ACC. The cost per share of the note is equal
to the per share cost for the $23,900 cash payment of 20% of ACC's shares.
In connection with the transaction, ACC and Toshiba entered into a
distribution agreement whereby ACC will be Toshiba's exclusive distributor for
the sale of Toshiba products in the United States, Canada, Mexico and all
countries in the Caribbean and Central and South America through May 29, 2007.
The distribution agreement established certain annual minimum purchase targets
for ACC's purchase of Toshiba products for each fiscal year during the entire
term of the agreement. In the event that ACC fails to meet the minimum purchase
target, Toshiba shall have the right to convert ACC's exclusive distributorship
to a non-exclusive distributorship for the remaining term of the agreement.
Also, in accordance with the terms of the stockholders agreement, upon the
termination of the distribution agreement in accordance with certain terms of
the distribution agreement, Toshiba maintains a put right and Audiovox Corp. a
call right, to repurchase all of the shares held by the other party for a price
65
equal to the fair market value of the shares as calculated in accordance with
the agreement. Pursuant to the agreement, the put right is only exercisable if
ACC terminates the distribution agreement or if another strategic investor
acquires a direct or indirect equity ownership interest in excess of 20% in the
Company. The call right is only exercisable if Toshiba elects to terminate the
distribution agreement after its initial five (5) year term.
Additionally in connection with the transaction, ACC entered into an
employment agreement with the President and Chief Executive Officer (the
Executive) of ACC through May 29, 2007. Under the agreement, ACC is required to
pay the Executive an annual base salary of $500 in addition to an annual bonus
equal to 2% of ACC's annual earnings before income taxes. Audiovox Corp., under
the employment agreement, was required to establish and pay a bonus of $3,200 to
key employees of ACC, including the Executive, to be allocated by the Executive.
The bonus was for services previously rendered in connection with the Toshiba
purchase of additional shares of ACC, and, accordingly, the bonus has been
included in general and administrative expenses in the accompanying statements
of operations for the year ended November 30, 2002. The Executive was required
to utilize all or a portion of the bonus allocated to him to repay the remaining
outstanding principal and accrued interest owed by the Executive to the Company
pursuant to the unsecured promissory note in favor of Audiovox Corp. During the
year ended November 30, 2002, the Executive was paid $1,800 less the amount
outstanding under the promissory note of $651.
As a result of the issuance of ACC's shares, the Company recognized a gain,
net of expenses of $1,735, of $14,269 ($8,847 after provision for deferred
taxes). The gain on the issuance of the subsidiary's shares has been recognized
in the accompanying consolidated statements of operations.
Inventory on hand at November 30, 2002 and November 30, 2003 purchased from
Toshiba approximated $138,467 and $22,405, respectively. At November 30, 2002,
the Company recorded receivables from Toshiba aggregating approximately $12,219
primarily for price protection and software upgrades. At November 30, 2003, the
Company recorded receivables from Toshiba aggregating approximately $709,
primarily for software upgrades.
At November 30, 2003, the Company had inventory on hand in the amount of
$18,841, which were purchased from Toshiba and have been recorded in inventory
and accounts payable on the accompanying consolidated balance sheet. The payment
terms are such that the payable is non-interest bearing and is payable in
accordance with the terms established in the distribution agreement, which is 30
days. On occasion, 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. The Company had no other amounts outstanding to
Toshiba at November 30, 2003.
Impact of Inflation and Currency Fluctuation
Inflation has not had a significant impact on the Company's financial
position or operating results other than the effect of our 80%-owned Venezuelan
subsidiary ceasing to be considered a highly- inflationary economy in fiscal
2002. Venezuela was no longer deemed a hyper-inflationary economy as of the
first quarter of fiscal 2002. On January 22, 2003, and as a result of the
National Civil Strike, the Venezuelan government suspended trading of the
66
Venezuelan Bolivar and set the currency at a stated government rate.
Accordingly, until further guidance is issued, the Company's 80% owned
Venezuelan subsidiary will translate its financial statements utilizing the
stated government rate.
To the extent that the Company expands its operations into Europe, Latin
America and the Pacific Rim, the effects of inflation and currency fluctuations
in those areas could have growing significance to its financial condition and
results of operations. Fluctuations in the foreign exchange rates in Europe and
Pacific Rim countries have not had a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
While the prices that the Company pays for the products purchased from its
suppliers are principally denominated in United States dollars, price
negotiations depend in part on the relationship between the foreign currency of
the foreign manufacturers and the United States dollar. This relationship is
dependent upon, among other things, market, trade and political factors.
Seasonality
The Company typically experiences some seasonality in its operations. The
Company generally experiences a substantial amount of its sales during
September, October and November. December is also a key month for the Company
due to increased demand for its products during the holiday season. This
increase results from increased promotional and advertising activities from the
Company's customers to end-users.
Off-Balance Sheet Arrangements
The Company does not maintain any off-balance sheet arrangements,
transactions, obligations or other relationships with unconsolidated entities
that would be expected to have a material current or future effect upon our
financial condition or results of operations.
Recent Accounting Pronouncements
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 May 31, 2003. The adoption of FIN 45 did not
have a material effect on the Company's consolidated financial position or
results of operations.
In April 2003, the FASB issued SFAS No. 149 (SFAS No. 149), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149
amends and clarifies the accounting guidance on derivative instruments
(including certain derivative instruments embedded in other contracts) and
hedging activities that fall within the scope of SFAS No. 133, "Accounting for
67
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for
all contracts entered into or modified after June 30, 2003, with certain
exceptions, and for hedging relationships designated after June 30, 2003. The
guidance is to be applied prospectively. The adoption of SFAS No. 149 did not
have a material effect on the Company's financial condition or results of
operations.
In May 2003, the FASB issued SFAS No. 150 (SFAS No. 150), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 changes the accounting guidance for certain financial
instruments that, under previous guidance, could be classified as equity or
"mezzanine" equity by now requiring those instruments to be classified as
liabilities (or assets in some circumstances) in the statement of financial
position. Further, SFAS No. 150 requires disclosure regarding the terms of those
instruments and settlement alternatives. SFAS No. 150 is generally effective for
all financial instruments entered into or modified after May 31, 2003, and is
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on
the Company's financial condition or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of Arb No. 51",
which addresses consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46 (Revised
Interpretations) resulting in multiple effective dates based on the nature as
well as the creation date of the VIE. VIEs created after January 31, 2003, but
prior to January 1, 2004, may be accounted for either based on the original
interpretation or the Revised Interpretations. However, the Revised
Interpretations must be applied no later than the first quarter of fiscal year
2004. VIEs created after January 1, 2004 must be accounted for under the Revised
Interpretations. The Company is currently evaluating the impact of FIN 46 on its
financial statements.
In August 2003, the EITF reached a final consensus regarding Issue No.
03-5, "Applicability of AICPA Statement of Position 97-2, Software Revenue
Recognition to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software". EITF 03-5 involves whether non- software
deliverables included in an arrangement that contains software that is
more-than-incidental to the products or services as a whole are included with
the scope of SOP 97-2 "Software Revenue Recognition". This new pronouncement
will not have an impact on the Company's financial condition or results of
operations.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
"Revenue Recognition" (SAB No. 104), which codifies, revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition", in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on our consolidated results of operations,
consolidated financial position or consolidated cash flows.
68
Item 7a - Quantitative and Qualitative Disclosures About Market Risk
Market Risk Sensitive Instruments
The market risk inherent in the Company's market risk sensitive instruments
and positions is the potential loss arising from adverse changes in marketable
equity security prices, foreign currency exchange rates and interest rates.
Marketable Securities
Marketable securities at November 30, 2003, which are recorded at fair
value of $9,512, include a net unrealized gain of $1,831 and have exposure to
price risk. This risk is estimated as the potential loss in fair value resulting
from a hypothetical 10% adverse change in prices quoted by stock exchanges and
amounts to $951 as of November 30, 2003. Actual results may differ.
Interest Rate Risk
The Company's bank loans expose earnings to changes in short-term interest
rates since interest rates on the underlying obligations are either variable or
fixed for such a short period of time as to effectively become variable. The
fair values of the Company's bank loans are not significantly affected by
changes in market interest rates.
Foreign Exchange Risk
In order to reduce the risk of foreign currency exchange rate fluctuations,
the Company hedges transactions denominated in a currency other than the
functional currencies applicable to each of its various entities. The
instruments used for hedging are forward contracts with banks. The changes in
market value of such contracts have a high correlation to price changes in the
currency of the related hedged transactions. There were no hedge transactions at
November 30, 2003. Intercompany transactions with foreign subsidiaries and
equity investments are typically not hedged. Therefore, the potential loss in
fair value for a net currency position resulting from a 10% adverse change in
quoted foreign currency exchange rates as of November 30, 2003 is not
applicable.
The Company is subject to risk from changes in foreign exchange rates for
its subsidiaries and equity investments that use a foreign currency as their
functional currency and are translated into U.S. dollars. These changes result
in cumulative translation adjustments which are included in accumulated other
comprehensive income. On November 30, 2003, the Company had translation exposure
to various foreign currencies with the most significant being the Euro,
Malaysian ringgit, Thailand baht and Canadian dollar. The potential loss
resulting from a hypothetical 10% adverse change in quoted foreign currency
exchange rates, as of November 30, 2003, amounts to $1,195. Actual results may
differ.
Item 8 - Consolidated Financial Statements and Supplementary Data
The consolidated financial statements of the Company as of November 30,
2003 and for the year then ended, together with the report of Grant Thornton
LLP, independent certified public accountants, are filed under this Item 8.
69
The consolidated financial statements of the Company as of November 30,
2002 and for each of the years in the two-year period ended November 30, 2002,
together with the independent auditors' report thereon of KPMG LLP are filed
under this Item 8.
70
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Audiovox Corporation
We have audited the accompanying consolidated balance sheet of Audiovox
Corporation and subsidiaries (the "Company") as of November 30, 2003, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss) and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Audiovox Corporation
and subsidiaries as of November 30, 2003, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
We have also audited Schedule II as of and for the year ended November 30, 2003.
In our opinion, this schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information therein.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Melville, New York
February 19, 2004
71
Independent Auditors' Report
The Board of Directors and Stockholders
Audiovox Corporation:
We have audited the accompanying consolidated balance sheet of Audiovox
Corporation and subsidiaries as of November 30, 2002, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss and cash flows for each of the years in the two-year period ended November
30, 2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Audiovox Corporation
and subsidiaries as of November 30, 2002, and the results of their operations
and their cash flows for each of the years in the two-year period ended November
30, 2002, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1, effective December 1, 2001, the Company adopted the
provisions of Statement of Financial Accounting Standards (Statement) No. 141,
"Business Combinations" and Statement No. 142, "Goodwill and Other Intangible
Assets".
As discussed in Note 2 to the accompanying consolidated financial statements,
the consolidated statements of operations, stockholders' equity and
comprehensive loss and cash flows for the year ended November 30, 2001 have been
restated.
s/KPMG LLP
KPMG LLP
Melville, New York
May 30, 2003
72
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
November 30, 2002 and 2003
(In thousands, except share and per share data)
2002 2003
--------- ---------
Assets
Current assets:
Cash $ 2,758 $ 4,702
Accounts receivable 186,564 266,421
Inventory 290,064 219,664
Receivables from vendors 14,174 7,830
Prepaid expenses and other current assets 7,626 12,371
Deferred income taxes 7,653 9,531
--------- ---------
Total current assets 508,839 520,519
Investment securities 5,405 9,512
Equity investments 11,097 13,142
Property, plant and equipment 18,381 20,242
Excess cost over fair value of assets acquired 6,826 7,532
Intangible assets -- 8,043
Other assets 687 713
--------- ---------
$ 551,235 $ 579,703
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 121,127 $ 94,864
Accrued expenses and other current liabilities 34,983 42,816
Accrued sales incentives 12,151 21,894
Income taxes payable 7,643 13,218
Bank obligations 40,248 39,940
Current portion of long-term debt -- 3,433
--------- ---------
Total current liabilities 216,152 216,165
Long-term debt 8,140 18,289
Capital lease obligation 6,141 6,070
Deferred income taxes 2,704 3,178
Deferred compensation 3,969 5,280
--------- ---------
Total liabilities 237,106 248,982
--------- ---------
Minority interest 4,616 4,993
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $50 par value; 50,000 shares authorized and outstanding, liquidation preference
of $2,500 2,500 2,500
Series preferred stock $.01 par value, 1,500,000 shares authorized; no shares issued or
outstanding -- --
Common stock:
Class A $.01 par value; 60,000,000 shares authorized; 20,632,182 and
20,728,382 shares issued in 2002 and 2003, respectively; and 19,559,445
and 19,655,645 shares outstanding
in 2002 and 2003, respectively 207 207
Class B $.01 par value convertible; 10,000,000 shares authorized; 2,260,954 shares issued
and outstanding 22 22
Paid-in capital 250,917 252,104
Retained earnings 69,396 80,635
Accumulated other comprehensive income (loss) (5,018) (1,229)
Treasury stock, at cost, 1,072,737 shares of Class A common stock (8,511) (8,511)
--------- ---------
Total stockholders' equity 309,513 325,728
--------- ---------
Total liabilities and stockholders' equity $ 551,235 $ 579,703
========= =========
See accompanying notes to consolidated financial statements.
73
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended November 30, 2001, 2002 and 2003
(In thousands, except share and per share data)
2001 2002 2003
------------ ------------ ------------
Note 2
Net sales $ 1,276,591 $ 1,100,382 $ 1,323,902
Cost of sales 1,205,201 1,025,783 1,199,696
------------ ------------ ------------
Gross profit 71,390 74,599 124,206
------------ ------------ ------------
Operating expenses:
Selling 30,039 29,509 36,514
General and administrative 46,505 55,292 60,106
Warehousing and technical support 4,082 3,874 5,783
------------ ------------ ------------
Total operating expenses 80,626 88,675 102,403
------------ ------------ ------------
Operating income (loss) (9,236) (14,076) 21,803
------------ ------------ ------------
Other income (expense):
Interest and bank charges (5,922) (4,219) (4,602)
Equity in income of equity investees 3,586 1,779 3,279
Gain on issuance of subsidiary shares -- 14,269 --
Other, net 90 (4,156) 556
------------ ------------ ------------
Total other income (expense), net (2,246) 7,673 (767)
------------ ------------ ------------
Income (loss) before provision for (recovery of) income taxes, minority
interest and cumulative effect of a change in accounting for negative
goodwill (11,482) (6,403) 21,036
Provision for (recovery of) income taxes (3,627) 12,932 9,407
Minority interest income (expense) 657 5,055 (390)
------------ ------------ ------------
Income (loss) before cumulative effect of a change in accounting for
negative goodwill (7,198) (14,280) 11,239
Cumulative effect of a change in accounting for negative goodwill -- 240 --
------------ ------------ ------------
Net income (loss) $ (7,198) $ (14,040) $ 11,239
============ ============ ============
Net income (loss) per common share (basic) before cumulative effect of a change
in accounting for negative goodwill
$ (0.33) $ (0.65) $ 0.51
Cumulative effect of a change in accounting for negative goodwill -- 0.01 --
------------ ------------ ------------
Net income (loss) per common share (basic) $ (0.33) $ (0.64) $ 0.51
============ ============ ============
Net income (loss) per common share (diluted) before cumulative effect of a
change in accounting for negative goodwill
$ (0.33) $ (0.65) $ 0.51
Cumulative effect of a change in accounting for negative goodwill -- 0.01 --
------------ ------------ ------------
Net income (loss) per common share (diluted) $ (0.33) $ (0.64) $ 0.51
============ ============ ============
Weighted average number of common shares outstanding (basic) 21,877,100 21,850,035 21,854,610
============ ============ ============
Weighted average number of common shares outstanding (diluted) 21,877,100 21,850,035 22,054,320
============ ============ ============
See accompanying notes to consolidated financial statements.
74
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years Ended November 30, 2001, 2002 and 2003
(In thousands, except share data)
Accum-
ulated
Class A other
and compre- Total
Class B hensive stock-
Preferred common Paid-in Retained income Treasury holders'
stock stock capital earnings (loss) stock equity
-------- --------- --------- --------- ---------- ---------- ---------
Balances at
November 30, 2000, Note (2) $ 2,500 $ 226 $ 248,468 $ 90,634 $ (5,058) $ (6,004) $330,766
Comprehensive loss:
Net loss, as restated -- -- -- (7,198) -- -- (7,198)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment -- -- -- -- (455) -- (455)
Unrealized loss on marketable securities,
net of tax effect of $(509) -- -- -- -- (831) -- (831)
---------
Other comprehensive loss -- -- -- -- -- -- (1,286)
---------
Comprehensive loss -- -- -- -- -- -- (8,484)
Exercise of stock options into 10,000 shares
of common stock -- -- 77 -- -- -- 77
Conversion of stock warrants into 314,800 shares
of common stock -- 3 2,240 -- -- -- 2,243
Repurchase of 147,045 shares of common stock -- -- -- -- -- (1,382) (1,382)
-------- --------- --------- --------- ---------- ---------- ---------
Balances at
November 30, 2001, Note (2) 2,500 229 250,785 83,436 (6,344) (7,386) 323,220
Comprehensive loss:
Net loss -- -- -- (14,040) -- -- (14,040)
Other comprehensive income, net of tax:
Foreign currency translation adjustment -- -- -- -- 904 -- 904
Unrealized gain on marketable securities,
net of tax effect of $260 -- -- -- -- 422 -- 422
---------
Other comprehensive income -- -- -- -- -- -- 1,326
---------
Comprehensive loss -- -- -- -- -- -- (12,714)
Exercise of stock options into 16,336 shares of
common stock -- -- 132 -- -- -- 132
Repurchase of 163,200 shares of common stock -- -- -- -- -- (1,125) (1,125)
-------- --------- --------- --------- ---------- ---------- ---------
Balances at
November 30, 2002 2,500 229 250,917 69,396 (5,018) (8,511) 309,513
Comprehensive income:
Net income -- -- -- 11,239 -- -- 11,239
Other comprehensive income, net of tax:
Foreign currency translation adjustment -- -- -- -- 2,055 -- 2,055
Unrealized gain on marketable securities,
net of tax effect of $1,063 -- -- -- -- 1,734 -- 1,734
---------
Other comprehensive income -- -- -- -- -- -- 3,789
---------
Comprehensive income -- -- -- -- -- -- 15,028
Exercise of stock options into 96,200 shares of
common stock -- -- 674 -- -- -- 674
Tax benefit of stock options exercised -- -- 216 -- -- -- 216
Issuance of stock warrants -- -- 297 -- -- -- 297
-------- --------- --------- --------- ---------- ---------- ---------
Balances at
November 30, 2003 $ 2,500 $ 229 $ 252,104 $ 80,635 $ (1,229) $ (8,511) $325,728
======== ========= ========= ========= ========== ========== =========
See accompanying notes to consolidated financial statements.
75
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended November 30, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
--------- --------- ---------
Note 2
Cash flows from operating activities:
Net income (loss) $ (7,198) $ (14,040) $ 11,239
Adjustments to reconcile net income (loss) to net cash flows (used in)
provided by operating activities
Depreciation and amortization 4,476 4,780 4,581
Provision for bad debt expense 1,936 4,884 566
Equity in income of equity investees (3,586) (1,779) (3,279)
Minority interest (657) (5,055) 390
Gain on issuance of subsidiary shares -- (14,269) --
Other-than-temporary decline in market value of investment security -- 1,158 21
Deferred income tax expense (benefit), net (3,332) 9,904 (2,468)
(Gain) loss on disposal of property, plant and equipment, net (18) (69) 274
Tax benefit on stock options exercised -- -- 216
Cumulative effect of a change in accounting for negative goodwill -- (240) --
Non-cash stock compensation -- -- 297
Changes in operating assets and liabilities, net of assets and liabilities
acquired
Accounts receivable 35,797 48,555 (64,553)
Inventory (67,735) (64,548) 94,341
Receivables from vendors (1,263) (7,346) 6,348
Prepaid expenses and other assets 1,863 (7,983) (2,693)
Investment securities-trading (1,635) (125) (1,312)
Accounts payable, accrued expenses and other current liabilities (29,745) 66,644 (20,160)
Income taxes payable (2,979) 3,599 5,188
--------- --------- ---------
Net cash provided by (used in) operating activities (74,076) 24,070 28,996
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,869) (3,159) (5,454)
Proceeds from sale of property, plant and equipment 261 7,250 265
Proceeds from distribution from an equity investee 4,634 947 1,316
Net proceeds from issuance of subsidiary shares -- 22,158 --
Proceeds from sale of assets to equity investee -- -- 3,600
Purchase of acquired business, net of acquired cash -- (7,106) (40,046)
--------- --------- ---------
Net cash provided by (used in) investing activities 2,026 20,090 (40,319)
--------- --------- ---------
Cash flows from financing activities:
Borrowings from bank obligations 901,628 403,043 277,983
Repayments on bank obligations (832,329) (454,300) (278,544)
Proceeds from issuance of convertible subordinated debentures -- 8,107 --
Payment of dividend to minority shareholder of subsidiary (1,034) -- --
Principal payments on capital lease obligation (29) (55) (61)
Proceeds from exercise of stock options and warrants 2,317 132 674
Repurchase of Class A common stock (1,382) (1,125) --
Proceeds from issuance of long-term debt -- -- 12,913
Principal payments on subordinated debt (486) -- --
--------- --------- ---------
Net cash provided by (used in) financing activities 68,685 (44,198) 12,965
--------- --------- ---------
76
Audiovox Corporation
Consolidated Statements of Cash Flows (continued)
Years Ended November 30, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
--------- --------- ---------
Note 2
Effect of exchange rate changes on cash (41) (229) 302
--------- --------- ---------
Net increase (decrease) in cash (3,406) (267) 1,944
Cash at beginning of period 6,431 3,025 2,758
--------- --------- ---------
Cash at end of period $ 3,025 $ 2,758 $ 4,702
========= ========= =========
See accompanying notes to consolidated financial statements.
77
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Audiovox Corporation and its subsidiaries (the Company) design and
market a diverse line of products and provide related services, such
as warranty and activations, throughout the world.
The Company operates in two primary markets (which are also the
Company's reportable segments for accounting purposes):
(1) Wireless communications (Wireless). The Wireless Group markets
wireless handsets and accessories through domestic and
international wireless carriers and their agents, independent
distributors and retailers.
(2) Mobile and consumer electronics (Electronics). The Electronics
Group sells autosound, mobile electronics and consumer
electronics primarily to mass merchants, power retailers,
specialty retailers, new car dealers, original equipment
manufacturers (OEMs), independent installers of automotive
accessories and the U.S. military.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements
of Audiovox Corporation and its wholly-owned and majority-owned
subsidiaries. Minority interest of majority-owned subsidiaries are
calculated based upon the respective minority ownership percentage and
included on the consolidated balance sheet. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(c) Cash and Cash Equivalents
Investments with original maturities of three months or less are
considered cash equivalents. There were no cash equivalents at
November 30, 2002 and 2003.
(d) Revenue Recognition
The Company recognizes revenue from product sales at the time of
passage of title and risk of loss to the customer either at FOB
Shipping Point or FOB Destination, based upon terms established with
(Continued)
78
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
the customer. Any customer acceptance provisions, which are related to
product testing, are satisfied prior to revenue recognition. There are
no further obligations on the part of the Company subsequent to
revenue recognition except for returns of product from the Company's
customers. The Company does accept returns of products if properly
requested, authorized and approved by the Company. The Company records
an estimate of returns of products to be returned by its customers.
Management continuously monitors and tracks such product returns and
records the provision for the estimated amount of such future returns,
based on historical experience and any notification the Company
receives of pending returns. The Electronics segment's selling price
to its customers is a fixed amount that is not subject to refund or
adjustment or contingent upon additional rebates.
The Wireless segment has sales agreements with certain customers that
provide for a rebate of the selling price to such customers if the
particular product is subsequently sold at a lower price to the same
customer or to a different customer. The rebate period extends for a
relatively short period of time. Historically, the amounts of such
rebates paid to customers have not been material. The Company
estimates the amount of the rebate based upon the terms of each
individual arrangement, historical experience and future expectations
of price reductions, and the Company records its estimate of the
rebate amount at the time of the sale.
(e) Sales Incentives
Both of the Company's segments, Wireless and Electronics, offer sales
incentives to its customers in the form of (1) co-operative
advertising allowances; (2) market development funds and (3) volume
incentive rebates. The Electronics segment also offers other trade
allowances to its customers. The terms of the sales incentives vary by
customer and are offered from time to time. Except for other trade
allowances, all sales incentives require the customer to purchase the
Company's products during a specified period of time. All sales
incentives require the customer to claim the sales incentive within a
certain time period. Although all sales incentives require customers
to claim the sales incentive within a certain time period (referred to
as the "claim period"), the Wireless segment historically has settled
sales incentives claimed after the claim period has expired if a
customer demands payment. The sales incentive liabilities are settled
either by the customer claiming a deduction against an outstanding
account receivable owed to the Company by the customer or by the
customer requesting a check from the Company. The Company is unable to
demonstrate that an identifiable benefit of the sales incentives has
been received as such, all costs associated with sales incentives are
classified as a reduction of net sales. The following is a summary of
the various sales incentive programs offered by the Company and the
related accounting policies:
(Continued)
79
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
Co-operative advertising allowances are offered to customers as
reimbursement towards their costs for print or media advertising in
which our product is featured on its own or in conjunction with other
companies' products (e.g., a weekly advertising circular by a mass
merchant). The amount offered is either based upon a fixed percentage
of the Company's sales revenue to the customer or is a fixed amount
per unit sold to the customer during a specified time period. Market
development funds are offered to customers in connection with new
product launches or entering into new markets. Those new markets can
be either new geographic areas or new customers. The amount offered
for new product launches is based upon a fixed percentage of the
Company's sales revenue to the customer or is a fixed amount per unit
sold to the customer during a specified time period. The Company
accrues the cost of co-operative advertising allowances and market
development funds at the later of when the customer purchases our
products or when the sales incentive is offered to the customer.
Volume incentive rebates offered to customers require that minimum
quantities of product be purchased during a specified period of time.
The amount offered is either based upon a fixed percentage of the
Company's sales revenue to the customer or is a fixed amount per unit
sold to the customer. Certain of the volume incentive rebates offered
to customers include a sliding scale of the amount of the sales
incentive with different required minimum quantities to be purchased.
The customer's achievement of the sales threshold and, consequently,
the measurement of the total rebate for the Wireless segment cannot be
reasonably estimated. Accordingly, the Wireless segment recognizes a
liability for the maximum potential amount of the rebate, with the
exception of certain volume incentive rebates that include very
aggressive tiered levels of volume purchases. For volume incentive
rebates that include very aggressive tiered levels of volume purchase,
the Wireless segment recognizes a liability for the rebate as the
underlying revenue transactions that result in progress by the
customer toward earning the rebate or refund on a program by program
basis are recognized. The Electronics segment makes an estimate of the
ultimate amount of the rebate their customers will earn based upon
past history with the customer and other facts and circumstances. The
Electronics segment has the ability to estimate these volume incentive
rebates as there does not exist a relatively long period of time for a
particular rebate to be claimed, the Electronics segment does have
historical experience with these sales incentive programs and the
Electronics segment does have a large volume of relatively homogenous
transactions. Any changes in the estimated amount of volume incentive
rebates are recognized immediately using a cumulative catch-up
adjustment.
With respect to the accounting for co-operative advertising
allowances, market development funds and volume incentive rebates,
(Continued)
80
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
there was no impact upon the adoption of EITF 01-9, "Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of
Vendor's Products)" (EITF 01-9), as the Company's accounting policy
prior to March 1, 2002 was consistent with its accounting policy after
the adoption of EITF 01-9.
Other trade allowances are additional sales incentives that the
Company provides to the Electronics segment customers subsequent to
the related revenue being recognized. In accordance with EITF 01-9,
the Company records the provision for these additional sales
incentives at the later of when the sales incentive is offered or when
the related revenue is recognized. Such additional sales incentives
are based upon a fixed percentage of the selling price to the
customer, a fixed amount per unit, or a lump-sum amount.
The accrual for sales incentives at November 30, 2002 and 2003 was
$12,151 and $21,894, respectively. The Company's sales incentive
liability may prove to be inaccurate, in which case the Company may
have understated or overstated the provision required for these
arrangements. Therefore, although the Company makes its best estimate
of its sales incentive liability, many factors, including significant
unanticipated changes in the purchasing volume of its customers and
the lack of claims made by customers of offered and accepted sales
incentives, could have a significant impact on the Company's liability
for sales incentives and the Company's reported operating results.
For the fiscal years ended November 30, 2001, 2002 and 2003, reversals
of previously established sales incentive liabilities amounted to
$14,369, $4,716 and $2,940, respectively. These reversals include
unearned sales incentives and unclaimed sales incentives. Unearned
sales incentives are volume incentive rebates where the customer did
not purchase the required minimum quantities of product during the
specified time. Volume incentive rebates for both segments are
reversed into income in the period when the customer did not purchase
the required minimum quantities of product during the specified time.
Unearned sales incentives for fiscal years ended November 30, 2001,
2002 and 2003 amounted to $9,051, $1,354 and $1,310, respectively.
Unclaimed sales incentives are sales incentives earned by the customer
but the customer has not claimed payment of the earned sales incentive
from the Company. Unclaimed sales incentives for fiscal years ended
November 30, 2001, 2002 and 2003 amounted to $5,318, $3,362 and
$1,630, respectively.
The accrual for earned but unclaimed sales incentives is reversed by
Wireless only when management is able to conclude, based upon an
individual judgement of each sales incentive, that it is remote that
the customer will claim the sales incentive. The methodology applied
for determining the amount and timing of reversals for the Wireless
(Continued)
81
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
segment is disciplined, consistent and rational. The methodology is
not systematic (formula based), as the Company makes an estimate as to
when it is remote that the sales incentive will not be claimed.
Reversals by the Wireless segment of unclaimed sales incentives have
historically occurred in varying periods up to 12 months after the
recognition of the accrual. In deciding on whether to reverse the
sales incentive liability into income, the Company makes an assessment
as to the likelihood of the customer ever claiming the funds after the
claim period has expired and considers the specific facts and
circumstances pertaining to the individual sales incentive. The
factors considered by management in making the decision to reverse
accruals for unclaimed sales incentives include (i) past practices of
the customer requesting payments after the expiration of the claim
period; (ii) recent negotiations with the customer for new sales
incentives; (iii) subsequent communications with the customer with
regard to the status of the claim; and (iv) recent activity in the
customer's account.
The Electronics segment reverses earned but unclaimed sales incentives
upon the expiration of the claim period. The Company believes that the
reversal of earned but unclaimed sales incentives for Electronics upon
the expiration of the claim period is a disciplined, rational,
consistent and systematic method of reversing unclaimed sales
incentives. For the Electronics segment, the majority of sales
incentive programs are calendar-year programs. Accordingly, the
program ends on the month following the fiscal year end and the claim
period expires one year from the end of the program.
(f) Accounts Receivable
The majority of the Company's accounts receivable are due from
companies in the wireless, retail, mass merchant and OEM industries.
Credit is extended based on an evaluation of a customer's financial
condition and, generally, collateral is not required. Accounts
receivable are generally due within 30-60 days and are stated at
amounts due from customers, net of an allowance for doubtful accounts.
Accounts outstanding longer than the contracted payment terms are
considered past due.
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's
current credit worthiness, as determined by a review of their current
credit information. The Company continuously monitors collections and
payments from its customers and maintains a provision for estimated
credit losses based upon historical experience and any specific
customer collection issues that have been identified. While such
credit losses have historically been within management's expectations
and the provisions established, the Company cannot guarantee that it
will continue to experience the same credit loss rates that have
(Continued)
82
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
been experienced in the past. Since the Company's accounts receivable
is concentrated in a relatively few number of customers, a significant
change in the liquidity or financial position of any one of these
customers could have a material adverse impact on the collectability
of the Company's accounts receivables and future operating results.
Accounts receivable is comprised of the following:
November 30,
--------------------
2002 2003
-------- --------
Trade accounts receivable and other $195,228 $275,695
Less:
Allowance for doubtful accounts 6,829 6,947
Allowance for cellular deactivations 1,628 1,127
Allowance for cash discounts 207 1,200
-------- --------
$186,564 $266,421
======== ========
The following is a rollforward of the allowance for doubtful accounts:
November 30,
-------------------
2002 2003
------- -------
Beginning balance $ 4,715 $ 6,829
Expense 4,884 566
Deductions (2,770) (448)
------- -------
Ending balance $ 6,829 $ 6,947
======= =======
(g) Inventory
Inventory consists principally of finished goods and is stated at the
lower of the actual cost to purchase (primarily on a weighted moving
average basis) and/or the current estimated market value of the
inventory less expected costs to sell the inventory. The Company
regularly reviews inventory quantities on-hand and records a provision
for excess and obsolete inventory based primarily on open purchase
orders from customers and selling prices subsequent to the balance
sheet date as well as indications from customers based upon the then
current negotiations. As demonstrated in recent years, demand for the
Company's products can fluctuate significantly. A significant sudden
increase in the demand for the Company's products could result in a
(Continued)
83
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
short-term increase in the cost of inventory purchases while a
significant decrease in demand could result in an increase in the
amount of excess inventory quantities on-hand. In addition, the
Company's industry is characterized by rapid technological change and
frequent new product introductions that could result in an increase in
the amount of obsolete inventory quantities on-hand. In such
situations, the Company generally does not obtain price protection
from its vendors, however, on occasion, the Company has received price
protection which reduces the cost of inventory. Since price protection
reduces the cost of inventory, as the Company sells the inventory for
which it has received price protection, the amount is reflected as a
reduction to cost of sales. There can be no assurances that the
Company will be successful in negotiating such price protection from
its vendors in the future.
The Company has, on occasion, performed upgrades on certain inventory
on behalf of its vendors. The reimbursements the Company receives to
perform these upgrades are reflected as a reduction to the cost of
inventory and is recognized as a reduction to cost of sales as the
related inventory is sold. Additionally, the Company's estimates of
excess and obsolete inventory may prove to be inaccurate, in which
case the Company may have understated or overstated the provision
required for excess and obsolete inventory. Therefore, although the
Company makes every effort to ensure the accuracy of its forecasts of
future product demand, any significant unanticipated changes in demand
or technological developments could have a significant impact on the
value of the Company's inventory and its reported operating results.
The Company maintains a significant investment in inventory and,
therefore, is subject to the risk of losses on write-downs to market
and inventory obsolescence. The Company decided to substantially exit
the analog phone line of business to reflect the shift in the wireless
industry from analog to digital technology and recorded a charge of
approximately $13,500 during the second quarter of 2001 to reduce its
carrying value of its analog inventory to estimated market value.
During the fourth quarter of 2001, Wireless recorded inventory
write-downs to market of $7,150 as a result of the reduction of
selling prices primarily related to digital hand-held phones during
the first quarter of 2002 in anticipation of new digital technologies.
During the year ended November 30, 2002, Wireless recorded inventory
write-downs to market of $13,823.
During the year ended November 30, 2003, Wireless recorded inventory
write-downs of $2,817 based upon open purchase orders with customers
at lower selling prices, as well as indications from our customers
based upon then current negotiations. It is reasonably possible that
additional write-downs to market may be required in the future given
the continued emergence of new technologies, however, no estimate can
(Continued)
84
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
be made of such write-downs. At November 30, 2003, Wireless had on
hand approximately 15,600 units of previously written-down inventory,
with an extended value of approximately $800.
For certain inventory items, the Company is entitled to receive price
protection in the event the selling price to its customers is less
than the purchase price from the manufacturer. The Company records
such price protection, as necessary, at the time of the sale of the
units. For fiscal 2001, 2002 and 2003, price protection of $4,550,
$27,683 and $13,031, respectively, was recorded as a reduction to cost
of sales as the related inventory was sold.
(h) Investment Securities
The Company classifies its equity securities in one of two categories:
trading or available- for-sale. Trading securities are bought and held
principally for the purpose of selling them in the near term. All
other securities not included in trading are classified as
available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses on trading securities are included
in earnings. Unrealized holding gains and losses, net of the related
tax effect, on available-for-sale securities are excluded from
earnings and are reported as a component of accumulated other
comprehensive income until realized. Realized gains and losses from
the sale of available-for-sale securities are determined on a specific
identification basis.
A decline in the market value of any available-for-sale security below
cost that is deemed other-than-temporary results in a reduction in
carrying amount to fair value. The impairment is charged to earnings
and a new cost basis for the security is established (such a charge
was recorded during fiscal 2002 and fiscal 2003 - Note 8). Dividend
and interest income are recognized when earned. The Company considers
numerous factors, on a case by case basis, in evaluating whether the
decline in market value of an available-for-sale security below cost
is other-than-temporary. Such factors include, but are not limited to,
(i) the length of time and the extent to which the market value has
been less than cost; (ii) the financial condition and the near-term
prospects of the issuer of the investment; and (iii) whether the
Company's intent to retain the investment for the period of time is
sufficient to allow for any anticipated recovery in market value.
(Continued)
85
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
(i) Derivative Financial Instruments
The Company accounts for derivatives and hedging activities under the
provisions of Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities",
as amended (Statement 133). Statement 133 requires the recognition of
all derivative financial instruments as either assets or liabilities
in the statements of financial condition and measurement of those
instruments at fair value. Changes in the fair values of those
derivatives are reported in earnings or other comprehensive income
(loss) depending on the designation of the derivative and whether it
qualifies for hedge accounting. The accounting for gains and losses
associated with changes in the fair value of a derivative and the
effect on the consolidated financial statements will depend on its
hedge designation and whether the hedge is highly effective in
achieving offsetting changes in the fair value or cash flows of the
asset or liability hedged. Under the provisions of Statement 133, the
method that will be used for assessing the effectiveness of a hedging
derivative, as well as the measurement approach for determining the
ineffective aspects of the hedge, must be established at the inception
of the hedged instrument.
The Company's evaluations of hedge effectiveness are subject to
assumptions based on the terms and timing of the underlying exposures.
For a fair value hedge, both the effective and ineffective portions of
the change in fair value of the derivative instrument, along with an
adjustment to the carrying amount of the hedge item for fair value
changes attributable to the hedge risk, are recognized in earnings.
For a cash flow hedge, changes in the fair value of a derivative
instrument that is highly effective are deferred in accumulated other
comprehensive income or loss until the underlying hedged item is
recognized in earnings. The ineffective portion is recognized in
earnings immediately. If a fair value or cash flow hedge was to cease
to qualify for hedge accounting or be terminated, it would continue to
be carried on the balance sheet at fair value until settled, but hedge
accounting would be discontinued prospectively. If a forecasted
transaction were no longer probable of occurring, amounts previously
deferred in accumulated other comprehensive income would be recognized
immediately in earnings.
The Company, as a policy, does not use derivative financial
instruments for trading purposes. The Company conducts business in
several foreign currencies and, as a result, is subject to foreign
currency exchange rate risk due to the effects that exchange rate
movements of these currencies have on the Company's costs. To minimize
the effect of exchange rate fluctuations on costs, the Company enters
into forward exchange rate contracts. The Company, as a policy, does
not enter into forward exchange contracts for trading purposes. The
forward exchange rate contracts are entered into as hedges of
(Continued)
86
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
inventory purchase commitments and of trade receivables due in foreign
currencies.
Gains and losses on the forward exchange contracts that qualify as
hedges are reported as a component of the underlying transaction.
Foreign currency transactions which have not been hedged are marked to
market on a current basis with gains and losses recognized through
income and reflected in other income (expense). In addition, any
previously deferred gains and losses on hedges which are terminated
prior to the transaction date are recognized in current income when
the hedge is terminated.
At November 30, 2002 and 2003, the Company had no contracts to
exchange foreign currencies in the form of forward exchange contracts.
For the years ended November 30, 2001, 2002 and 2003, gains and losses
on foreign currency transactions which were not hedged were not
material. For the years ended November 30, 2001, 2002 and 2003, there
were no gains or losses as a result of terminating hedges prior to the
transaction date.
(j) Debt Issuance Costs
Costs incurred in connection with the restructuring of bank
obligations (Note 12) have been capitalized. These charges are
amortized over the lives of the respective agreements. Amortization
expense of these costs amounted to $336, $379 and $528 for the years
ended November 30, 2001, 2002 and 2003, respectively.
(k) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Property under a
capital lease is stated at the present value of minimum lease
payments. Major improvements are capitalized and minor replacements,
maintenance and repairs are charged to expense as incurred. Upon
retirement or disposal of assets, the cost and related accumulated
depreciation are removed from the consolidated balance sheets.
Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets as follows:
Buildings 20-30 years
Furniture, fixtures and displays 5-10 years
Machinery and equipment 5-10 years
Computer hardware and software 3-5 years
Automobiles 3 years
(Continued)
87
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
Leasehold improvements are amortized over the shorter of the lease
term or estimated useful life of the asset. Assets acquired under
capital lease are amortized over the term of the lease.
Capitalized computer software costs obtained for internal use are
amortized on a straight- line basis.
(l) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consists of the excess over the
fair value of assets acquired (goodwill) and other intangible assets
(patents and trademarks).
Prior to the adoption of SFAS 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142), the Company amortized goodwill and other
intangible assets on a straight-line basis over their respective
lives.
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141 "Business Combinations" (SFAS No. 141) and SFAS No.142.
The Company early adopted the provisions of SFAS No. 141 and SFAS No.
142 as of December 1, 2001. SFAS No. 141 requires that the purchase
method of accounting be used for all future business combinations and
specifies criteria intangible assets acquired in a business
combination must meet to be recognized and reported apart from
goodwill. As a result of adopting the provisions of SFAS No. 141 the
Company accounted for the acquisitions of Code-Alarm and Recoton under
the purchase method of accounting in accordance with SFAS No.141 (see
Note 6).
SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually or more frequently if an event occurs or
circumstances change that could more likely than not reduce the fair
value of a reporting unit below its carrying amount. SFAS No. 142 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives and reviewed
for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets".
As a result of adopting the provisions of SFAS No. 142, the Company
did not record amortization expense relating to its goodwill and the
Company reassessed the useful lives and residual lives of all acquired
intangible assets to make any necessary amortization period
adjustments. Based upon that assessment, no adjustments were made to
the amortization period or residual values of other intangible assets.
(Continued)
88
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
The cost of other intangible assets with definite lives are amortized
on a straight-line basis over their respective lives. In addition, the
Company was not required under SFAS No. 142 to assess the useful life
and residual value of its goodwill as the Company's goodwill, at the
time of adoption, was equity method goodwill and, as such, this equity
method goodwill will continue to be evaluated for impairment under
Accounting Principles Board No. 18, "The Equity Method of Accounting
for Investments in Common Stock", as amended. For intangible assets
with indefinite lives, including goodwill, recorded subsequent to the
adoption of SFAS No. 142, the Company performed its annual impairment
test which indicated no reduction is required.
The following table presents adjusted net income (loss) and income
(loss) per share data restated to include the retroactive impact of
the adoption of SFAS No. 142:
Years Ended November 30,
2001 2002 2003
-------------- -------------- --------------
Note (2)
Reported net income (loss) before cumulative effect of a
change in accounting for negative goodwill $ (7,198) $ (14,280) $ 11,239
Cumulative effect of a change in accounting principle for
negative goodwill, net of tax -- 240 --
-------------- -------------- --------------
Reported net income (loss) (7,198) (14,040) 11,239
Add back:
Goodwill amortization, net of tax 224 -- --
-------------- -------------- --------------
Adjusted net income (loss) $ (6,974) $ (14,040) $ 11,239
============== ============== ==============
Basic net income (loss) per common share:
Reported net income (loss) before accounting change $ (0.33) $ (0.65) $ 0.51
Cumulative effect of a change in accounting principle for
negative goodwill, net of tax -- 0.01 --
-------------- -------------- --------------
Net income (loss) (0.33) (0.64) 0.51
Goodwill amortization, net of tax 0.01 -- --
-------------- -------------- --------------
Adjusted net income (loss) $ (0.32) $ (0.64) $ 0.51
============== ============== ==============
Diluted net income (loss) per common share:
Reported net income (loss) before accounting change $ (0.33) $ (0.65) $ 0.51
Cumulative effect of a change in accounting principle for
negative goodwill, net of tax -- 0.01 --
-------------- -------------- --------------
Net income (loss) (0.33) (0.64) 0.51
Goodwill amortization, net of tax 0.01 -- --
-------------- -------------- --------------
Adjusted net income (loss) $ (0.32) $ (0.64) $ 0.51
============== ============== ==============
Weighted average common shares outstanding:
Basic 21,877,100 21,850,035 21,854,610
============== ============== ==============
Diluted 21,877,100 21,850,035 22,054,320
============== ============== ==============
(Continued)
89
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
Goodwill
The change in carrying amount of goodwill is as follows:
November 30,
------------------
2002 2003
------ ------
Net beginning balance $4,732 $6,826
Write off of unamortized negative goodwill upon
change in accounting principle 240 --
Goodwill acquired in connection with the purchase
of certain assets of Code-Alarm (Note 6) 1,854 --
Adjustments of certain acquired assets of Code-
Alarm (Note 6) -- 706
------ ------
Net ending balance $6,826 $7,532
====== ======
Other Intangible Assets
November 30, 2002
--------------------------------------
Gross
Carrying Accumulated Total Net
Value Amortization Book Value
Patents subject to amortization $677 $677 --
Trademarks subject to
amortization 34 34 --
---- ---- ---
Total $711 $711 --
==== ==== ===
(Continued)
90
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
November 30, 2003
---------------------------------------
Gross
Carrying Accumulated Total Net
Value Amortization Book Value
Patents subject to
amortization $ 677 $ 677 --
Trademarks subject to
amortization 34 34 --
Trademarks not subject
to amortization
(Note 6) 8,043 -- $8,043
------ ------ ------
Total $8,754 $ 711 $8,043
====== ====== ======
At November 30, 2003, all intangible assets subject to
amortization have been fully amortized. Accordingly, the
estimated aggregate amortization expense for each of the
succeeding years ending November 30, 2008 amounts to $0.
(m) Equity Investments
The Company has common stock investments which are accounted for
by the equity method as the Company owns between 20% and 50% of
the common stock.
The Company applies the equity method of accounting to its
investments in entities where the Company has non-controlling
ownership interests. The Company's share of its equity method
investees earnings or losses is included in the consolidated
statements of operations. The Company eliminates its pro rata
share of gross profit on sales to its equity method investees for
inventory on hand at the investees at the end of the year. A
description of the Company's equity investments and the related
transactions between the Company and these investees is discussed
in Note 10.
(n) Cellular Telephone Commissions
Under various agency agreements, the Company receives an initial
activation commission for obtaining subscribers for cellular
telephone services. The agreements may contain provisions for
additional commissions based upon usage and length of continued
subscription. The agreements also provide for the reduction or
(Continued)
91
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
elimination of initial activation commissions if subscribers
deactivate service within stipulated periods. The Company has
provided a liability for estimated cellular deactivations which
is reflected in the accompanying consolidated financial
statements as a reduction of accounts receivable.
The Company recognizes sales revenue for the initial activation
and residual commissions based upon usage on the accrual basis.
Such commissions approximated $29,859, $26,756 and $19,046 for
the years ended November 30, 2001, 2002 and 2003, respectively.
Related commissions paid to outside selling representatives for
cellular activations are included in cost of sales in the
accompanying consolidated statements of operations and amounted
to $22,390, $18,673 and $12,246 for the years ended November 30,
2001, 2002 and 2003, respectively.
(o) Advertising
The Company expenses the cost of advertising as incurred,
excluding co-operative advertising (see sales incentives Note
24). During the years ended November 30, 2001, 2002 and 2003, the
Company had no direct response advertising.
(p) 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
of products for warranty matters. 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 $12,006 is recorded in accrued expenses
in the accompanying consolidated balance sheets as of November
30, 2002 and 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 $6,506 is recorded as a
reduction to inventory in the accompanying consolidated balance
sheets as of November 30, 2002 and 2003, respectively. Warranty
claims and product repair costs expense for each of the fiscal
years ended November 30, 2001, 2002 and 2003 were $11,319, $6,985
and $12,015, respectively.
(Continued)
92
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
The following table provides the changes in the Company's product
warranties and product repair costs for 2002 and 2003:
2002 2003
-------- --------
Beginning balance $ 13,066 $ 15,410
Liabilities accrued for warranties issued during
the period 6,985 12,015
Warranty claims paid during the period (4,641) (8,913)
-------- --------
Ending balance $ 15,410 $ 18,512
======== ========
(q) Foreign Currency
With the exception of a subsidiary operating in Venezuela, which
was deemed a hyper-inflationary economy in fiscal 2001, assets
and liabilities of those subsidiaries and equity investees
located outside the United States whose cash flows are primarily
in local currencies have been translated at rates of exchange at
the end of the period or historical exchange rates, as
appropriate in accordance with SFAS No. 52, "Foreign Currency
Translation". Revenues and expenses have been translated at the
weighted average rates of exchange in effect during the period.
Gains and losses resulting from translation are recorded in the
cumulative foreign currency translation account in accumulated
other comprehensive income (loss). For the operation in
Venezuela, financial statements are translated at either current
or historical exchange rates, as appropriate. These adjustments,
along with gains and losses on currency transactions, are
reflected in the consolidated statements of operations for fiscal
2001. During the first quarter of fiscal 2002 (January 1, 2002),
Venezuela ceased to be deemed a hyper- inflationary economy.
Exchange gains and losses on intercompany balances of a long-term
nature are also recorded in the cumulative foreign currency
translation account in accumulated other comprehensive income
(loss). Foreign currency transaction gains (losses) of $200, $418
and $(232) for the years ended November 30, 2001, 2002 and 2003,
respectively, were included in other income (expense).
(r) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
(Continued)
93
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled (Note 14). The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
(s) Net Income (Loss) Per Common Share
Basic net income (loss) per common share is based upon the
weighted average number of common shares outstanding during the
period. Diluted net income (loss) per common share reflects the
potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into
common stock.
A reconciliation between the numerators and denominators of the
basic and diluted income (loss) per common share is as follows:
Years Ended
November 30,
----------------------------------------------
2001 2002 2003
-------------- ------------- -----------
Note (2)
Net income (loss) (numerator for net income (loss) per
common share, basic) $ (7,198) $ (14,040) $ 11,239
Interest on 6 1/4% convertible subordinated debentures,
net of tax 5 -- --
-------------- ------------- -----------
Adjusted net income (loss) (numerator for net income
per common share, diluted) $ (7,203) $ (14,040) $ 11,239
============== ============= ===========
Weighted average value of common shares outstanding
(denominator for net income (loss) per common
share, basic) 21,877,100 21,850,035 21,854,610
Effect of dilutive securities:
Employee stock options and stock warrants -- -- 199,710
-------------- ------------- -----------
Weighted average value of common and potential
common shares outstanding (denominator for net
income (loss) per common share, diluted) 21,877,100 21,850,035 22,054,320
============== ============= ===========
Net income (loss) per common share before cumulative
effect of accounting change for negative goodwill:
Basic $ (0.33) $ (0.65) $ 0.51
============== ============= ===========
Diluted $ (0.33) $ (0.65) $ 0.51
============== ============= ===========
Net income (loss) per common share:
Basic $ (0.33) $ (0.64) $ 0.51
============== ============= ===========
Diluted $ (0.33) $ (0.64) $ 0.51
============== ============= ===========
(Continued)
94
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
Employee stock options and stock warrants totaling 2,595,108 and
1,540,000 for the years ended November 30, 2002 and 2003,
respectively, were not included in the net income (loss) per
common share calculation because their effect would have been
anti-dilutive. Dilutive net loss per common share for fiscal
2001 and 2002 is the same as basic net loss per common share due
to the anti-dilutive effect of the potential exercise of stock
options and warrants.
(t) Supplementary Financial Statement Information
Interest income of approximately $670, $509 and $516 for the
years ended November 30, 2001, 2002 and 2003, respectively, is
included in other, net, in the accompanying consolidated
statements of operations.
(u) Use of Estimates
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, 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.
(v) Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of
Effective December 1, 2002, the Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets",
which establishes accounting and reporting standards for the
impairment or disposal of long-lived assets. SFAS No. 144 removes
goodwill from its scope and retains the requirements of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", regarding the recognition
of impairment losses on long-lived assets held for use.
Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
(Continued)
95
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
future undiscounted net cash flows expected to be generated by
the asset. Recoverability of assets held for sale is measured by
comparing the carrying amount of the assets to their estimated
fair market value. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of
the assets.
(w) Accounting for Stock-Based Compensation
The Company applies the intrinsic value method as outlined in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25), and related interpretations in
accounting for stock options and share units granted under these
programs. Under the intrinsic value method, no compensation
expense is recognized if the exercise price of the Company's
employee stock options equals the market price of the underlying
stock on the date of grant. SFAS No. 123, "Accounting for
Stock-Based Compensation", requires that the Company provide
pro-forma information regarding net income and net income per
common share as if compensation cost for the Company's stock
option programs had been determined in accordance with the fair
value method prescribed therein. The Company adopted the
disclosure portion of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" requiring more
prominent proforma disclosures as described in SFAS No. 123. The
following table illustrates the effect on net income and income
per common share as if the Company had measured the compensation
cost for the Company's stock option programs under the fair value
method in each period presented:
Years Ended
November 30,
------------------------------------
2001 2002 2003
-------- -------- ----------
Note (2)
Net income (loss):
As reported $ (7,198) $(14,040) $ 11,239
Stock based compensation expense 2,287 864 --
-------- -------- ----------
Pro-forma $ (9,485) $(14,904) $ 11,239
======== ======== ==========
Net income (loss) per common share (basic):
As reported $ (0.33) $ (0.64) $ 0.51
Pro-forma (0.43) (0.68) $ 0.51
(Continued)
96
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
Years Ended
November 30,
------------------------------------
2001 2002 2003
-------- -------- ----------
Note (2)
Net income (loss) per common share (diluted):
As reported $ (0.33) $ (0.64) $ 0.51
Pro-forma (0.43) (0.68) $ 0.51
Pro-forma net income (loss) reflect only options granted after
November 30, 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not
reflected in the pro-forma net income (loss) amounts presented
above because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior to
December 1, 1995 was not considered. Therefore, the pro-forma net
income (loss) may not be representative of the effects on
reported net income (loss) for future years.
(x) Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) may include foreign currency
translation adjustments, minimum pension liability adjustments
and unrealized gains and losses on investment securities
classified as available-for-sale and fair market value changes
for cash flow hedges.
The change in net unrealized gain (loss) on marketable securities
of $(831), $422 and $1,734 for the years ended November 30, 2001,
2002 and 2003 is net of tax of $(509), $260 and $1,063,
respectively. The currency translation adjustments are not
adjusted for income taxes as they relate to indefinite
investments in non-U.S. subsidiaries and equity investments.
(y) New Accounting Pronouncements
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
(Continued)
97
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
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 May 31,
2003. The adoption of FIN 45 did not have a material effect on
the Company's consolidated financial position or results of
operations.
In April 2003, the FASB issued SFAS No. 149 (SFAS No. 149),
"Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". SFAS No. 149 amends and clarifies the accounting
guidance on derivative instruments (including certain derivative
instruments embedded in other contracts) and hedging activities
that fall within the scope of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is
effective for all contracts entered into or modified after June
30, 2003, with certain exceptions, and for hedging relationships
designated after June 30, 2003. The guidance is to be applied
prospectively. The adoption of SFAS No. 149 did not have a
material effect on the Company's financial condition or results
of operations.
In May 2003, the FASB issued SFAS No. 150 (SFAS No. 150),
"Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". SFAS No. 150
changes the accounting guidance for certain financial instruments
that, under previous guidance, could be classified as equity or
"mezzanine" equity by now requiring those instruments to be
classified as liabilities (or assets in some circumstances) in
the statement of financial position. Further, SFAS No. 150
requires disclosure regarding the terms of those instruments and
settlement alternatives. SFAS No. 150 is generally effective for
all financial instruments entered into or modified after May 31,
2003, and is otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of
SFAS No. 150 did not have a material effect on the Company's
financial condition or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN
46), "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51", which addresses consolidation by
business enterprises of variable interest entities (VIEs) either:
(1) that do not have sufficient equity investment at risk to
permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity
investors lack an essential characteristic of a controlling
financial interest. In December 2003, the FASB completed
deliberations of proposed modifications to FIN 46 (Revised
Interpretations) resulting in multiple effective dates based on
(Continued)
98
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
the nature as well as the creation date of the VIE. VIEs created
after January 31, 2003, but prior to January 1, 2004, may be
accounted for either based on the original interpretation or the
Revised Interpretations. However, the Revised Interpretations
must be applied no later than the first quarter of fiscal year
2004. VIEs created after January 1, 2004 must be accounted for
under the Revised Interpretations. The Company is currently
assessing the impact of the adoption of FIN 46.
In August 2003, the EITF reached a final consensus regarding
Issue No. 03-5, "Applicability of AICPA Statement of Position
97-2, Software Revenue Recognition to Non-Software Deliverables
in an Arrangement Containing More-Than-Incidental Software". EITF
03-5 involves whether non-software deliverables included in an
arrangement that contains software that is more-than-incidental
to the products or services as a whole are included with the
scope of SOP 97-2 "Software Revenue Recognition". This new
pronouncement will not have an impact on the Company's financial
condition or results of operations.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB)
No. 104, "Revenue Recognition" (SAB No. 104), which codifies,
revises and rescinds certain sections of SAB No. 101, "Revenue
Recognition", in order to make this interpretive guidance
consistent with current authoritative accounting and auditing
guidance and SEC rules and regulations. The changes noted in SAB
No. 104 did not have a material effect on our consolidated
results of operations, consolidated financial position or
consolidated cash flows.
(z) Shipping and Handling Costs
In fiscal 2001, the Company adopted the provisions of EITF Issue
No. 00-10, "Accounting for Shipping and Handling Fees and Costs",
which requires the Company to report all amounts billed to a
customer related to shipping and handling as revenue. The Company
includes all costs incurred for shipping and handling as cost of
sales. The Company has reclassified such billed amounts, which
were previously netted in cost of sales to net sales. As a result
of this reclassification, net sales and cost of sales were
increased by $1,548 for year ended November 30, 2001.
(aa) Issuances of Subsidiary Stock
The Company's accounting policy on the issuances of subsidiary
stock is to recognize through earnings the gain on the sale of
the shares as long as the sale of the shares is not part of a
broader corporate reorganization planned or contemplated by the
(Continued)
99
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
Company and realization of the gain is assured.
(bb) Reclassifications
Certain reclassifications have been made to the 2001 and 2002
consolidated financial statements in order to conform to the 2003
presentation.
(2) Restatement of Consolidated Financial Statements
The Company has previously restated its consolidated financial statements
for the fiscal years ended November 30, 2000 and 2001 and for the fiscal
quarters during the year ended November 30, 2001 and the fiscal 2002
quarters ended February 28, 2002, May 31, 2002 and August 31, 2002. In
addition, the Company previously reclassified certain expenses from
operating expenses to cost of sales for fiscal 2001 and for each of the
quarters in the nine months ended August 31, 2002. Please refer to the
Company's previously filed Form 10-K for the year ended November 30, 2002
for details.
(3) Issuance of Subsidiary Shares
On May 29, 2002, Toshiba Corporation (Toshiba) purchased an additional 20%
of Audiovox Communications Corp. (ACC), a majority-owned subsidiary of the
Company. Such purchase accounted for approximately 31 shares at
approximately $774 per share, for approximately $23,900 in cash, increasing
Toshiba's total ownership interest in ACC to 25%. In addition, Toshiba paid
$8,107 in exchange for an $8,107 convertible subordinated note (the Note).
The Note bears interest at a per annum rate equal to 1 3/4% and interest is
payable annually on May 31st of each year, commencing May 31, 2003. The
unpaid principal amount shall be due and payable, together with all unpaid
interest, on May 31, 2007 and automatically renews for an additional five
years. In accordance with the provisions of the Note, Toshiba may convert
the balance of the Note into additional shares of ACC in order to maintain
a 25% interest in ACC, but under no circumstances can Toshiba convert the
Note to exceed a 25% interest in ACC.
In connection with the transaction, the Company, ACC and Toshiba entered
into a stockholders agreement. The stockholders agreement provides for the
composition of the board of directors of ACC and identifies certain items,
other than in the ordinary course of business, that ACC cannot do without
prior approval from Toshiba. The agreement does not require or preclude ACC
from paying dividends on a pro-rata basis. The agreement may be terminated
upon the mutual written agreement of the parties, if the distribution
agreement, which is discussed below, is terminated or if either party
commences a bankruptcy or similar proceeding.
(Continued)
100
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
The Company has historically been the exclusive distributor for Toshiba in
the United States and Canada. In connection with the transaction, ACC and
Toshiba formalized this distribution arrangement whereby ACC is Toshiba's
exclusive distributor for the sale of Toshiba cellular products in the
United States, Canada, Mexico and all countries in the Caribbean and
Central and South America through May 29, 2007. The distribution agreement
provides for 30-day payment terms. The distribution agreement established
certain annual minimum purchase targets for ACC's purchase of Toshiba
products for each fiscal year during the entire term of the agreement. In
the event that ACC fails to meet the minimum purchase target, Toshiba shall
have the right to convert ACC's exclusive distributorship to a
non-exclusive distributorship for the remaining term of the agreement.
Also, in accordance with the terms of the stockholders agreement, upon the
termination of the distribution agreement in accordance with certain terms
of the distribution agreement, Toshiba maintains a put right and the
Company a call right, to repurchase all of the shares held by the other
party for a price equal to the fair market value of the shares as
calculated in accordance with the agreement. Pursuant to the agreement, the
put right is only exercisable if ACC terminates the distribution agreement
or if another strategic investor acquires a direct or indirect equity
ownership interest in excess of 20% in Audiovox Corporation. The call right
is only exercisable if Toshiba elects to terminate the distribution
agreement after its initial five (5) year term.
In May 2002, the Company granted seven stock appreciation units in ACC to
its Chief Executive Officer of ACC and seven stock appreciation units in
ACC to the Chief Executive Officer of the Company. Each unit has a value of
approximately $774, which was based upon the then fair value per share of
ACC based upon the value of shares sold to Toshiba.
Each stock appreciation unit equals the value of one ACC share. All of
these units vested upon the date of grant, however, all of these units are
contingent upon the following future events (i) an initial public offering
of ACC or (ii) a change of control of ACC as defined where in its Chief
Executive Officer resigns within 90 days from the change of control date.
Further, as these specified events were not considered probable at the
grant date and since these units had no value at November 30, 2002 and
2003, no expense has been recorded with respect to these stock appreciation
units.
Additionally, ACC entered into an employment agreement with the President
and Chief Executive Officer (the Executive) of ACC through May 29, 2007
(Note 21). Under the agreement, ACC is required to pay the Executive an
annual base salary of $500 in addition to an annual bonus equal to 2% of
ACC's annual earnings before income taxes. The Company, under the
employment agreement, was required to establish and pay a bonus of $3,200
to key employees of ACC, including the Executive, to be allocated by the
Executive. The bonus was for services previously rendered and, accordingly,
the bonus has been included in general and administrative expenses in the
(Continued)
101
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
accompanying statements of operations for the year ended November 30, 2002.
The Executive was required to utilize all or a portion of the bonus
allocated to him to repay the remaining outstanding principal and accrued
interest owed by the Executive to the Company pursuant to the unsecured
promissory note in favor of the Company (Note 20). During the year ended
November 30, 2002, the Executive was paid $1,800 less an amount outstanding
under a promissory note of $651.
As a result of the issuance of ACC's shares, the Company recognized a gain,
net of expenses of $1,735, of $14,269 ($8,847 after provision for deferred
taxes) during the quarter ended May 31, 2002. The gain represents the
excess of the sale price per share over the carrying amount per share
multiplied by the number of shares issued to Toshiba. The gain on the
issuance of the subsidiary's shares has been recognized in the accompanying
consolidated statements of operations for the year ended November 30, 2002
in accordance with the Company's policy on the recognition of such
transactions, which is an allowable method under Staff Accounting Bulleting
Topic 5.H.
Minority interest income (expense) relating to Toshiba's minority share
ownership in ACC for the years ended November 30, 2001, 2002 and 2003 was
$501, $4,741 and $(1,066), respectively.
(4) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
Years Ended November 30,
2001 2002 2003
------- ------- -------
Cash paid during the years for:
Interest, excluding bank charges $ 3,883 $ 1,303 $ 1,857
Income taxes $ 3,550 $ 2,478 $10,556
Non-cash Transactions:
During the years ended November 30, 2001, 2002 and 2003, the Company
recorded an unrealized holding gain (loss) relating to
available-for-sale marketable equity securities, net of deferred income
taxes, of $(831), $422 and $1,734, respectively, as a separate
component of accumulated other comprehensive income (loss) (Note 8).
During fiscal 2003, the Company issued warrants for the purchase of 120,000
(Continued)
102
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
shares of common stock to non-employees and recorded a charge to operations
of $297,000 (Note 16).
As a result of stock option exercises, the Company recorded a tax benefit
of $216 during fiscal 2003 which is included in paid-in capital in the
accompanying consolidated financial statements.
During fiscal 2001, 314,800 warrants were exercised and converted into
314,800 shares of common stock.
(5) Transactions With Major Suppliers
(a) ACC Dividend
In February 2001, the board of directors of ACC declared a dividend
payable to its stockholders, Audiovox Corporation, a then 95%
stockholder, and Toshiba, a then 5% stockholder for their respective
share of net income for the previous fiscal years. ACC paid Toshiba
its share of the dividend, which approximated $1,034 in the first
quarter of fiscal 2001. There were no dividends declared during fiscal
2002 and 2003.
(b) Sale/Leaseback Transaction
In April 2000, Audiovox Japan (AX Japan), a wholly-owned subsidiary,
purchased land and a building (the Property) from Shintom Co., Ltd.
(Shintom) for 770,000,000 Yen (approximately $7,300) and entered into
a leaseback agreement whereby Shintom leased the Property from AX
Japan for a one-year period. The lease was being accounted for as an
operating lease by AX Japan. Shintom is a stockholder who owns all of
the outstanding preferred stock of the Company and is a manufacturer
of products purchased by the Company through its previously-owned
equity investee, TALK Corporation (TALK). The Company currently holds
stock in Shintom and has previously invested in Shintom convertible
debentures.
The purchase of the Property by AX Japan was financed with a
500,000,000 Yen ($4,671) subordinated loan obtained from Vitec Co.,
Ltd. (Vitec), a 150,000,000 Yen loan ($1,397) from Pearl First (Pearl)
and a 140,000,000 Yen loan ($1,291) from the Company. The land and
building were included in property, plant and equipment, and the loans
were recorded as notes payable on the balance sheet as of November 30,
2001 . Changes arising from the fluctuations in the Yen exchange rate
were reflected as a component of accumulated other comprehensive loss.
Vitec is a major supplier to Shintom, and Pearl is an affiliate of
Vitec. The loans bore interest at 5% per annum, and principle is
payable in equal monthly installments over a six-month period
(Continued)
103
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
beginning six months subsequent to the date of the loans. The loans
from Vitec and Pearl were subordinated completely to the loan from the
Company and, in liquidation, the Company receives payment first.
Upon the expiration of six months after the transfer of the title to
the Property to AX Japan, Shintom had the option to repurchase the
Property or purchase all of the shares of stock of AX Japan. This
option could be extended for one additional six month period. The
option to repurchase the building was at a price of 770,000,000 Yen
plus the equity capital of AX Japan (which in no event can be less
than 60,000,000 Yen) and could only be made if Shintom settles any
rent due AX Japan pursuant to the lease agreement. The option to
purchase the shares of stock of AX Japan was at a price not less than
the aggregate par value of the shares and, subsequent to the purchase
of the shares, AX Japan must repay the outstanding loan due to the
Company. If Shintom did not exercise its option to repurchase the
Property or the shares of AX Japan, or upon occurrence of certain
events, AX Japan could dispose of the Property as it deemed
appropriate. The events which result in the ability of AX Japan to be
able to dispose of the Property include Shintom petitioning for
bankruptcy, failing to honor a check, failing to pay rent, etc. If
Shintom failed, or at any time became financially or otherwise unable
to exercise its option to repurchase the Property, Vitec had the
option to repurchase the Property or purchase all of the shares of
stock of AX Japan under similar terms as the Shintom options.
AX Japan had the option to delay the repayment of the loans for an
additional six months if Shintom extended its options to repurchase
the Property or stock of AX Japan. In September 2000, Shintom extended
its option to repurchase the Property and AX Japan delayed its
repayment of the loans for an additional six months.
In March 2001, upon the expiration of the additional six-month period,
the Company and Shintom agreed to extend the lease for an additional
one-year period. In addition, Shintom was again given the option to
purchase the Property or shares of stock of AX Japan after the
expiration of a six-month period or extend the option for one
additional six-month period. AX Japan was also given the option to
delay the repayment of the loans for an additional six months if
Shintom extended its option for an additional six months.
In October 2002, the Company sold all of its shares in AX Japan to RMS
Co., Ltd., an unrelated party to the Company. The purchase price of
the shares was 60,000 Yen. As a result of this transaction, the
purchaser repaid in full 113,563 Yen which represented the full
balance of amounts then owed to the Company by AX Japan. The agreement
(Continued)
104
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
required the purchaser to immediately change the name of AX Japan to
RMS Co., Ltd., and the Company resigned from all officer and board of
directors positions. The Company has no further relationship or
obligations, whether contingent or direct to RMS Co., Ltd., formerly
known as AX Japan.
As a result of the completion of this transaction, all assets and
liabilities of AX Japan have been removed from the accompanying
consolidated balance sheet as of November 30, 2002, specifically the
land and the building and the notes payable for the Vitec 150,000 Yen
loan and the Pearl 140,000 Yen loan. As a result of this transaction,
the Company recovered in Yen its initial investment in AX Japan as
well as its loan to finance the purchase of the land and building.
However, the Company recognized a $338 loss on the sale of its shares
in AX Japan, as the sales price was less than the value of the net
assets of AX Japan sold to Vitec. Contributing to the loss on sale
were foreign currency loss and other expenses that will not be
recovered. The loss on the sale of the shares of AX Japan has been
included in other, net, under other income (expense) in the
accompanying consolidated statements of operations for the year ended
November 30, 2002.
(c) Inventory Purchases - Other
Two wireless suppliers, including Toshiba, approximated 75%, 67% and
63% of total inventory purchases for the years ended November 30,
2001, 2002 and 2003, respectively. Although there are a limited number
of manufacturers of its products, management believes that other
suppliers could provide similar products on comparable terms. A change
in suppliers, however, could cause a delay in product availability and
a possible loss of sales, which would affect operating results
adversely.
(6) Business Acquisitions
Code Systems, Inc.
On March 15, 2002, Code Systems, Inc. (Code), a wholly-owned subsidiary of
Audiovox Electronics Corp. (AEC), a wholly-owned subsidiary of the Company,
purchased certain assets of Code, an automotive security product company.
The purpose of this acquisition was to expand brand recognition and improve
OEM production with manufacturers. The results of operations of Code are
included in the accompanying consolidated financial statements from the
date of purchase. The purchase price consisted of approximately $7,100,
paid in cash at the closing, and a debenture (CSI Debenture) whose value is
linked to the future earnings of Code. An adjustment to the allocation of
(Continued)
105
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
the purchase price was made to certain acquired assets resulting in an
increase to goodwill of $706 during the year ended November 30, 2003. The
payment of any amount under the terms of the CSI Debenture is based on
performance and is scheduled to occur in the first calendar quarter of
2006. The Company accounted for the transaction in accordance with the
purchase method of accounting. As a result of the transaction, goodwill of
$2,560 was recorded. The purchase price allocation for the acquisition of
Code is final.
Simultaneous with this business acquisition, the Company entered into a
purchase and supply agreement with a third party. Under the terms of this
agreement, the third party will purchase or direct its suppliers to
purchase certain products from the Company. In exchange for entering into
this agreement, the Company issued 50 warrants in its subsidiary, Code,
which vest immediately. These warrants were deemed to have minimal value
based upon the then current value of Code. Furthermore, the agreement calls
for the issuance of additional warrants based upon the future operating
performance of Code.
Based upon the contingent nature of the debenture and warrants, no
recognition was given to the Code debenture or warrants as the related
contingencies were not considered probable and such warrants had not vested
at November 30, 2002 or 2003.
Recoton Audio Group
On July 8, 2003, the Company, through a newly-formed, wholly-owned
subsidiary, acquired in cash (i) certain accounts receivable, inventory and
trademarks from the U.S. audio operations of Recoton Corporation (the "U.S.
audio business") or (Recoton) and (ii) the outstanding capital stock of
Recoton German Holdings GmbH (the "international audio business"), the
parent holding company of Recoton Corporation's Italian, German and
Japanese subsidiaries, for $40,046, net of cash acquired, including
transaction costs of $1.9 million. The primary reason for this transaction
was to expand the product offerings of AEC and to obtain certain long-
standing trademarks such as Jensen(R), Acoustic Research(R) and others. The
Company also acquired an obligation with a German financial institution as
a result of the purchase of the common stock of Recoton German Holdings
GmbH. This obligation is secured by the acquired company's accounts
receivable and inventory.
The results of operations of this acquisition have been included in the
consolidated financial statements from the date of acquisition.
The acquisition is being accounted for using the purchase method of
accounting in accordance with SFAS No. 141. SFAS No. 141 requires that the
total cost of the acquisition be allocated to the tangible and intangible
assets acquired and liabilities assumed based upon their respective fair
(Continued)
106
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
values at the date of acquisition.
The following summarizes the allocation of the purchase price to the fair
value of the assets acquired and liabilities assumed at the date of
acquisition:
Assets acquired:
Accounts receivable $ 12,291
Inventory 21,979
Other current assets 4,014
Property, plant and equipment 2,201
Trademarks 10,303
--------
Total assets acquired 50,788
--------
Liabilities assumed:
Accounts payable and other current liabilities 6,966
Long-term debt 3,776
--------
Total liabilities assumed 10,742
--------
Cash paid, net of cash acquired $ 40,046
========
The excess of the estimated purchase price over the fair value of assets
and liabilities acquired of $10,303 was allocated to trademarks, with an
indefinite useful life. The allocation of purchase price to assets and
liabilities acquired was based upon an independent valuation study, and the
purchase price is final.
Subsequent to July 8, 2003, the Company sold accounts receivable, inventory
and trademarks ($524, $816 and $2,260, respectively) attributable to the
marine products division of the Electronics Group based upon their
estimated fair values which resulted in no gain or loss to the Company. The
sale of the marine division assets was required since the Company is
precluded from selling marine products as a result of its joint venture
agreement with Audiovox Specialized Applications, Inc. (ASA), an equity
investee of the Company.
(Continued)
107
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
The following unaudited pro-forma financial information for the year ended
November 30, 2003 represents the combined results of the Company's
operations and the Recoton acquisition as if the Recoton acquisition had
occurred at the beginning of the year of acquisition. The unaudited
pro-forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company constituted a single
entity during such periods.
Years Ended
November 30,
----------------------------
2002 2003
------------ ------------
Revenue $ 1,305,212 $ 1,364,291
Net loss (14,985) (3,961)
Net loss per share-basic
and diluted $ (0.69) $ (0.18)
On August 29, 2003, the Company entered into a call/put option agreement
with certain employees of Audiovox Europe, whereby these employees can
acquire up to a maximum of 20% of the Company's stated share capital in
Audiovox Europe at a call price equal to the same proportion of the actual
price paid by the Company for Audiovox Europe. The put options cannot be
exercised until the later of (i) November 30, 2008 or (ii) the full
repayment (including interest) of an inter-company loan granted to Audiovox
Europe in the amount of 5.3 million Euros. Notwithstanding the lapse of
these time periods, the put options become immediately exercisable upon (i)
the sale of Audiovox Europe or (ii) the termination of employment or death
of the employee. The put price to be paid to the employee upon exercise
will be the then net asset value per share of Audiovox Europe. Accordingly,
the Company recognizes compensation expense based on 20% of the increase in
Audiovox Europe's net assets representing the incremental change of the put
price over the call option price. Compensation expense for these options
amounted to $388 for the year ended November 30, 2003.
(7) Receivables from Vendors
The Company has recorded receivables from vendors in the amount of $14,174
and $7,830 as of November 30, 2002 and 2003, respectively. Receivables from
vendors represent prepayments on product shipments, defective product
reimbursements and amounts due from Toshiba. At November 30, 2002, the
Company recorded receivables from Toshiba aggregating approximately $12,219
for price protection and software upgrades. Subsequent to November 30,
2002, the receivables from Toshiba were paid in full. At November 30, 2003,
the Company recorded receivables from Toshiba aggregating approximately
$709, primarily for software upgrades. In addition, one wireless vendor
represented $2,211 of the November 30, 2003 vendor receivable balance.
(Continued)
108
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
(8) Investment Securities
As of November 30, 2002, the Company's investment securities consist of
$1,456 of available-for- sales marketable securities, which relates to
306,000 shares (after a 5 for 1 reverse stock split) of CellStar Common
Stock, 1,904,000 shares of Shintom Common Stock and trading securities of
$3,949 which consist of mutual funds that are held in connection with the
deferred compensation plan.
As of November 30, 2003, the Company's investment securities consist of
$4,232 of available-for- sales marketable securities, which relates to
306,000 shares of CellStar Common Stock and trading securities of $5,280
which consist of mutual funds that are held in connection with the deferred
compensation plan.
During fiscal 2002 and 2003, the Company recorded a $1,158 and $21
other-than-temporary impairment of its Shintom common stock, respectively,
due to a decline in the value of Shintom stock.
The cost, gross unrealized gains and losses and aggregate fair value of the
investment securities available-for-sale as of November 30, 2002 and 2003
were as follows:
2002 2003
----------------------------------------------- ---------------------------------------------
Gross Other-than- Gross Other-than-
Unrealized Temporary Aggregate Unrealized Temporary Aggregate
Holding Impairment Fair Holding Impairment Fair
Cost Gain (Loss) Charge Value Cost Gain (Loss) Charge Value
------- ----------- ----------- --------- ------- ----------- ----------- ---------
CellStar
Common
Stock $ 2,401 $ (966) -- $ 1,435 $ 2,401 $ 1,831 -- $ 4,232
Shintom
Common
Stock 1,179 -- $(1,158) 21 21 -- $ (21) --
------- ------- ------- ------- ------- ------- -------- -------
$ 3,580 $ (966) $(1,158) $ 1,456 $ 2,422 $ 1,831 $ (21) $ 4,232
======= ======= ======= ======= ======= ======= ======= =======
Related deferred tax assets/(liabilities) of $367 and $(696) were recorded
at November 30, 2002 and 2003, respectively, as a reduction to the
unrealized holding gain (loss) included in accumulated other comprehensive
income (loss).
(Continued)
109
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
During fiscal 2002 and 2003, the net unrealized holding (loss)/gain on
trading securities that has been included in earnings is $(558) and
$656, respectively.
(9) Property, Plant and Equipment
A summary of property, plant and equipment, net, is as follows:
November 30,
---------------------
2002 2003
-------- --------
Land $ 363 $ 648
Buildings 1,605 4,244
Property under capital lease 7,142 7,142
Furniture, fixtures and displays 2,404 2,228
Machinery and equipment 8,204 8,061
Construction in progress -- 196
Computer hardware and software 14,467 12,702
Automobiles 769 924
Leasehold improvements 4,305 4,614
-------- --------
39,259 40,759
Less accumulated depreciation and amortization (20,878) (20,517)
-------- --------
$ 18,381 $ 20,242
======== ========
The amortization of the property under capital lease is included in
depreciation and amortization expense.
Computer software includes approximately $1,450 and $794 of unamortized
costs as of November 30, 2002 and 2003, respectively, related to the
acquisition and installation of management information systems for internal
use.
Depreciation and amortization of property, plant and equipment amounted to
$4,174, $4,768 and $4,581 for the years ended November 30, 2001, 2002 and
2003, respectively. Included in accumulated depreciation and amortization
is amortization of computer software costs of $776, $850 and $500 for the
years ended November 30, 2001, 2002 and 2003, respectively. Included in
accumulated depreciation and amortization is amortization expense of
property under capital lease of $240 for each of the years ended November
30, 2001, 2002 and 2003, respectively.
(Continued)
110
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
(10) Equity Investments
As of November 30, 2003, the Company's 72% owned subsidiary, Audiovox
Communications Sdn. Bhd., had a 29% ownership interest in Avx Posse
(Malaysia) Sdn. Bhd. (Posse) which monitors car security commands through a
satellite based system in Malaysia. In addition, the Company had a 20%
ownership interest in Bliss-tel which distributes cellular telephones and
accessories in Thailand, and the Company had 50% non-controlling ownership
interests in three other entities: Protector Corporation (Protector) which
acts as a distributor of chemical protection treatments; ASA which acts as
a distributor to specialized markets for RV's and van conversions, of
televisions and other automotive sound, security and accessory products;
and G.L.M. Wireless Communications, Inc. (G.L.M.) which is in the cellular
telephone, pager and communications business in the New York metropolitan
area.
The Company's net sales to the equity investees amounted to $2,656, $3,504
and $4,277 for the years ended November 30, 2001, 2002 and 2003,
respectively. The Company's purchases from the equity investees amounted to
$5,592, $1,883 and $1,978 for the years ended November 30, 2001, 2002 and
2003, respectively. The Company recorded $746, $644 and $296 of outside
representative commission expenses for activations and residuals generated
by G.L.M. on the Company's behalf during fiscal 2001, 2002 and 2003,
respectively.
Included in accounts receivable at November 30, 2002 and 2003 are trade
receivables due from its equity investments aggregating $817 and $934,
respectively. At November 30, 2002 and 2003, included in accounts payable
and other accrued expenses were obligations to equity investments
aggregating $6 and $6, respectively.
For the years ended November 30, 2001, 2002 and 2003, interest income
earned on equity investment notes and other receivables approximated $157,
$2 and $0, respectively.
As discussed in Note 6, the Company sold $3,600 of marine division assets
to ASA in connection with the Recoton acquisition.
The following presents summary financial information for ASA. Such summary
financial information has been provided herein based upon the individual
significance of this unconsolidated equity investment to the consolidated
financial information of the Company. Furthermore, based upon the lack of
significance to the consolidated financial information of the Company, no
summary financial information for the Company's other equity investments
(Continued)
111
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
has been provided herein:
November 30,
------------------
2002 2003
------- -------
Current assets $20,533 $22,518
Non-current assets 2,332 4,803
Current liabilities 3,447 4,640
Members' equity 19,418 22,681
Years Ended
November 30,
--------------------------
2001 2002 2003
------- ------- ------
Net sales $63,336 $44,168 $44,671
Gross profit 17,226 10,301 12,034
Operating income 5,581 216 2,607
Net income 6,908 3,486 5,895
The Company's share of income from this unconsolidated equity investment
for fiscal 2001, 2002 and 2003 was $3,454, $1,743 and $2,948, respectively.
(11) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
November 30,
------------------
2002 2003
------- -------
Commissions $ 4,676 $ 5,180
Employee compensation 3,070 5,564
Future warranty 9,143 12,006
Freight and duty 2,272 3,572
Other taxes payable 410 2,707
Other 15,412 13,787
------- -------
$34,983 $42,816
======= =======
(Continued)
112
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
(12) Financing Arrangements
(a) Bank Obligations
The Company's principal source of liquidity is its revolving credit
agreement which expires July 27, 2004. The Company is currently
negotiating with the bank to extend this agreement for an additional
three years, of which no assurance can be given. At November 30, 2003,
the credit agreement provided for $150,000 of available credit,
including $10,000 for foreign currency borrowings. An amendment to the
credit agreement reduced its credit availability from $200,000 to
$150,000 during the third quarter of fiscal 2003 as a result of the
Company's working capital position and current anticipated borrowing
requirements. The foreign currency borrowing sublimit was
simultaneously reduced from $15,000 to $10,000.
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 are secured by accounts receivable,
inventory and the Company's shares of ACC common stock. At November
30, 2003, the amount of unused available credit is $109,184. The
credit agreement also allows for commitments up to $50,000 in forward
exchange contracts.
Outstanding domestic obligations under the credit agreement at
November 30, 2002 and 2003 were as follows:
November 30,
-----------------
2002 2003
------- -------
Revolving Credit Notes $16,883 $11,709
Eurodollar Notes 20,000 20,000
------- -------
$36,883 $31,709
======= =======
Interest rates are as follows: revolving credit notes at 0.25% above
the Prime Rate at November 30, 2001, 0.50% above the Prime Rate at
November 30, 2002 and 0.75% above the Prime Rate at November 30,
2003, which was 5.5%, 4.8% and 4.75% at November 30, 2001, 2002 and
2003, respectively. Eurodollar Notes at 1.75% above Libor at November
30, 2001, 2.50% above Libor at November 30, 2002 and 2.75% above Libor
at November 30, 2003 which was 3.4%, 3.9% and 3.9% at November 30,
2001, 2002 and 2003, respectively. The Company pays a commitment fee
on the unused portion of the credit line.
(Continued)
113
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
The Company's ability to borrow under its credit facility is a maximum
aggregate amount of $150,000, subject to certain conditions, based
upon a formula taking into account the amount and quality of its
accounts receivable and inventory. The credit agreement 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
and had not received a waiver. Accordingly, the Company recorded its
outstanding domestic bank obligations of $36,883 in current
liabilities at November 30, 2002.
Subsequent to November 30, 2002, the Company repaid its fiscal 2002
obligation of $36,883 in full and borrowed additional funds during the
fourth quarter of fiscal 2003, resulting in domestic bank obligations
outstanding at November 30, 2003 of $31,709. The Company subsequently
obtained a waiver for the November 30, 2002 and February 28, 2003
violations. The Company was in compliance with all its bank covenants
at November 30, 2003. 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.
The Company also has revolving credit facilities in Malaysia
(Malaysian Credit Agreement) to finance additional working capital
needs. As of November 30, 2003, the available line of credit for
direct borrowing, letters of credit, bankers' acceptances and other
forms of credit approximated $3,600. The credit facilities are
partially secured by three standby letters of credit of $800 each and
are payable upon demand or upon expiration of the standby letters of
credit in January, July and July 2004, respectively. The obligations
of the Company under the Malaysian Credit Agreement are also secured
by the property and building owned by Audiovox Communications Sdn.
Bhd. Outstanding obligations under the Malaysian Credit Agreement at
November 30, 2002 and 2003 were approximately $3,317 and $2,721,
respectively. At November 30, 2003, interest on the credit facility
ranged from 4.75% to 6.5%. At November 30, 2002, interest on the
credit facility ranged from 4.75% to 6.0%.
(Continued)
114
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
The Company also had a revolving credit facility in Brazil to finance
additional working capital needs. The Brazilian credit facility was
secured by the Company under a standby letter of credit in the amount
of $200, which expired on December 9, 2002 and was payable on demand
or upon expiration of the standby letter of credit. At November 30,
2002, outstanding obligations under the credit facility was 172
Brazilian Bolivars, and interest on the credit facility ranged from
19% to 29%.
At November 30, 2003, the Company had additional outstanding standby
letters of credit aggregating $678 which expire on various dates from
May to July 2004.
(b) Debt/Loan Agreement
On September 2, 2003, the Company's subsidiary, Audiovox Europe
Holdings GmbH, (Audiovox Europe) borrowed 12 million Euros under a new
term loan agreement. This agreement was for a 5 year term loan with a
financial institution consisting of two tranches. Tranche A is for 9
million Euros and Tranche B is for 3 million Euros. The term loan
matures on August 30, 2008. Payments are due in 60 monthly
installments and interest accrues at (i) 2.75% over the Euribor rate
for the Tranche A and (ii) 3.5% over the three months Euribor rate for
Tranche B. Any amount repaid may not be reborrowed. The term loan
becomes immediately due and payable if a change of control occurs
without permission of the financial institution.
Audiovox Corporation guarantees 3 million Euros of this term loan. The
term loan is secured by the pledge of the stock of Audiovox Europe
Holdings GmbH and on all brands and trademarks of the Audiovox Europe
Holdings Group. The term loan requires the maintenance of certain
yearly financial covenants that are calculated according to German
Accounting Standards for Audiovox Europe Holdings. Should any of the
financial covenants not be met, the financial institution may charge a
higher interest rate on any outstanding borrowings. The short and long
term amounts outstanding under this agreement were $3,226 and $9,736,
respectively, at November 30, 2003 and have been included in the
accompanying consolidated balance sheet.
(c) Factoring Arrangements
The Company has available a 16,000 Euro factoring arrangement with a
German financial institution for its recently acquired German
operations. Selected accounts receivable are purchased from the
Company on a non-recourse basis at 80% of face value and payment of
the remaining 20% upon receipt from the customer of the balance of the
receivable purchased. The rate of interest is Euribor plus 2.5%, and
(Continued)
115
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
the Company pays 0.4% of its gross sales as a fee for this arrangement. The
amount outstanding under this agreement was $5,510 at November 30, 2003,
and has been included in bank obligations in the accompanying consolidated
balance sheet.
(13) Long-Term Debt to Toshiba
As discussed in Note 3, on May 29, 2002, Toshiba purchased an additional
20% of ACC. In connection with the transaction, an $8,107 convertible
subordinated note (the Note) was issued to Toshiba. The Note bears interest
at a per annum rate equal to 1 3/4% and interest is payable annually on May
31st of each year, commencing May 31, 2003. The unpaid principal amount
shall be due and payable, together with all unpaid interest, on May 31,
2007 and automatically renews for an additional five years. In accordance
with the provisions of the Note, Toshiba may convert the balance of the
Note into additional shares of ACC in order to maintain a maximum 25%
interest in ACC. The total amount outstanding under the Note at November
30, 2003 was $8,107 and has been included as long-term debt in the
accompanying consolidated balance sheet.
The following is a maturity table for debt and bank obligations outstanding
at November 30, 2003:
Total
Amounts
Committed 2004 2005 2006 2007 2008
------- ------- ------- ------- ------- -------
Lines of credit $39,940 $39,940 $ -- $ -- $ -- $ --
Debt 21,722 3,433 2,662 2,596 10,697 2,334
------- ------- ------- ------- ------- -------
Total $61,662 $43,373 $ 2,662 $ 2,596 $10,697 $ 2,334
======= ======= ======= ======= ======= =======
(Continued)
116
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
(14) Income Taxes
The components of income (loss) before the provision for (recovery of)
income taxes, minority interest and cumulative effect of a change in
accounting for negative goodwill are as follows:
November 30,
------------------------------------
2001 2002 2003
--------- --------- ---------
Note (2)
Domestic Operations $(11,535) $ (7,584) $ 17,391
Foreign Operations 53 1,181 3,645
--------- --------- ---------
$ (11,482) $ (6,403) $ 21,036
========= ========= =========
Total income tax expense (benefit) was allocated as follows:
November 30,
-------------------------------
2001 2002 2003
-------- -------- --------
Note (2)
Statement of operations $ (3,627) $ 12,932 $ 9,407
Stockholders' equity:
Unrealized holding gain (loss) on
investment securities recognized
for financial reporting purposes (509) 260 1,063
Tax benefit of stock options exercised -- (17) (216)
-------- -------- --------
Total income tax expense
(benefit) $ (4,136) $ 13,175 $ 10,254
======== ======== ========
(Continued)
117
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
The provision for (recovery of) income taxes is comprised of:
Federal Foreign State Total
-------- -------- -------- --------
2001:
Note (2)
Current $ (1,751) $ 359 $ 1,097 $ (295)
Deferred (2,407) 153 (1,078) (3,332)
-------- -------- -------- --------
$ (4,158) $ 512 $ 19 $ (3,627)
======== ======== ======== ========
2002:
Current $ (525) $ 1,604 $ 1,949 $ 3,028
Deferred 8,645 180 1,079 9,904
-------- -------- -------- --------
$ 8,120 $ 1,784 $ 3,028 $ 12,932
======== ======== ======== ========
2003:
Current $ 6,643 $ 4,153 $ 1,079 $ 11,875
Deferred (1,737) (906) 175 (2,468)
-------- -------- -------- --------
$ 4,906 $ 3,247 $ 1,254 $ 9,407
======== ======== ======== ========
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to income (loss) before income taxes and minority interest
and the actual provision for income taxes is as follows:
November 30,
---------------------------------------------------------------------------------
2001 2002 2003
------------------------- ------------------------- ---------------------------
Note (2)
Tax provision at Federal statutory
rates $ (4,019) (35.0)% $ (2,241) (35.0)% $ 7,363 35.0%
State income taxes, net of Federal
benefit 12 0.1 338 5.3 1,132 5.4
Increase (decrease) in the
valuation allowance for
deferred tax assets (227) (2.0) 13,090 204.4 (641) (3.1)
Foreign tax rate differential 448 4.0 1,372 21.4 1,971 9.4
Permanent and other, net 159 1.3 373 5.9 (418) (2.0)
-------- -------- -------- ------ -------- ------
$ (3,627) (31.6)% $ 12,932 202.0% $ 9,407 44.7%
======== ======== ======== ====== ======== ======
The significant components of deferred income tax expense (recovery) for
(Continued)
118
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
the years ended November 30, 2002 and 2003 are as follows:
November 30,
------------------------
2002 2003
-------- --------
Deferred tax expense (recovery) (exclusive of the
effect of other components listed below) $ (3,186) $ (1,827)
Increase (decrease) in the balance of the valuation
allowance for deferred tax assets 13,090 (641)
-------- --------
$ 9,904 $ (2,468)
======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred liabilities are presented
below:
November 30,
---------------------
2002 2003
-------- --------
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts and cellular deactivations $ 1,723 $ 2,094
Inventory, principally due to additional costs
capitalized for tax purposes pursuant to the Tax
Reform Act of 1986 1,617 1,561
Inventory, principally due to valuation reserve 7,521 7,480
Accrual for future warranty costs 3,249 3,460
Plant, equipment and certain intangibles, principally
due to depreciation and amortization 1,863 2,112
Net operating loss carryforwards, federal, state and
foreign 4,926 4,203
Foreign tax credits 1,347 2,895
Accrued liabilities not currently deductible and other 520 298
Investment securities 719 (355)
Deferred compensation plans 1,537 2,037
-------- --------
Total gross deferred tax assets 25,022 25,785
Less: valuation allowance (13,206) (12,565)
-------- --------
Net deferred tax assets 11,816 13,220
-------- --------
Deferred tax liabilities:
Issuance of subsidiary shares (6,867) (6,867)
-------- --------
Total gross deferred tax liabilities (6,867) (6,867)
-------- --------
Net deferred tax asset $ 4,949 $ 6,353
======== ========
The net change in the total valuation allowance for the year ended November
(Continued)
119
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
30, 2003 was a decrease of $641, primarily resulting from a reduction in
the valuation allowance recorded on certain of ACC's deferred tax assets.
After this valuation allowance, the net deferred tax assets remaining on
the consolidated balance sheet represent deferred tax assets generated from
the Electronics Group.
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. Based on
the Electronics Group's ability to carry back future reversals of deferred
tax assets to taxes paid in current and prior years and the Electronics
Group's historical taxable income record, adjusted for unusual items,
management believes it is more likely than not that the Electronics Group
will realize the benefit of the net deferred tax assets existing at
November 30, 2003. Further, management believes the existing net deductible
temporary differences will reverse during periods in which the Electronics
Group generates net taxable income. There can be no assurance, however,
that the Company will generate any earnings or any specific level of
continuing earnings in the future. The amount of the deferred tax asset
considered realizable by the Electronics Group, therefore, could be reduced
in the near term if estimates of future taxable income during the
carryforward period are reduced.
At November 30, 2003, the Wireless Group had a net operating loss
carryforward for federal income tax purposes of approximately $6,639, which
is available to offset future taxable income, if any, which will expire
through the year ended November 30, 2023.
(15) Capital Structure
The Company's capital structure is as follows:
Voting
Rights
Par Shares Per Liquidation
Security Value Shares Authorized Outstanding Share Rights
-------- ----- ------ -------
------------------------------- ------------------------------
November 30, November 30,
------------------------------- ------------------------------
2002 2003 2002 2003
---- ---- ---- ----
Preferred Stock $50.00 50,000 50,000 50,000 50,000 - $50 per share
Series Preferred Stock $ 0.01 1,500,000 1,500,000 - - - -
Ratably
with Class
Class A Common Stock $ 0.01 60,000,000 60,000,000 19,559,445 19,655,645 One B
Class B Common Stock $ 0.01 10,000,000 10,000,000 2,260,954 2,260,954 Ten Ratably
with Class
A
(Continued)
120
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
The holders of Class A and Class B common stock are entitled to receive
cash or property dividends declared by the Board of Directors. The Board
can declare cash dividends for Class A common stock in amounts equal to or
greater than the cash dividends for Class B common stock. Dividends other
than cash must be declared equally for both classes. Each share of Class B
common stock may, at any time, be converted into one share of Class A
common stock.
The 50,000 shares of non-cumulative Preferred Stock outstanding are owned
by Shintom (see Notes 5 and 8) and have preference over both classes of
common stock in the event of liquidation or dissolution. These shares have
no dividend rights.
The Company's Board of Directors approved the repurchase of 1,563,000
shares of the Company's Class A common stock in the open market under a
share repurchase program (the Program). As of November 30, 2002 and 2003,
1,072,737 shares were repurchased under the Program at an average price of
$7.93 for an aggregate amount of $8,511.
As of November 30, 2002 and 2003, 2,900,317 and 2,804,117 shares,
respectively, of the Company's Class A common stock are reserved for
issuance under the Company's Stock Option and Restricted Stock Plans.
During fiscal 2003, 120,000 warrants were issued to outside counsel (Note
16). Warrants are outstanding that may be converted into shares of Code
(Note 6).
Undistributed earnings from equity investments included in retained
earnings amounted to $4,496 and $6,127 at November 30, 2002 and 2003,
respectively.
(16) Stock-Based Compensation and Retirement Plans
(a) Stock Options and Warrants
The Company applies APB No. 25 in accounting for its stock option
grants and, accordingly, no compensation cost has been recognized in
the financial statements for its stock options which have an exercise
price equal to or greater than the fair value of the stock on the date
of the grant.
The Company has stock option plans under which employees and
non-employee directors may be granted incentive stock options (ISO's)
and non-qualified stock options (NQSO's) to purchase shares of Class A
common stock. Under the plans, the exercise price of the ISO's will
not be less than the market value of the Company's Class A common
stock or greater than 110% of the market value of the Company's Class
A common stock on the date of grant. The exercise price of the NQSO's
(Continued)
121
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
may not be less than 50% of the market value of the Company's Class A
common stock on the date of grant. The options must be exercised no
later than ten years after the date of grant. The vesting requirements
are determined by the Board of Directors at the time of grant.
Compensation expense is recorded with respect to the options based
upon the quoted market value of the shares and the exercise provisions
at the date of grant. No compensation expense was recorded for stock
options during the years ended November 30, 2001, 2002 and 2003.
At November 30, 2002 and 2003, 219,253 and 234,253 shares were
available for future grants under the terms of these plans,
respectively.
(b) Stock Warrants
During fiscal 2003, the Company issued non-transferable warrants for
the purchase of 120,000 shares to outside legal counsel. The warrants
vested immediately upon issuance, and the exercise price of the
warrants was equal to the market price on the date of issuance. In
accordance with APB No. 25 and SFAS 123, the Company recorded an
expense equal to the fair value of the warrants, as these warrants
were issued to non-employees for services performed. Accordingly, the
Company recorded $297 of expense during fiscal 2003 for the
aforementioned warrants which is reflected in general and
administrative expenses in the accompanying consolidated statements of
operations for the fiscal year ended November 30, 2003.
No stock options or warrants were granted in fiscal 2001 or fiscal
2002.
(Continued)
122
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
Information regarding the Company's stock options and warrants is
summarized below:
Weighted
Average
Number Exercise
of Shares Price
----------- ------------
Outstanding at November 30, 2000 2,749,900 $ 11.61
Granted -- --
Exercised (10,000) 7.69
Canceled/Lapsed -- --
---------- ---------
Outstanding at November 30, 2001 2,739,900 11.62
Granted -- --
Exercised (16,336) 7.69
Canceled/Lapsed (12,500) 13.75
---------- ---------
Outstanding at November 30, 2002 2,711,064 11.64
Granted 120,000 11.02
Exercised (96,200) 6.90
Canceled/Lapsed (15,000) 15.00
---------- ---------
Outstanding at November 30, 2003 2,719,864 $ 11.76
========== =========
Options and warrants exercisable at November
30, 2003 2,719,864 $ 11.76
========== =========
Summarized information about stock options and warrants outstanding as
of November 30, 2003 is as follows:
Outstanding Exercisable
--------------------------------------------------- ------------------------------------
Weighted Weighted
Average Average Weighted
Exercise Exercise Life Average
Price Number Price Remaining Number Price
Range of Shares of Shares In Years of Shares of Shares
- ---------------- ------------- -------------- ---------------- ------------- ---------------
$4.63-8.00 1,026,664 7.24 3.19 1,026,664 7.24
$8.01-13.00 228,200 11.30 4.22 228,200 11.30
$13.01-15.00 1,465,000 15.00 5.78 1,465,000 15.00
(Continued)
123
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
(c) Restricted Stock Plan
The Company has restricted stock plans under which key employees and
directors may be awarded restricted stock. Awards under the restricted
stock plan may be performance-accelerated shares or
performance-restricted shares. There were no performance-restricted
accelerated shares or performance-restricted shares granted in 2001,
2002 and 2003.
Compensation expense for the performance-accelerated shares is
recorded based upon the quoted market value of the shares on the date
of grant. Compensation expense for the performance-restricted shares
is recorded based upon the quoted market value of the shares on the
balance sheet date. There was no restricted stock outstanding at
November 30, 2001, 2002 and 2003.
(d) Employee Stock Purchase Plan
In April 2000, the stockholders approved the 2000 Employee Stock
Purchase Plan of up to 1,000,000 shares. The stock purchase plan
provides eligible employees an opportunity to purchase shares of the
Company's Class A common stock through payroll deductions at a minimum
of 2% and a maximum of 15% of base salary compensation. Amounts
withheld are used to purchase Class A common stock on the open market.
The cost to the employee for the shares is equal to 85% of the fair
market value of the shares on or about the quarterly purchase date
(December 31, March 31, June 30 or September 30). The Company bears
the cost of the remaining 15% of the fair market value of the shares
as well as any broker fees.
The Company's employee stock purchase plan is a non-compensatory plan,
in accordance with APB No. 25, for which the related expense is
recorded in general and administrative expenses in the consolidated
statement of operations.
(e) Profit Sharing Plans/ 401(k) Plan
The Company has established two non-contributory employee profit
sharing plans for the benefit of its eligible employees in the United
States and Canada. The plans are administered by trustees appointed by
the Company. A contribution accrual of $300 and $600 was recorded by
the Company for the United States plan in fiscal 2001 and 2003,
respectively. No accruals for contributions were recorded by the
Company in fiscal 2002. Contributions required by law to be made for
eligible employees in Canada were not material for all periods
presented.
(Continued)
124
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
The Company also has a 401(k) plan for eligible employees. The Company
matches a portion of the participant's contributions after one year of
service under a predetermined formula based on the participant's
contribution level. The Company's contributions were $160, $114 and
$135 for the year ended November 30, 2001, 2002 and 2003,
respectively. Shares of the Company's Common Stock are not an
investment option in the Savings Plan and the Company does not use
such shares to match participants' contributions.
(f) Deferred Compensation Plan
Effective December 1, 1999, the Company adopted a Deferred
Compensation Plan (the Plan) for a select group of management. The
Plan is intended to provide certain executives with supplemental
retirement benefits as well as to permit the deferral of more of their
compensation than they are permitted to defer under the Profit Sharing
and 401(k) Plan. The Plan provides for a matching contribution equal
to 25% of the employee deferrals up to $20. The Plan is not intended
to be a qualified plan under the provisions of the Internal Revenue
Code. All compensation deferred under the Plan is held by the Company
in an investment trust which is considered an asset of the Company.
The investments, which amounted to $5,280 at November 30, 2003, have
been classified as trading securities and are included in investment
securities on the accompanying consolidated balance sheet as of
November 30, 2003. The return on these underlying investments will
determine the amount of earnings credited to the employees. The
Company has the option of amending or terminating the Plan at any
time. The deferred compensation liability is reflected as a long-term
liability on the accompanying consolidated balance sheet as of
November 30, 2003. Compensation expense and investment income (loss)
are recorded in the accompanying consolidated statements of operations
in connection with this deferred compensation plan.
(17) Lease Obligations
During 1998, the Company entered into a 30-year lease for a building with
its principal stockholder and chief executive officer. A significant
portion of the lease payments, as required under the lease agreement,
consists of the debt service payments required to be made by the principal
stockholder in connection with the financing of the construction of the
building. For financial reporting purposes, the lease has been classified
as a capital lease, and, accordingly, a building and the related obligation
of approximately $6,340 was recorded (Note 20). The effective interest rate
on the capital lease obligation is 8.0%.
(Continued)
125
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
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 and has been extended for an additional
two years. No gain or loss was recorded on the transaction as the book
value of the equipment equaled the fair market value.
At November 30, 2003, the Company was obligated under non-cancelable
capital and operating leases for equipment and warehouse facilities for
minimum annual rental payments as follows:
Capital Operating
Lease Leases
2004 $ 553 $ 3,946
2005 552 3,309
2006 561 2,731
2007 577 2,499
2008 580 1,667
Thereafter 10,829 188
-------- ---------
Total minimum lease payments 13,652 $ 14,340
=========
Less: amount representing interest 7,517
---------
Present value of net minimum lease
payments 6,135
Less: current installments included in accrued
expenses and other current liabilities 65
---------
Long-term obligation $ 6,070
=========
Rental expense for the above-mentioned operating lease agreements and other
leases on a month- to-month basis approximated $2,958, $3,191 and $3,735
for the years ended November 30, 2001, 2002 and 2003, respectively.
(Continued)
126
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
The Company leases certain facilities and equipment from its principal
stockholder and several officers. Rentals for such leases are considered by
management of the Company to approximate prevailing market rates. At
November 30, 2003, minimum annual rental payments on these related party
leases, in addition to the capital lease payments, which are included in
the above table, are as follows:
2004 $1,264
2005 1,021
2006 912
2007 940
2008 968
Thereafter 119
------
$5,224
======
(18) Financial Instruments
(a) Off-Balance Sheet Risk
Commercial letters of credit are issued by the Company during the
ordinary course of business through major domestic banks as requested
by certain suppliers. The Company also issues standby letters of
credit principally to secure certain bank obligations of Audiovox
Communications Sdn. Bhd. (Note 12). The Company had open commercial
letters of credit of approximately $8,129 and $2,541, of which $3,740
and $468 were accrued for purchases incurred as of November 30, 2002
and 2003, respectively. The terms of these letters of credit are all
less than one year. No material loss is anticipated due to
nonperformance by the counter parties to these agreements. The fair
value of these open commercial and standby letters of credit is
estimated to be the same as the contract values based on the nature of
the fee arrangements with the issuing banks.
The Company is a party to joint and several guarantees on behalf of
G.L.M. which aggregate $300. There is no market for these guarantees
and they were issued without explicit cost. Therefore, it is not
practicable to establish its fair value.
(b) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of trade
receivables. The Company's customers are located principally in the
United States and Canada and consist of, among others, wireless
carriers and service providers, distributors, agents, mass
(Continued)
127
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
merchandisers, warehouse clubs and independent retailers.
At November 30, 2002, one customer, a wireless carrier and service
provider, accounted for approximately 27% of consolidated accounts
receivable. At November 30, 2003, three wireless customers accounted
for 13%, 12% and 12% of consolidated accounts receivable.
During the years ended November 30, 2001, 2002 and 2003, one customer
accounted for approximately 35%, 24% and 21% of the Company's fiscal
2001, 2002 and 2003 sales, respectively.
The Company generally grants credit based upon analyses of its
customers' financial position and previously established buying and
payment patterns. For certain customers, the Company establishes
collateral rights in accounts receivable and inventory and obtains
personal guarantees from certain customers based upon management's
credit evaluation.
A portion of the Company's customer base may be susceptible to
downturns in the retail economy, particularly in the consumer
electronics industry. Additionally, customers specializing in certain
automotive sound, security and accessory products may be impacted by
fluctuations in automotive sales.
(c) Fair Value
The carrying value of all financial instruments classified as a
current asset or liability is deemed to approximate fair value because
of the short term maturity of these instruments. The estimated fair
value of the Company's financial instruments is as follows:
November 30, 2002 November 30, 2003
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ------- -------- ---------
Investment securities $ 5,405 $ 5,405 $ 9,512 $ 9,512
Bank obligations $36,883 $36,883 $39,940 $39,940
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
(Continued)
128
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
Investment Securities
The carrying amount represents fair value, which is based upon quoted
market prices at the reporting date (Note 8).
Long-Term Obligations
The carrying amount of bank debt under the Company's revolving credit
agreement and foreign debt approximates fair value because the
interest rate on the bank debt is reset every quarter to reflect
current market rates.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(19) 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.
The Company's chief decision maker evaluates performance of the
segments based upon income before provision for income taxes. The
accounting policies of the segments are the same as those described in
the summary of significant accounting policies (Note 1). 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
(Continued)
129
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
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 is
jointly 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. Segment identifiable assets
are those which are directly used in or identified to segment
operations.
During the years ended November 30, 2001, 2002 and 2003, one customer
of the Wireless segment accounted for approximately 35%, 24% and 21%
of the Company's consolidated fiscal 2001, 2002 and 2003 sales,
respectively. No customers in the Electronics segment exceeded 10% of
consolidated sales in fiscal 2001, 2002 or 2003.
Consolidated
Wireless Electronics Corporate Totals
2001, Note (2)
Net sales $ 978,888 $ 297,703 -- $ 1,276,591
Interest income 138 91 $ 441 670
Equity in income of equity investees -- 45 3,541 3,586
Interest expense 7,711 2,039 (4,575) 5,175
Depreciation and amortization 878 1,408 2,190 4,476
Income (loss) before provision for (recovery of)
income taxes and minority interest (17,656) 13,623 (7,449) (11,482)
Total assets 347,393 138,779 58,325 544,497
Goodwill, net -- 370 4,362 4,732
Non-cash items:
Provision for bad debt expense 629 1,091 216 1,936
Deferred income tax (benefit) -- -- (3,332) (3,332)
Minority interest -- -- 1,830 1,830
Capital expenditures 1,082 992 795 2,869
(Continued)
130
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
Consolidated
Wireless Electronics Corporate Totals
2002
Net sales 727,658 372,724 -- 1,100,382
Interest income 81 169 259 509
Equity in income of equity investees -- 37 1,742 1,779
Interest expense 3,984 1,605 (2,409) 3,180
Depreciation and amortization 1,114 1,571 2,095 4,780
Income (loss) before provision for (recovery of)
income taxes, minority interest, and cumulative
effect (24,906) 17,415 1,088 (6,403)
Total assets 304,337 209,231 37,667 551,235
Goodwill, net -- 2,224 4,602 6,826
Non-cash items:
Provision for bad debt expense 3,482 1,402 -- 4,884
Deferred income tax expense -- -- 9,904 9,904
Minority interest -- -- 4,616 4,616
Capital expenditures 1,093 1,321 745 3,159
2003
Net sales 806,210 517,692 -- 1,323,902
Interest income 45 254 217 516
Equity in income of equity investees -- 35 3,244 3,279
Interest expense 1,798 3,917 (2,194) 3,521
Depreciation and amortization 1,056 1,884 1,641 4,581
Income (loss) before provision for (recovery of)
income taxes and minority interest 5,617 29,540 (14,121) 21,036
Total assets 199,304 339,541 40,858 579,703
Goodwill, net -- 2,930 4,602 7,532
Non-cash items:
Provision for bad debt expense (10) 576 -- 566
Deferred income tax expense -- -- (2,468) (2,468)
Minority interest -- -- 4,993 4,993
Capital expenditures 274 1,099 4,081 5,454
In accordance with SFAS No. 142, Corporate wrote-off its unamortized
negative goodwill of $240 as of the date of adoption, which has been
reflected in the consolidated statements of operations as a cumulative
effect of a change in accounting principle for the year ended November
30, 2002. The implementation of SFAS No. 142 was immaterial to the
segments.
Goodwill was acquired in connection with the purchase of certain
assets of Code-Alarm, Inc. by Code Systems, Inc., a wholly-owned
subsidiary of Audiovox Electronics Corp. (Note 6).
(Continued)
131
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
Net sales and long-lived assets by location for the years ended
November 30, 2001, 2002 and 2003 were as follows.
Net Sales Long-Lived Assets
-------------------------------------- -----------------------------------
2001 2002 2003 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ----------
Note (2)
United States $1,061,853 $ 867,154 $1,074,547 $ 34,820 $ 40,506 $ 55,256
Canada 85,796 143,368 135,952 -- -- --
Argentina 2,684 985 64 -- -- --
Peru 4,148 313 441 -- -- --
Japan -- -- 456 6,545 -- --
Malaysia 12,570 11,637 7,720 1,220 1,038 1,010
Venezuela 22,422 16,744 2,908 8,339 852 511
Mexico, Central
America and
Caribbean 77,134 28,655 60,093 -- -- --
Chile 1,077 21,711 9,776 -- -- --
Europe -- -- 27,708 -- -- 2,407
Other foreign -- --
countries 8,907 9,815 4,237 --
---------- ---------- ---------- ---------- ---------- ----------
Total $1,276,591 $1,100,382 $1,323,902 $ 50,924 $ 42,396 $ 59,184
========== ========== ========== ========== ========== ==========
(20) Related Party Transactions
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, at November
30, 2002, the Company had outstanding notes due from various officers
of the Company aggregating $235, which have been included in prepaid
expenses and other current assets on the accompanying consolidated
balance sheet. The notes bore interest at the LIBOR rate plus 0.5% per
annum. Principal and interest were payable in equal annual
installments beginning July 1, 1999 through July 1, 2003. The notes
have been paid in full. In addition, no new notes with officers or
directors of the Company have been entered into.
The Company also leases certain facilities and equipment from its
principal stockholder (Note 17).
During the years ended November 30, 2001, 2002 and 2003, 34%, 38% and
10% of the Company's purchases, respectively, were from Toshiba (Note
3). At November 30, 2002, the Company recorded receivables from
Toshiba aggregating approximately $12,219 for price protection and
software upgrades. At November 30, 2003, the Company recorded
(Continued)
132
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
receivables from Toshiba aggregating approximately $709 primarily for
software upgrades.
At November 30, 2003, the Company had inventory on hand from Toshiba
in the amount of $18,841, which has been recorded in inventory and
accounts payable on the accompanying consolidated balance sheet. The
payment terms are such that the payable is non-interest bearing and is
payable in accordance with the terms established in a distribution
agreement with Toshiba, which is 30 days. For certain inventory items,
the Company is entitled to receive price protection in the event the
selling price to its customers is less than the purchase price from
the manufacturer. The Company records such price protection, as
necessary, at the time of the sale of the units. For fiscal 2001, 2002
and 2003, price protection of $4,550, $27,683 and $13,031,
respectively, was recorded as a reduction to cost of sales as the
related inventory was sold.
On May 29, 2002, Toshiba purchased an additional 20% of ACC for
$23,900 in cash, bringing Toshiba's total ownership interest in ACC to
25%. In addition, an $8,107 convertible subordinated note (the Note)
was issued to Toshiba. The Note bears interest at a per annum rate
equal to 1 3/4% and interest is payable annually on May 31st of each
year, commencing May 31, 2003. The unpaid principle amount shall be
due and payable, together with all unpaid interest, on May 31, 2007
and automatically renews for an additional five years. In accordance
with the provisions of the Note, Toshiba may convert the balance of
the Note into additional shares of ACC in order to maintain a maximum
25% interest in ACC.
In connection with the transaction, ACC and Toshiba formalized a
distribution agreement whereby ACC will be Toshiba's exclusive
distributor for the sale of Toshiba products in the United States,
Canada, Mexico and all countries in the Caribbean and Central and
South America through May 29, 2007. Pursuant to the agreement, the put
right is only exercisable if ACC terminates the distribution agreement
or if another strategic investor acquires a direct or indirect equity
ownership interest in excess of 20% in the Company. Toshiba maintains
a put right and the Company a call right, to repurchase all of the
shares held by the other party for a price equal to the fair market
value of the shares as calculated in accordance with the agreement.
Audiovox's call right is only exercisable if Toshiba elects to
terminate the distribution agreement after its initial five (5) year
term (see Note 3).
(21) Commitments and Contingencies
Contingencies
The Company is currently, and has in the past been, a party to routine
litigation incidental to its business. From time to time, the Company
receives notification of alleged violations of registered patent
holders' rights. The Company has either been indemnified by its
(Continued)
133
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
manufacturers in these matters, obtained the benefit of a patent
license or has decided to vigorously defend such claims.
On September 17, 2003, AEC settled the action for patent infringement
that was instituted by Nissho Iwai American Corporation against AEC in
the United State District Court for the Southern District of New York.
Pursuant to the settlement Nissho granted AEC a non-exclusive license
for a payment covering any alleged past infringements and a per unit
payment for future infringement. Neither party to the lawsuit admitted
any liability or any merit to the allegations of either party.
The Company and ACC, along with other manufacturers of wireless phones
and cellular service providers, were named as defendants in two class
action lawsuits alleging non-compliance with FCC ordered emergency 911
call processing capabilities. These lawsuits were consolidated and
transferred to the United States District Court for the Northern
District of Illinois, which in turn referred the cases to the Federal
Communications Commission ("FCC") to determine if the manufacturers
and service providers are in compliance with the FCC's order on
emergency 911 call processing capabilities. The Company and ACC intend
to vigorously defend this matter. However, no assurances regarding the
outcome of this matter can be given at this point in the litigation.
In June 2003, ACC settled the litigation it had instituted against
Northcoast Communications, LLC ("Northcoast"). ACC received a partial
payment of its claimed amount from Northcoast. In addition, Northcoast
withdrew its counterclaims with prejudice. A Stipulation of
Discontinuance with prejudice was filed in the Supreme Court of the
State of New York, County of Suffolk.
During 2001, the Company, along with other suppliers, manufacturers
and distributors of hand- held wireless telephones, was named as a
defendant in five class action lawsuits alleging damages relating to
exposure to radio frequency radiation from hand-held wireless
telephones. These class actions have been consolidated and transferred
to a Multi-District Litigation Panel before the United States District
Court of the District of Maryland. On March 5, 2003, Judge Catherine
C. Blake of the United States District Court for the District of
Maryland granted the defendants' consolidated motion to dismiss these
complaints. Plaintiffs have appealed to the United States Circuit
Court of Appeals, Fourth Circuit. The appeal pending before the United
States Circuit Court of Appeals, Fourth Circuit in the consolidated
class action lawsuits (Pinney, Farina, Gilliam, Gimpelson and Naquin)
against ACC and other suppliers, manufacturers and distributors as
well as wireless carriers of hand-held wireless telephones alleging
damages relating to risk of exposure to radio frequency radiation from
the wireless telephones has not yet been heard. It is anticipated that
the appeal will be heard in May 2004.
(Continued)
134
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
The Company had been the subject of an administrative agency
investigation involving alleged reimbursement of a fixed nominal
amount of federal campaign contributions during the years 1995 and
1996. During the third quarter of fiscal 2003, the Company entered
into a Conciliation Agreement and paid a civil penalty in the amount
of $620.
During the third quarter of fiscal 2003, a certain Venezuelan
employee, who is also a minority shareholder in Audiovox Venezuela,
submitted a claim to the Venezuela Labor Court for severance
compensation of approximately $560. The Court approved the claim and
it was paid and expensed by Audiovox Venezuela in the third quarter of
fiscal 2003. The Company is challenging the payment of this claim and
will seek reimbursement from the Venezuelan shareholder or the
Company's insurance carrier.
The Company does not expect the outcome of any pending litigation,
separately and in the aggregate, to have a material adverse effect on
its business, consolidated financial position or results of
operations.
Commitments
The Company has guaranteed the borrowings of one of its 50%-owned
equity investees (GLM) at a maximum of $300. During the second quarter
of fiscal 2003, the Company adopted FIN 45, "Guarantors Accounting and
Disclosure Requirements for Guarantors, Including Guarantees of
Indebtedness of Others" (FIN 45). The Company has not modified this
guarantee after December 31, 2002. No liability has been recorded for
this guarantee on the accompanying consolidated financial statements.
ACC entered into an employment agreement with the President and Chief
Executive Officer (the Executive) of ACC through May 29, 2007 (Note
3). Under the agreement, ACC is required to pay the Executive an
annual base salary of $500 in addition to an annual bonus equal to 2%
of ACC's annual earnings before income taxes.
(Continued)
135
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
(22) Unaudited Quarterly Financial Data
Selected unaudited, quarterly financial data of the Company for the years
ended November 30, 2002 and 2003 appears below:
QUARTER ENDED
(Dollars in thousands, except per share data) Feb. 28 May 31 Aug. 31 Nov. 30
-------- ------ ------- -------
Note (2) Note (2) Note (2)
2002
Net sales 184,269 297,267 301,992 316,853
Gross profit 13,723 18,653 27,468 14,755
Operating expenses 18,946 24,089 21,283 24,356
Income (loss) before provision for (recovery
of) income taxes, minority interest, and
cumulative effect (7,554) 7,737 4,985 (11,571)
Provision for (recovery of) income taxes (1,500) 4,320 2,416 7,696
Minority interest income 557 256 49 4,193
Income (loss) before cumulative effect of
accounting change for negative goodwill (5,497) 3,673 2,618 (15,074)
Cumulative effect of accounting change for
negative goodwill 240 - - -
Net income (loss) (5,257) 3,673 2,618 (15,074)
Net income (loss) per common share before
cumulative effect of accounting change for
negative goodwill:
Basic (0.25) 0.17 0.12 (0.69)
Diluted (0.25) 0.17 0.12 (0.69)
Net income (loss)
Basic (0.24) 0.17 0.12 (0.69)
Diluted (0.24) 0.17 0.12 (0.69)
(Continued)
136
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
QUARTER ENDED
(Dollars in thousands, except per share data) Feb. 28 May 31 Aug. 31 Nov. 30
-------- ------ ------- -------
2003
Net sales 296,818 301,010 265,822 460,252
Gross profit 25,468 25,612 27,831 45,295
Operating expenses 21,007 22,558 25,381 33,457
Income before provision for income taxes,
minority interest, and cumulative effect 2,628 3,355 2,442 12,611
Provision for income taxes 1,040 918 2,606 4,843
Minority interest income (expense) (380) (363) 811 (458)
Net income 1,208 2,074 647 7,310
Net income per common share before
cumulative effect:
Basic 0.06 0.10 0.03 0.33
Diluted 0.05 0.09 0.03 0.33
Net income
Basic 0.06 0.10 0.03 0.33
Diluted 0.05 0.09 0.03 0.33
(23) Fourth Quarter Adjustments for Fiscal 2002
During the fourth quarter of fiscal 2002, the Company recorded the
following adjustments to its statement of operations (i) a $13,090
valuation allowance for deferred tax assets that were considered more
likely than not to be unrecoverable related to the Wireless segment (Note
14); (ii) an inventory obsolescence charge of $7,665 and $2,725 for the
Wireless Group and Electronics Group, respectively, relating to inventory
(Note 1); (iii) a $1,158 other-than-temporary impairment charge related to
investment securities (Note 8); (iv) a $2,091 bad debt reserve related to
certain customers whose financial condition and ability to pay their
outstanding receivables became doubtful during the fourth quarter; and (v)
the reversal of unearned sales incentives of $763 and $947 for the Wireless
Group and Electronics Group, respectively. The Company has determined that
none of these adjustments relate to prior quarters.
(Continued)
137
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
(24) Accrued Sales Incentives
During the quarter ended May 31, 2002, the Company adopted the provisions
of EITF 01-9. As a result of adopting EITF 01-9 in 2002, 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 $11,100 for the year ended November 30, 2001.
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 last
three years on a segment and consolidated basis is provided below:
Wireless
Fiscal Fiscal Fiscal
2001 2002 2003
-------- -------- --------
Note (2)
Opening balance $ 11,700 $ 5,209 $ 7,525
Accruals 19,680 31,186 21,327
Payments (13,616) (25,654) (20,426)
Reversals for unearned incentives (7,535) (570) (393)
Reversals for unclaimed incentives (5,020) (2,646) (744)
-------- -------- --------
Ending balance $ 5,209 $ 7,525 $ 7,289
======== ======== ========
Electronics
Fiscal Fiscal Fiscal
2001 2002 2003
-------- -------- --------
Note (2)
Opening balance $ 2,894 $ 3,265 $ 4,626
Accruals** 5,789 7,665 19,994
Payments (3,604) (4,804) (8,212)
Reversals for unearned incentives (1,516) (784) (917)
Reversals for unclaimed incentives (298) (716) (886)
-------- -------- --------
Ending balance $ 3,265 $ 4,626 $ 14,605
======== ======== ========
(Continued)
138
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
Consolidated
Fiscal Fiscal Fiscal
2001 2002 2003
-------- -------- --------
Note (2)
Opening balance $ 14,594 $ 8,474 $ 12,151
Accruals 25,469 38,851 41,321
Payments (17,220) (30,458) (28,638)
Reversals (14,369) (4,716) (2,940)
-------- -------- --------
Ending balance $ 8,474 $ 12,151 $ 21,894
======== ======== ========
The majority of the reversals of previously established sales incentive
liabilities pertain to sales recorded in prior periods.
**Included in Electronics accruals is $4,111 of accrued sales incentives
acquired from the acquisition of Recoton (Note 6).
(25) Subsequent Event
On February 19, 2004, the Company announced that it signed a non-binding
letter of intent to sell a controlling interest in the Company's wireless
subsidiary, ACC, to Curitel Communications Inc., (or one of its affiliates
or subsidiaries) a leading mobile phone manufacturer in South Korea
(Curitel). Currently, Audiovox owns 75% of ACC and Toshiba owns the
remaining interest.
The transaction is subject to a number of contingencies, including
satisfactory completion of due diligence, negotiation and signing of
definitive agreements and requisite approvals. The terms of the transaction
have not been finalized. The Company must also consider all proposals
submitted and there can be no assurances that this, or any other
transaction, will be completed or as to any terms that may be negotiated.
139
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
(a) Previous Principal Independent Accountants and Auditors.
(i) On October 16, 2003, the Board of Directors of Registrant approved a
resolution authorizing the dismissal of KPMG LLP ("KPMG") effective as of the
close of business on that date. The decision of the Board of Directors was based
on the recommendation of the Audit Committee of the Board of Directors. KPMG had
been engaged as the Registrant's principal accountants since 1980.
(ii) The audit reports of KPMG on the Registrant's consolidated financial
statements as of and for the years ended November 30, 2002 and 2001 did not
contain any adverse opinion or a disclaimer of opinion nor were they qualified
or modified as to uncertainty, audit scope, or accounting principles, except for
a modification of accounting principles as their report included a reference to
a footnote which discusses that effective December 1, 2001, the Company adopted
the provisions of Statement of Financial Accounting Standards (Statement) No.
141, " Business Combinations" and Statement No. 142, "Goodwill and Other
Intangible Assets" and a reference to a footnote which discusses that the
consolidated balance sheet as of November 30, 2001 and the related consolidated
statements of operations, stockholders' equity and comprehensive income (loss)
and cash flows for the years ended November 30, 2000 and 2001 were restated.
(iii) In connection with the audits of the two fiscal years ended November
30, 2002 and 2001, and the subsequent interim periods preceding the date of
determination of termination of the engagement of KPMG, the Registrant was not
in disagreement with KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of KPMG, would have caused
KPMG to make reference to the subject matter of the disagreement in connection
with their reports.
(iv) In connection with the audits of the two fiscal years ended November
30, 2002 and 2001, and the subsequent interim periods preceding the date of
determination of termination of the engagement of KPMG, there were no
"reportable events" except that KPMG reported to the Registrant's Audit
Committee that KPMG considered two matters involving internal controls and their
operation to be material weaknesses. Specifically, in connection with its audit
of the consolidated financial statements of Registrant and its subsidiaries for
the fiscal year ended November 30, 2002, KPMG reported that a material weakness
existed related to the technical competence of the Registrant's accounting
personnel and recommended significantly enhancing the accounting staff. The
Registrant is addressing this concern and is in the process of enhancing its
accounting staff. Additionally, KPMG reported that it considered a deficiency in
internal controls over sales incentives arrangements with its customers to be a
material weakness. Included in KPMG's recommendations in this area was a
standardized approach to the documentation of sales incentive arrangements, both
internally and externally. A similar issue, relative to the Registrant's
Wireless segment, was also reported to the Audit Committee of Registrant by KPMG
in March 2002. The Registrant began implementing KPMG's recommendations for its
Wireless and Electronics segments in November 2002 and May 2003, respectively.
140
(b) New Principal Independent Accountants and Auditors.
On October 16, 2003, the Audit Committee of the Board of Directors of
Registrant engaged Grant Thornton LLP as the Registrant's certifying accountants
for the fiscal year ending November 30, 2003. The Registrant has not consulted
with Grant Thornton LLP during its two most recent fiscal years nor during any
subsequent interim period prior to its appointment as auditor for the fiscal
year 2003 audit regarding the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on Registrant's consolidated financial
statements.
Item 9a - Controls and Procedures
Within the 90-day period immediately preceding the filing of this Report,
the Company's Chief Executive Officer and Principal Financial Officer has each
evaluated the effectiveness of the Company's "Disclosure Controls and
Procedures" and has concluded that they were effective. As such term is used
above, the Company's Controls and Procedures are controls and other procedures
of the Company that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Security Exchange Commission's rules
and forms. Disclosure Controls and Procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by the Company in such reports is accumulated and communicated to the
Company's management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date that the Company's Chief Executive Officer and Principal Financial Officer
conducted their evaluations of the Disclosure Controls and Procedures, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
PART III
Item 10 - Directors and Executive Officers of the Registrant
Section 16(a) Beneficial Ownership Reporting Compliance
Information regarding this item is set forth under the captions "Election
of Directors" and "Compliance with Section 16(a) of the Exchange Act" of the
Company's Proxy Statement to be dated March 23, 2004, which will be filed
pursuant to Regulation 14A under the Securities and Exchange Act of 1934 (the
Proxy Statement) and is incorporated herein by reference. Information with
regard to Executive Officers is set forth in Item 1 of this Form 10-K.
The Company has adopted a code of ethics for all employees and directors,
including the principal executive officer, other executive officers, principal
finance officer and other financial personnel. A copy of the code of ethics is
available free of charge upon request. Any such request should be directed to
the attention of: Chris Lis Johnson, Company Secretary, 150 Marcus Boulevard,
Hauppauge, New York 11788, (631) 231-7750.
141
Item 11 - Executive Compensation
The information regarding this item is set forth under the caption
"Executive Compensation" of the Proxy Statement and is incorporated herein by
reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information regarding this item is set forth under the caption
"Beneficial Ownership of Common Stock" of the Proxy Statement and is
incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
Information regarding this item is set forth under the caption "Certain
Relationships and Related Party Transactions" of the Proxy Statement and is
incorporated herein by reference.
Item 14 - Principal Accountant Fees and Services
Information regarding this item is set forth under the caption "Principal
Accountant Fees and Services" of the Proxy Statement and is incorporated herein
by reference.
PART IV
Item 15 - Exhibits, Consolidated Financial Statement Schedules and Reports on
Form 8-K
(a) (1)
The following are included in Item 8 of this Report:
Report of Independent Certified Public Accountants: Grant Thornton LLP
Independent Auditors' Report: KPMG LLP
Consolidated Balance Sheets of Audiovox Corporation and Subsidiaries as of
November 30, 2002 and 2003.
Consolidated Statements of Operations of Audiovox Corporation and Subsidiaries
for the Years Ended November 30, 2001, 2002 and 2003.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
of Audiovox Corporation and Subsidiaries for the Years Ended November 30, 2001,
2002 and 2003.
Consolidated Statements of Cash Flows of Audiovox Corporation and Subsidiaries
for the Years Ended November 30, 2001, 2002 and 2003.
Notes to Consolidated Financial Statements.
142
(a) (2)
Financial Statement Schedules of the Registrant for the Years Ended November 30,
2001, 2002 and 2003.
Independent Auditors' Report on Financial Statement Schedule: KPMG LLP
Schedule Page
Number Description Number
------ ----------- ------
Valuation and Qualifying Accounts 151
II
All other financial statement schedules not listed are omitted because they are
either not required or the information is otherwise included.
143
Independent Auditors' Report
The Board of Directors and Stockholders
Audiovox Corporation:
Under the date of May 30, 2003 we reported on the consolidated balance sheet of
Audiovox Corporation and subsidiaries as of November 30, 2002, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss and cash flows for each of the years in the two-year period ended November
30, 2002, which are included in the Company's 2003 annual report on Form 10-K.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule in the 2003 annual report on Form 10-K. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this consolidated financial statement
schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1, effective December 1, 2001, the Company adopted the
provisions of Statement of Financial Accounting Standards (Statement) No. 141,
"Business Combinations" and Statement No. 142, "Goodwill and Other Intangible
Assets".
As discussed in Note 2 to the accompanying consolidated financial statements,
the consolidated statements of operations, stockholders' equity and
comprehensive loss and cash flows for the year ended November 2001 have been
restated.
s/KPMG LLP
--------------------------------
KPMG LLP
Melville, New York
May 30, 2003
144
(3) Exhibits
See Item 15(c) for Index of Exhibits.
(b) Reports on Form 8-K
(c) Exhibits
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company (incorporated
by reference to the Company's Registration Statement on
Form S-1; No. 33-107, filed May 4, 1987).
3.1a Amendment to Certificate of Incorporation
(incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended November 30,
1993).
3.1b Amendment to Certificate of Incorporation
(incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended November 30,
2000).
3.2 By-laws of the Company (incorporated by reference to the
Company's Registration Statement on Form S-1; No. 33-10726,
filed May 4, 1987).
10.1 The Fourth Amended and Restated Credit Agreement among the
Registrant and the several banks and financial institutions
dated as of July 28, 1999 (incorporated
by reference to the Company's Form 8-K filed via EDGAR on October 27,
1999).
10.2 First Amendment, dated as of October 13, 1999, to
the Fourth Amended and Restated Credit Agreement
among the Registrant and the several banks and
financial institutions (incorporated by reference to
the Company's Form 8-K filed via EDGAR on October
27, 1999).
10.3 Second Amendment, dated as of December 20, 1999, to
the Fourth Amended and Restated Credit Agreement
among the Registrant and the several banks and
financial institutions (incorporated by reference to
the Company's Form 8-K filed via EDGAR on January
13, 2000).
10.4 Securities Purchase Agreement made and entered into
as of May 29, 2002, by and among Toshiba
Corporation, Audiovox Communications Corp. and
Audiovox Corporation (incorporated by reference to
the Company's Form 8-K filed via EDGAR on June 6,
2002).
10.5 Stockholders Agreement made and entered into as of
May 29, 2002, by and among Toshiba Corporation,
Audiovox Communications Corp. and Audiovox
Corporation (incorporated by reference to the
Company's Form 8-K filed via EDGAR on June 6, 2002).
145
Exhibit
Number Description
10.6 Distribution Agreement made and entered into as of May 29, 2002, by and between
Toshiba Corporation and Audiovox Communications Corp.(incorporated by
reference to the Company's Form 8-K filed via EDGAR on June 6, 2002).
10.7 Non-Negotiable Subordinated Convertible Promissory Note dated May 31, 2002
by Audiovox Communications Corp. in favor of Toshiba Corporation (incorporated
by reference to the Company's Form 8-K filed via EDGAR on June 6, 2002).
10.8 Employment Agreement effective as of May 29, 2002 by and among Audiovox
Communications Corp., Philip Christopher and Audiovox Corporation (incorporated
by reference to the Company's Form 8-K filed via EDGAR on June 6, 2002).
10.9 Trademark License Agreement made as of May 29, 2002
between Audiovox Corporation and Audiovox Communications
Corp.(incorporated by reference to the Company's Form
8-K filed via EDGAR on June 6, 2002).
10.10 Non-Negotiable Demand Note dated May 29, 2002 by Audiovox Communications
Corp. in favor of Audiovox Corporation (incorporated by reference to the Company's
Form 8-K filed via EDGAR on June 6, 2002).
10.11 Sixth Amendment and Consent, dated as of May 28, 2002 to
the Fourth Amended and Restated Credit Agreement, dated
as of July 28, 1999 (as amended) among Audiovox
Corporation, the several banks and other financial
institutions from time to time parties thereto
(collectively the "Lenders") and JPMorgan Chase Bank, as
administrative and collateral agent for the Lenders
(incorporated by reference to the Company's Form 8-K
filed via EDGAR on June 6, 2002).
10.12 Waiver dated as of March 13, 2003 to the Fourth Amended
and Restated Credit Agreement, dated as of July 28, 1999
among Audiovox Corporation, the several banks and other
financial institutions from time to time parties thereto
(collectively the "Lenders") and JPMorgan Chase Bank, as
administrative and collateral agent for the Lenders
(incorporated by reference to the Company's Form 8-K
filed via EDGAR on March 14, 2003).
10.13 Amendment and Waiver dated as of June 10, 2003 to the
Fourth Amended and Restated Credit Agreement, dated as
of July 28, 1999 among Audiovox Corporation, the several
banks and other financial institutions from time to time
parties thereto (collectively the "Lenders") and
JPMorgan Chase Bank, as administrative and collateral
agent for the Lenders (incorporated by reference to the
Company's Form 8-K filed via EDGAR on June 12, 2003).
146
Exhibit
Number Description
10.14 Ninth Amendment effective June 26, 2003 to the Fourth
Amended and Restated Credit Agreement dated as of July
28, 1999 among Audiovox Corporation, the several banks
and other financial institutions from time to time
parties thereto (collectively the "Lenders") and
JPMorgan Chase Bank, as administrative and collateral
agent for the Lenders (incorporated by reference to the
Company's Form 8-K filed via EDGAR on July 1, 2003).
10.15 First Amended and Restated Stock and Asset Purchase
Agreement, dated as of June 2, 2003, by and among
Recoton Recoton Audio Corporation, Recoton Home Audio,
Inc., Recoton Mobile Electronics, Inc., Recoton
International Holdings, Inc. ("RIH"), Recoton
Corporation and Recoton Canada Ltd. (collectively, the
"Sellers") , JAX Assets Corp. ("Buyer") and Audiovox
Corporation ("Registrant"), as guarantor (incorporated
by reference to the Company's Form 8-K filed via EDGAR
on July 23, 2003).
10.16 Long Term Incentive Compensation Award to John J. Shalam (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
November 30, 2002).
10.17 Long Term Incentive Compensation Award to Philip Christopher (incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended
November 30, 2002).
21 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Grant Thornton LLP (filed herewith).
23.2 Consent of KPMG LLP (filed herewith).
31.1 Certification Pursuant to Rule 13a-14(a) of The Securities Exchange Act of 1934
(filed herewith)
31.2 Certification Pursuant to Rule 13a-14(a) of The Securities Exchange Act of 1934
(filed herewith)
32.1 Certification Pursuant to Rule 13a-14(a) And Rule 15d-14(a) Section 1350, Chapter
63 of Title 18 of the United State Code, As Adopted Pursuant to Section 906
of The Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certification Pursuant to Rule 13a-14(a) And Rule 15d-14(a) Section 1350, Chapter
63 of Title 18 of the United State Code, As Adopted Pursuant to Section 906
of The Sarbanes-Oxley Act of 2002 (filed herewith).
(d) All other schedules are omitted because the required information is
shown in the financial statements or notes thereto or because they are
not applicable.
147
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
February 24, 2004 BY:s/John J. Shalam
-----------------------------
John J. Shalam, President
and Chief Executive Officer
148
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
President;
Chief Executive Officer
s/John J. Shalam (Principal Executive Officer February 24, 2004
- ---------------- and Director
John J. Shalam
Executive Vice President and
s/Philip Christopher Director February 24, 2004
- --------------------
Philip Christopher
Senior Vice President,
Chief Financial Officer
(Principal Financial and February 24, 2004
s/Charles M. Stoehr Accounting Officer) and
- -------------------
Charles M. Stoehr Director
s/Patrick M. Lavelle Director February 24, 2004
- --------------------
Patrick M. Lavelle
s/Ann Boutcher Director February 24, 2004
- --------------
Ann Boutcher
s/Richard A. Maddia Director February 24, 2004
- -------------------
Richard A. Maddia
s/Paul C. Kreuch, Jr. Director February 24, 2004
- ---------------------
Paul C. Kreuch, Jr.
s/Dennis McManus Director
- -----------------
Dennis McManus February 24, 2004
s/Irving Halevy Director
- ---------------
Irving Halevy February 24, 2004
149
Signature Title Date
- ---------
/s/Peter A. Lesser Director February 24, 2004
- -------------------
Peter A. Lesser
150
SCHEDULE II
AUDIOVOX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended November 30, 2001, 2002 and 2003
(In thousands)
Column A Column B Column C Column D Column E
-------- --------- ------------------------- ----------- --------
Gross
Amount Reversals of
Balance at Charged to Previously Balance
Beginning Costs and Established At End
Description Of Year Expenses Accruals Deductions (a) Of Year
----------- -------- -------- -------- -------------- --------
2001(b)
Allowance for doubtful accounts $ 6,297 $ 1,936 -- $ 3,518 $ 4,715
Cash discount allowances 195 2,630 -- 2,643 182
Accrued sales incentives 14,594 25,469 $(14,369) 17,220 8,474
Allowance for cellular
deactivations 1,254 3,382 -- 2,601 2,035
Reserve for warranties and
product
repair costs 12,374 11,319 -- 10,627 13,066
-------- -------- -------- -------- --------
$ 34,714 $ 44,736 $(14,369) $ 36,609 $ 28,472
======== ======== ======== ======== ========
2002
Allowance for doubtful accounts $ 4,715 $ 4,884 -- $ 2,770 $ 6,829
Cash discount allowances 182 2,858 -- 2,833 207
Accrued sales incentives 8,474 38,851 $ (4,716) 30,458 12,151
Allowance for cellular
deactivations 2,035 2,308 -- 2,715 1,628
Reserve for warranties and
product
repair costs 13,066 6,985 -- 4,641 15,410
-------- -------- -------- -------- --------
$ 28,472 $ 55,886 $ (4,716) $ 43,417 $ 36,225
======== ======== ======== ======== ========
2003
Allowance for doubtful accounts $ 6,829 $ 566 -- $ 448 $ 6,947
Cash discount allowances 207 5,007 -- 4,014 1,200
Accrued sales incentives 12,151 41,321 $ (2,940) 28,638 21,894
Allowance for cellular
deactivations 1,628 3,780 -- 4,281 1,127
Reserve for warranties and
product
repair costs 15,410 12,015 -- 8,913 18,512
-------- -------- -------- -------- --------
$ 36,225 $ 62,689 $ (2,940) $ 46,294 $ 49,680
======== ======== ======== ======== ========
(a) For the allowance for doubtful accounts, cash discount allowances and
accrued sales incentives, deductions represent currency effects and
payments made or credits issued to customers. For the allowance for
cellular deactivations, deductions represent credits taken against accounts
receivable by carrier customers for deactivations of previously activated
wireless customers. For the reserve for warranties and product repair
costs, deductions represent payments for labor and parts made to service
centers and vendors for the repair of units returned under warranty.
(b) See Note (2) of Notes to Consolidated Financial Statements.
151
SUBSIDIARIES OF REGISTRANT
Jurisdiction of
Subsidiaries Incorporation
- ------------ -------------
Audiovox Communications Corp. Delaware
Audiovox Electronics Corporation Delaware
Quintex Mobile Communications Corp. Delaware
American Radio Corp. Georgia
Audiovox Holding Corp. New York
Audiovox Communications Canada Co. Ontario
Audiovox Communications (Malaysia) Sdn. Bhd. Malaysia
Audiovox Holdings (M) Sdn. Bhd. Malaysia
Audiovox Venezuela C.A. Venezuela
Audiovox Europe Holdings GmbH Germany
Exhibit 21
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 19, 2004, accompanying the consolidated
financial statements and schedule included in the Annual Report of Audiovox
Corporation and subsidiaries on Form 10-K for the year ended November 30, 2003.
We hereby consent to the incorporation by reference of said report in the
Registration Statements of Audiovox Corporation on Forms S-8 (Registration Nos.
333-36762 and 333-82073).
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Melville, New York
February 19, 2004
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors and Stockholders
Audiovox Corporation:
We consent to the incorporation by reference in registration statement Nos.
333-36762 and 333- 82073 on Form S-8 of Audiovox Corporation of our report dated
May 30, 2003, with respect to the consolidated balance sheet of Audiovox
Corporation and subsidiaries as of November 30, 2002, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss and cash flows for each of the years in the two-year period ended November
30, 2002, and the related financial statement schedule, which report appears in
the November 30, 2003 annual report on Form 10-K of Audiovox Corporation and
subsidiaries.
Our report dated May 30, 2003 contained explanatory paragraphs that stated that
the Company adopted the provisions of Statement of Financial Accounting
Standards (Statement) No. 141, "Business Combinations" and Statement No. 142,
"Goodwill and Other Intangible Assets" and that the consolidated statements of
operations, stockholders' equity and comprehensive loss and cash flows for the
year ended November 30, 2001 have been restated.
s/KPMG LLP
KPMG LLP
Melville, New York
February 24, 2004
Exhibit 23.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
I, John J. Shalam, certify that:
1. I have reviewed this annual report on Form 10-K of Audiovox Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and to the audit committee of the registrant's board
of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 24, 2004 By: /s/ John J. Shalam
---------------------------------------
John J. Shalam
Chief Executive Officer
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
I, Charles M. Stoehr, certify that:
1. I have reviewed this annual report on Form 10-K of Audiovox Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 the report;
4. The registrant's other certifying officers(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and to the audit committee of the registrant's board
of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 24, 2004 By: /s/ Charles M. Stoehr
---------------------------------
Charles M. Stoehr
Chief Financial Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a)
SECTION 1350, CHAPTER 63 OF TITLE 18 OF THE UNITED STATE CODE,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the year ended
November 30, 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
February 24, 2004
Exhibit 32.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a)
SECTION 1350, CHAPTER 63 OF TITLE 18 OF THE UNITED STATE CODE,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the year ended
November 30, 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
February 24, 2004
Exhibit 32.2
