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, 2004
Commission file number 0-28839
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
180 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
(631) 231-7750
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of Each Exchange on 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 requirements for the past 90 days.
Yes No X
-------- ---------
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 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. X
The aggregate market value of the common stock held by non-affiliates of
the Registrant was $244,171,332 (based upon closing price on the Nasdaq Stock
Market on May 28, 2004).
The number of shares outstanding of each of the registrant's classes of
common stock, as of March 28, 2005 was:
Class Outstanding
- -----
Class A common stock $.01 par value 20,872,538
Class B common stock $.01 par value 2,260,954
DOCUMENTS INCORPORATED BY REFERENCE
(1) Part III - Portions of the Registrant's Proxy Statement relating to its
2005 Annual Stockholders Meeting filed on March 30, 2005.
2
AUDIOVOX CORPORATION
Form 10-K
For the Fiscal Year Ended November 30, 2004
Table of Contents
PART I .........................................................................................................4
Item 1-Business..........................................................................................4
Item 2-Properties.......................................................................................20
Item 3-Legal Proceedings................................................................................20
Item 4-Submission of Matters to a Vote of
Security Holders................................................................................22
PART II ........................................................................................................24
Item 5-Market for the Registrant's Common Equity and Related
Stockholder Matters.............................................................................24
Item 6-Selected Consolidated Financial Data.............................................................25
Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................................................26
Item 7a-Quantitative and Qualitative Disclosures About Market Risk......................................51
Item 8-Consolidated Financial Statements and Supplementary Data.........................................52
Item 9-Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................................................105
Item 9a-Controls and Procedures........................................................................105
Item 9b-Other Information..............................................................................113
PART III .......................................................................................................113
PART IV .......................................................................................................113
Item 15-Exhibits, Financial Statement Schedules........................................................113
SIGNATURES......................................................................................................117
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PART I
Item 1-Business
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on expectations, estimates
and projections as of the date of this filing. Actual results may differ
materially from those expressed in forward-looking statements. See Item 7 of
Part II--"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Forward- Looking Statements."
General
All amounts presented in thousands unless otherwise indicated.
Audiovox Corporation ("Audiovox", "We", "Our", "Us" or "Company") is a
leading international distributor and value added service provider in the mobile
and consumer electronics industry. The Company conducts its business through
subsidiaries and markets its products both domestically and internationally
under its own brands. The Company also functions as an OEM ("Original Equipment
Manufacturer") supplier to several customers and presently has one reportable
segment ("Electronics"), which is organized by product class.
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. The Company designs and markets a diverse
line of products and provides related services throughout the world. These
products and services include:
o mobile entertainment and security products,
o mobile electronic products and accessories,
o consumer electronic products and accessories, and
o autosound products and accessories.
The Company through its four wholly-owned subsidiaries: Audiovox
Electronics Corporation ("AEC"), American Radio Corp., Code Systems, Inc.
("Code") and Audiovox German Holdings GmbH ("Audiovox Germany") and three
majority-owned subsidiaries: Audiovox Communications (Malaysia) Sdn. Bhd.,
Audiovox Holdings (M) Sdn. Bhd. and Audiovox Venezuela, C.A. markets its
products under the Audiovox(R) brand name and other brand names, such as
Jensen(R), Prestige(R), Pursuit(R), Rampage(TM), Code- Alarm(R), Car Link(R),
Movies 2 Go(R), Magnate(R), Mac Audio(R), Heco(R), Acoustic Research(R),
Advent(R) and Phase Linear, as well as private labels through a large and
diverse distribution network both domestically and internationally. The
Company's extensive distribution network and its long-standing industry
relationships have allowed the Company to benefit from growing market
opportunities and emerging niches in the electronics business.
Divestiture of Cellular Business
On November 1, 2004, the Company completed the divestiture of its Cellular
business (formerly known as "ACC", "Cellular" or "Wireless") to UTStarcom, Inc.
("UTSI"). The Cellular business was a major driver in the Company's growth over
the past twenty years. However, consolidation of cellular service providers
within the cellular industry, extensive price competition and the inability to
successfully partner with a manufacturer created a difficult challenge for the
Company to compete within the cellular industry.
The competitive nature of the Cellular business caused inconsistency in
Cellular results, which led to the Company's sale of selected assets and certain
liabilities of ACC to UTSI for a purchase price of $165,170 subject to a working
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capital adjustment. In addition, the Company retained certain receivables of ACC
of $148,494 and, after collecting these receivables, the Company expects to
receive total gross proceeds of $322,136 from the divestiture of the Cellular
business. These proceeds were, or will be, reduced by aggregate payments of
$84,586 to Toshiba, estimated taxes, former Cellular employees and other
divestiture costs. In addition, the Company utilized a portion of the proceeds
to repay $99,266 of domestic bank obligations outstanding. The expected net
proceeds ("the net proceeds") is $138,284 from the divestiture of the Cellular
business. Please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (Item 7) for additional information
regarding the divestiture of the Cellular business.
Currently and subsequent to the sale of the Cellular business, the net
proceeds have been invested in short-term investments with the intention of
maintaining principal while generating a moderate return and maintaining
liquidity in the account's holdings. The Company plans to utilize the net
proceeds to pursue strategic and complementary acquisitions or invest in the
Company's Electronics Group, which has had a history of sales and profit growth.
Specifically, sales and gross profit for the Electronics Group have increased
52.1% and 49.4%, respectively from fiscal 2002. However, the Company may use all
or a portion of the net proceeds for other purposes and is considering all
opportunities.
The Company has presented Cellular's financial results in discontinued
operations for all periods presented due to the divestiture of the Cellular
business. As such, certain reclassifications have been made to prior year
amounts in order to conform to the current period presentation. Unless indicated
otherwise, all amounts presented herein exclude the results of the Cellular
business.
Acquisitions
On July 8, 2003, the Company, through a newly-formed, wholly-owned
subsidiary, acquired for 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 $1,900. 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 assumed an obligation of
$10,742 with a German financial institution as a result of the purchase of the
common stock of Recoton German Holdings GmbH.
On March 15, 2002, Code purchased certain assets of Code-Alarm, Inc., an
automotive security product company. The purpose of this acquisition was to
expand brand recognition and improve OEM production with manufacturers. The
purchase price consisted of approximately $7,100, paid in cash at the closing,
and a contingent debenture (CSI Debenture) whose value is linked to the future
earnings of Code.
Please refer to Note 5 "Business Acquisitions" of the Notes to Consolidated
Financial Statements for additional information regarding the aforementioned
acquisitions.
Subsequent Event
On January 4, 2005, the Company's wholly-owned subsidiary, Audiovox
Electronics Corporation, signed an asset purchase agreement to purchase certain
assets of Terk Technologies Corp. for a purchase price of $13,100, subject to a
working capital adjustment, plus contingent debentures based on achievement of
future revenue targets. This acquisition is expected to increase the Company's
market share for satellite radio products as well as accessories related to HDTV
products.
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Strategy
The Company's objective is to increase revenue and operating income by
leveraging and expanding through acquisitions the well-recognized Audiovox(R)
brand name and family of brand names. The key elements of the Company's strategy
are:
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 in the electronics
industry, such as satellite radio, navigation, mobile video, DVD's, flat
panel TVs and vehicle tracking systems.
Leverage its distribution network. The Company believes it has a
significant distribution network that includes all of the major
distribution outlets; power retailers, mass merchandisers, independents,
distributors, car dealers and OEM. The Company provides value added
services such as market intelligence, product design, engineering,
development and testing, sales support, customer service and product
service. The Company intends to continue to expand its value-added services
as the market evolves and customer needs change.
Increase market penetration by capitalizing on the Audiovox(R) family of
brands. The Company believes the "Audiovox(R)" family of brands, which
includes Prestige(R), Pursuit(R), Rampage(TM), Jensen(R), Magnate(R), Mac
Audio(R), Heco(R), Acoustic Research(R) , Advent(R) and Phase Linear, is
one of its greatest strengths. During the past 44 years, the Company has
invested to establish the brands for Consumer Electronics products. To
further benefit from the Audiovox(R) brands, the Company continues to
introduce new products using its brand names and licenses its brand name
for selected consumer products.
Pursue strategic and complementary acquisitions - Management consistently
monitors economic and industry conditions in order to evaluate potential
synergistic business acquisitions that would allow the Company to leverage
overhead, penetrate new markets or expand the Company's existing business
distribution.
Grow our 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 this international business
through the introduction of Audiovox products to their marketing mix.
Continue to outsource manufacturing to increase operating leverage. A key
component of the Company's business strategy is outsourcing the
manufacturing of its products, which allows the Company to deliver the
latest technological advances without the fixed costs associated with
manufacturing.
Monitor operating expenses. The Company's total operating expenses have
increased at a slower rate than sales since 2000. In fiscal 2004, operating
expenses have increased 92.3% since 2000, compared to sales growth of
105.1% since 2000. The Company has invested in management information
systems and its operating facilities to increase its efficiency. The
operating structure of the Company for the year ended November 30, 2004 was
structured to facilitate the operations of a combined group through
November 1, 2004 of Cellular and Electronics. Due to the divestiture of
Cellular in the later part of fiscal 2004 and the internal costs necessary
to unwind the Cellular business, the Company was unable to change the
operating structure of the Company to impact the fiscal 2004 operating
results. During fiscal 2005, the Company will focus its efforts on
evaluating the current business structure of the Company in order to create
operating efficiencies with the primary goal of increasing operating
income.
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Narrative Description of Business
Industry
The mobile and consumer electronics industry is large and diverse and
encompasses a broad range of products. Among the significant manufacturers in
the industry, are Sony, RCA, Panasonic, Kenwood, Motorola, Samsung and JVC, as
well as other large companies that specialize in niche products. The Company
participates in selected niche markets such as autosound, mobile video, portable
DVD, digital multi-media, vehicle security and selected consumer electronics. As
discussed above, we may pursue strategic acquisitions to either diversify our
business model or expand our current operations within the Electronics business,
or both.
The introduction of new products and technological advancements are the
major growth drivers in the electronics industry. Currently, new products
include, but are not limited to, digital satellite radio, installed and portable
DVD mobile video systems, rear observation systems, LCD flat panel TVs,
navigation systems with real time traffic information and digital multi media
products.
Products
The Company's electronic products consist of two major categories: Mobile
Electronics and Consumer Electronics .
Mobile electronics products include:
o mobile video products, including overhead, headrest and portable
mobile video systems,
o autosound products including radios, speakers, amplifiers and CD
changers,
o satellite radios including plug and play models and direct connect
models,
o automotive security and remote start systems,
o navigation systems,
o rear observation systems, and
o automotive power accessories, including cruise control systems.
Consumer electronics include:
o LCD and flat panel televisions,
o portable DVD players,
o home and portable stereos, and
o GMRS radios digital multi-media products such as personal video
recorders, MP3 players, MPG4 products.
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The Company markets products under several trademarks, including
Audiovox(R), Jensen(R), Prestige(R), Pursuit(R), Rampage(TM), Code-Alarm(R), Car
Link(R), Movies 2 Go(R), Magnate(R), Mac Audio(R), Heco(R), Acoustic
Research(R), Advent(R) and Phase Linear. These trademarks are a significant
factor in marketing our products to customers. The Company's net sales by
product category were as follows:
Percent
Change
2002 2003 2004 2002/2004
-------- -------- -------- --------
Mobile electronics $285,608 $355,207 $405,645 42.0%
Consumer electronics 86,472 161,965 161,432 86.7
Other 644 520 -- (100.0)
-------- -------- -------- --------
Total net sales $372,724 $517,692 $567,077 52.1%
======== ======== ======== ========
The increase in net sales reflects new product introductions in the Mobile
and Consumer Electronics categories as well as increased sales of Jensen
autosound and strong satellite radio sales. Net sales of Consumer Electronics
were negatively impacted in fiscal 2004 due to the decline in portable DVD
players as a result of price erosion and increased competition. In fiscal 2005,
the Company will focus its Consumer Electronics efforts on emerging technologies
such as LCD TVs, digital multimedia portables, home theater and new speaker
lines and expects these lines to be key drivers. New product introductions in
fiscal 2005 for Mobile Electronics will include satellite radio including new
direct connect models, DVD video shuttle systems for both car and home, larger
screen mobile video products, new dual all-in-one headrest systems, rear
observation systems and navigation systems with real time traffic.
In the future, the Company will continue to focus its efforts on new
technologies to take advantage of market opportunities created by the digital
convergence of data, navigation and entertainment products.
Licensing and Royalties
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. The Company
increased license and royalty income by acquiring the assets of Recoton in
fiscal 2003. Actual sales of licensed products are not included in the Company's
reported net sales. License sales promote select Audiovox(R) brands without
adding any significant costs. License fees are recognized upon sale to the
end-user and are recorded in other income. License fees in fiscal 2004 were
$2,024 compared to $1,116 in fiscal 2003.
The Company has various license and royalty programs with manufacturers,
customers and other electronic suppliers. Such agreements entitle the Company to
receive license and royalty income for Audiovox products sold by the licensees.
Depending on the agreement, income from these agreements is based on either a
fixed amount per unit or percentage of net sales. Current license and royalty
agreements have duration periods, which range from 1 to 8 years and certain
agreements may be renewed at the end of termination of the agreement. Renewals
of license and royalty agreements are dependent on negotiations with licensees
as well as current Audiovox products being sold by the licensee.
Distribution and Marketing
The Company sells its electronics products to:
o power retailers,
o mass merchants,
o regional chain stores,
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o specialty retailers,
o independent 12 volt retailers,
o distributors,
o new car dealers,
o vehicle equipment manufacturers (OEM), and
o the U.S. military.
The Company sells its products under OEM arrangements with domestic and/or
international subsidiaries of automobile manufacturers such as Ford Motor
Company, Daimler Chrysler, General Motors Corporation , Toyota, Kia and Mazda.
OEM projects accounted for approximately 14% of the Company's sales in 2004
versus 10% in 2003. These projects require a close partnership with the customer
as the Company develops products to their specific requirements. Three of the
largest domestic auto makers, General Motors, Daimler Chrysler and Ford require
QS registration for all of their vendors. The Company's Hauppauge facility is QS
9000, ISO-14001 and ISO 9001 registered and is Q1 rated for the Ford Motor
Company.
In fiscal 2002, the five largest customers (Circuit City, Target, Wal-Mart,
Sam's Wholesale Club and Gulf States Toyota) represented 25% of net sales. In
fiscal 2003, the five largest customers (Target, Circuit City, Best Buy, Costco
Wholesale and Wal-Mart) represented 34% of net sales. In fiscal 2004, the five
largest customers ( Circuit City, Best Buy, Wal Mart, Sirius and Sam's
Wholesale) represented 27% of net sales.
The Company provides value-added management services including:
o product design and development,
o engineering and testing,
o technical and sales training and support,
o product repair services and warranty,
o dealer installation technical support,
o nationwide installation network,
o warehousing, and
o custom packaging.
The Company has flexible shipping policies designed to meet customer needs.
In the absence of specific customer instructions, the Company ships its products
within 24 to 48 hours from the receipt of an order. The Company 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.
Product Development, Warranty and Customer Service
The Company's product development cycle includes:
o identifying consumer trends and potential demand,
o responding to those trends through product design and feature
integration, which includes software design, electrical engineering,
industrial design and pre production testing. In the case of OEM
customers, the product development cycle may also include product
validation to the customer quality standards, and
o evaluating and testing production level new products in our own
facilities to ensure compliance with our design specifications and
standards.
9
The Company works closely with customers and suppliers throughout the
product design, testing and development process in an effort to meet the
expectations of consumer demand for technologically- advanced and high quality
products.
We are committed to providing high quality products and provide warranties
for all our product lines, which generally range 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 Company has independent warranty centers
throughout the United States, Canada, Europe, Venezuela and Malaysia. At the
Hauppauge, New York facility, the Company has a customer service group that
provides product information, answers questions and serves as a technical
hotline for installation help for end-users and customers.
The Company's Hauppauge facility is QS-9000:1998 (ISO-9001:1994) ISO-14001:
1996 certified, which requires the monitoring of quality standards in all facets
of its business.
Suppliers
The Company has relationships with a broad group of suppliers who
manufacture its products to the Company's design specifications. The Company
works directly with its suppliers on industrial design, feature sets,
development and product testing.
The Company purchases its electronics products from manufacturers located
in several Pacific Rim countries, including Japan, China, South Korea, Taiwan,
Singapore and Malaysia. The Company also uses several manufacturers in the
United States for cruise controls, mobile video and power amplifiers. In
selecting its manufacturers, the Company considers quality, price, service and
reputation. In order to provide local supervision of supplier performance such
as price negotiations, delivery and quality control, the Company maintains
buying offices or inspection offices in Taiwan, South Korea, China and Hong
Kong. The Company generally purchases its products under short-term purchase
orders and does not have long-term contracts with its suppliers. Although the
Company believes that alternative sources of supply are currently available, an
unplanned shift to a new supplier could result in product delays and increased
cost which may have a material impact on the Company.
The Company considers relations with its suppliers to be good and
alternative sources of supply are generally available within 120 days.
Competition
The electronics industry is highly competitive across all product lines,
and the Company competes with a number of well-established companies that
manufacture and sell similar products. Brand name, design, features and price
are the major competitive factors within the electronics industry. The Company's
Mobile Electronic products compete against factory-supplied products , including
those provided by General Motors, Ford and Daimler Chrysler. The Company's
Mobile Electronics products also compete in the automotive aftermarket against
major companies such as Sony, Panasonic, Kenwood, Alpine, Directed Electronics,
Pioneer and Dual. The Company's Consumer Electronics product lines compete
against major consumer electronic companies, such as JVC, Sony, Panasonic,
Motorola, RCA, Samsung and AIWA.
Financial Information About Foreign and Domestic Operations
The amounts of net sales and long-lived assets, attributable to foreign and
domestic operations for each of the last three fiscal years are set forth in
Note 15 of the Company's consolidated financials statements, included herein.
10
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 business conduct and 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 equity investments in unconsolidated entities which were
formed to market its products in specific market segments or geographic areas in
a more cost-effective manner. The goal of the Company's equity investments are
to blend financial and product resources with local operations in an effort to
expand its distribution and marketing capabilities. The Company does not
participate in the day-to-day management of the following significant equity
investments:
Percentage Formation
Investment Ownership Date Function
- ----------------------- --------------- --------------- ------------------------------
Distribution of products for
Audiovox Specialized marine, van, RV and other
Applications 50.0% 1997 specialized vehicles.
Bliss-Tel Company, Ltd. 20.0% 1997 Distribution of Cellular
products and accessories in
Thailand.
Employees
As of November 30, 2003 and 2004, the Company employed approximately 1,000
and 770 people, respectively. The Company's headcount reduced significantly in
fiscal 2004 as a result of the divestiture of the Cellular business and is
subject to change based upon economic conditions. The Company considers its
relations with its employees to be good and no employees are covered by
collective bargaining agreements.
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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 71 President, Chief Executive Officer and Chairman of the Board
of Directors
Charles M. Stoehr 58 Senior Vice President, Chief Financial Officer and a Director
Patrick M. Lavelle 53 Senior Vice President and a Director
Ann M. Boutcher 54 Vice President, Marketing and a Director
Richard A. Maddia 46 Vice President, IT and a Director
Philip Christopher 56 Director
Paul C. Kreuch, Jr.* 66 Director
Dennis F. McManus* 54 Director
Irving Halevy* 89 Director
Peter A. Lesser* 69 Director (First elected Director in 2003)
* 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 Board of the Consumer Electronics 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 Board of the Consumer Electronics
Association and serves as Chairman of its Mobile Electronics Division.
Ann M. Boutcher has been our Vice President of Marketing since 1984 and was
elected to the Board of Directors in 1995. Ms. Boutcher's responsibilities
include the development and implementation of our advertising, sales promotion
and public relations programs.
Richard A. Maddia has been our Vice President of Information Systems since
1992 and was elected to the Board of Directors in 1996. Prior thereto, Mr.
Maddia was Assistant Vice President, IT. Mr. Maddia's responsibilities include
development and maintenance of information systems.
Philip Christopher has served as a Director of Audiovox or its predecessor
since 1973. Up until November 1, 2004, Mr. Christopher had been Executive Vice
President of Audiovox and Chief Executive Officer of Audiovox's cellular
subsidiary, Audiovox Communications Corp. Mr. Christopher is currently the
12
President and Chief Executive Officer of UTStarcom Personal Communications, LLC,
a division of UTStarcom, Inc. Mr. Christopher also serves on the Executive
Committee of the Cellular Telephone Industry Association.
Paul C. Kreuch, Jr. was elected to the Board of Directors in February 1997.
Mr. Kreuch became Non-Executive Chairman in May 2004 and was elected Chairman in
September 2004 of International Asset Transactions, LLC, a securitization and
asset management firm. Prior to May 2004, he was 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 self-employed as a telecommunications consultant. From May
2001 to February 2005, he was fully-employed by one of his clients, LSSI
Corporation, as Vice President-New Product Marketing. Prior to that, Mr. McManus
was employed by NYNEX Corp. (now Verizon) 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 was elected to the Board of Directors in 2003. Mr. Lesser
is the President of X-10 (USA), Inc., a wholesaler of electronic home control
and security systems. Mr. Lesser is a founder and shareholder 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.
Cautionary Factors That May Affect Future Results
We have identified certain risk factors that apply to the Company. 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.
There is no plan to distribute any of the net proceeds of the sale of the
Cellular business to Audiovox stockholders.
Currently, we do not intend to distribute any portion of the net proceeds
from the sale of the Cellular business to our stockholders. Currently, we intend
to use the net proceeds from the sale of the Cellular business to fund and grow
our Consumer Electronics business. However, we may use all or a portion of the
net proceeds from the sale for other purposes, and we will also consider other
market opportunities, including acquisitions.
13
We could spend or invest the net proceeds from the sale of the Cellular business
in ways with which Audiovox stockholders may not agree, including the possible
pursuit of other market opportunities, including acquisitions.
The investment of these net proceeds may not yield a favorable return. In
addition, because the market for the Company's remaining businesses is often
evolving, in the future, we may discover new opportunities that are more
attractive. As a result, we may commit resources to these alternative market
opportunities, including acquisitions. This action may require the Company to
limit or abandon its currently planned focus on the current businesses. If we
change the business focus, we may face risks that may be different from the
risks associated with our current business.
The asset purchase agreement with UTSI exposes the Company to contingent
liabilities.
Under the asset purchase agreement for the sale of the Cellular business to
UTSI we agreed to indemnify UTSI for any breach or violation of ACC's and its
representations, warranties and covenants contained in the asset purchase
agreement and for other matters, subject to certain limitations. Significant
indemnification claims by UTSI could have a material adverse effect on the
Company's financial condition and results of operations.
We will be unable to compete in the Cellular business for five years from the
date of the sale of our former Cellular business.
The asset purchase agreement with UTSI provided that for a period of five
years after the closing on November 1, 2004, we will not compete, directly or
indirectly, in the Cellular business or, without the prior written consent of
UTSI, directly or indirectly, own an interest in, manage, operate, control, as a
partner, stockholder or otherwise, any person that competes in the Cellular
business, subject to certain exceptions.
Our success will depend on a less diversified line of business.
The sale of the Cellular business constituted a significant portion of the
Company's assets and revenues. As such, the Company's asset base and revenues
have changed significantly from those existing prior to the divestiture.
Currently, we generate substantially all of our sales from the Consumer and
Mobile Electronics businesses. We cannot assure you that we can grow the
revenues of our Electronics business or maintain profitability. As a result, the
Company's revenues and profitability will depend on our ability to maintain and
generate additional customers. A reduction in demand for the products and
services would have a material adverse effect on our business. The
sustainability of current levels of our Electronics business and the future
growth of such revenues, if any, will depend on, among other factors:
o the overall performance of the economy,
o competition within key markets,
o customer acceptance of products and services, and
o the demand for other products and services.
We cannot assure you that we will maintain or increase our current level of
revenues or profits from the Electronics business in future periods.
14
The Electronics Business Is Highly Competitive and Faces Significant Competition
from Original Equipment Manufacturers (OEMs).
The market for electronics is highly competitive across all product lines.
We compete against many established companies who have substantially greater
resources than we do. 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 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.
We Depend on a Small Number of Key Customers For a Large Percentage of Our
Sales.
The electronics industry is characterized by a number of key customers.
Specifically, 25%, 34% and 27% of our sales were to five customers in fiscal
2002, 2003 and 2004, 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 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 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, satellite radios, LCD TVs 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 may 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, and we do not have long-term contracts
with our suppliers. 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 not become competitors;
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, and
o our suppliers have sufficient financial resources to fulfill their
obligations to the Company.
On occasion our suppliers have not been able to produce the quantities of
products that we desire. Our inability to supply sufficient quantities of
products that are in demand could reduce our profitability and have a material
15
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 our
business.
The Impact of Future Selling Prices and Technological Advancements may Adversely
Impact our Profitability and Inventory Value
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 technologically
advanced products in order to remain competitive. Furthermore, the introduction
or expected introduction of new products or technologies may 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.
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
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, and
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.
Our products could infringe the intellectual property rights of others and we
may be exposed to costly litigation.
The products we sell are continually changing as a result of improved
technology. As a result, although we and our suppliers attempt to avoid
infringing known proprietary rights of third parties in our products, we may be
16
subject to legal proceedings and claims for alleged infringement by us, our
suppliers or our distributors, of third party's patents, trade secrets,
trademarks or copyrights.
Any claims relating to the infringement of third-party proprietary rights,
even if not meritorious, could result in costly litigation, divert management's
attention and resources, or require us to either enter into royalty or license
agreements which are not advantageous to us or pay material amounts of damages.
In addition, parties making these claims may be able to obtain an injunction,
which could prevent us from selling our products. We may increasingly be subject
to infringement claims as we expand our product offerings.
Fluctuations in Foreign Currencies or United States Dollar 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 produced in foreign countries. Trade sanctions or regulatory
procedures involving a country in which 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 have increased significantly from $276.5 million for fiscal 2000 to
$567.1 million for fiscal 2004. 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. 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
17
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 mobile and consumer electronics , 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, 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 employees. We have no
employment contracts, with any of our 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. 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. 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, and
o we need to make significant increases in capital expenditures or
working capital.
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,
18
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, and
o delayed filings of financial results.
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.
If We Are Unable to Successfully Address the Deficiencies in Our Internal
Controls, Our Ability to Report Our Financial Results on a Timely and Accurate
Basis May be Adversely Affected.
The Company is currently in the process of remediating the material
weaknesses identified in management's report on internal controls (see Item 9A
of this Report). If the Company is not successful in remediating these internal
control issues, our ability to report our financial results on a timely and
accurate basis may be adversely affected.
Our independent registered public accounting firm advised our Audit
Committee that they identified certain deficiencies that constituted material
control weaknesses. We implemented various actions to address the issues
identified in the evaluation of our controls and procedures. If these actions
are not successful in addressing these internal control issues, our ability to
report our financial results on a timely and accurate basis may continue to be
adversely affected.
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 53% 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 the Company.
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 shareholder action by written consent,
Mr. Shalam may be able to take significant corporate actions without prior
notice and a shareholder meeting.
19
Other Risks
Other risks and uncertainties include:
o changes in U.S. federal, state and local law, and
o our ability to implement operating cost structures that align with
revenue growth.
Item 2-Properties
A portion of the Company's owned Corporate headquarters is located at 180
Marcus Blvd in Hauppauge, New York. In addition, as of November 30, 2004, the
Company leased a total of seventeen operating facilities or offices located in
nine states as well as Germany and Venezuela. The leases have been classified as
operating leases, with the exception of one, which is recorded as a capital
lease. These facilities are located in California, Florida, Georgia,
Massachusetts, New York, Ohio, Tennessee, Texas and Michigan. These facilities
serve as offices, warehouses, distribution centers or retail locations.
Additionally, the Company utilizes public warehouse facilities located in
Norfolk, Virginia, and Sparks, Nevada.
Item 3-Legal Proceedings
The Company is currently, and has in the past been, a party to various
routine legal proceedings incident to the ordinary course of business. The
Company believes that the outcome of all such pending legal proceedings in the
aggregate is unlikely to have a material adverse effect on the business or
consolidated financial condition of the Company.
During the fourth quarter of 2004, several purported derivative and class
actions were filed in the Court of Chancery of the State of Delaware, New Castle
County. On January 10, 2005, Vice Chancellor Steven Lamb of the Court of
Chancery of the State of Delaware, New Castle County, granted an order
permitting the filing of a Consolidated Complaint by several shareholders of
Audiovox Corporation derivatively on behalf of Audiovox Corporation against
Audiovox Corporation, ACC and the directors of Audiovox Corporation captioned
"In Re Audiovox Corporation Derivative Litigation". The complaint seeks (a)
rescission of: agreements; amendments to long-term incentive awards; and
severance payments pursuant to which Audiovox and ACC executives were paid from
the net proceeds of the sale of certain assets of ACC to UTStarcom, Inc., (b)
disgorgement to ACC of $16 million paid to Philip Christopher pursuant to a
Personally Held Intangibles Purchase Agreement in connection with the UTStarcom
transaction, (c) disgorgement to Audiovox of $4 million paid to Philip
Christopher as compensation for termination of his Employment Agreement and
Award Agreement with ACC, (d) disgorgement to ACC of $1,916,477 paid to John
Shalam pursuant to an Award Agreement with ACC, and (e) recovery by ACC of $5
million in severance payments distributed by Philip Christopher to ACC's former
employees. ACC is sued as a nominal defendant only. Defendants have filed a
motion to dismiss the complaint. Defendants intend to vigorously defend this
matter. However, no assurances regarding the outcome of this matter can be given
at this point in the litigation.
During the first quarter of 2005, the litigation commenced by Compression Labs,
Incorporated in the United States District Court for the Eastern District of
Texas, Marshall Division, against the Company and its subsidiary Audiovox
Electronics Corp. ("AEC") was dismissed without prejudice as to the Company and
settled with respect to AEC. The litigation against ACC is still pending and
although ACC intends to vigorously defend this matter, no assurances regarding
the outcome can be given at this point in the litigation.
During the third quarter of 2004, an arbitration proceeding was commenced
by the Company and several of its subsidiaries against certain Venezuelan
employees and two Venezuelan companies ("Respondents") before the American
20
Arbitration Association, International Centre in New York, New York, seeking
recovery of monies alleged to have been wrongfully taken by individual
Respondents and damages for fraud. Respondents asserted counterclaims alleging
that the Company engaged in certain business practices that caused damage to
Respondents. The matter was submitted to mediation during the fourth quarter of
fiscal 2004 and settled subsequent to year end. The settlement provides, in
pertinent part, for a payment (to be made upon satisfaction of certain
pre-closing conditions) from the Company to the Respondents of $1,700,000 in
consideration of which the Company will acquire all of Respondents' ownership in
the Venezuelan companies and a release of any and all claims.
On September 17, 2004, Shintom Co. Ltd. commenced action against Audiovox
Corporation in the Chancery Court of the State of Delaware, New Castle County,
seeking recovery of the sum of $2,500,000 or the value of Audiovox preferred
stock determined as of April 16, 1987 (the date of the merger of Audiovox Corp.,
a New York corporation, with Audiovox Corporation, a Delaware corporation) which
preferred stock was purchased by Shintom from Audiovox in April 1981. In lieu of
answering, the Company has moved to dismiss the complaint. That motion is
currently pending. The Company believes that the lawsuit is baseless and it
intends to vigorously defend this matter. However, no assurance regarding the
outcome of this matter can be given at this point in the litigation.
During the second quarter of fiscal 2004, the Company, AEC and one of its
distributors of car security products, were named as defendants in a lawsuit
brought by Magnadyne Corporation in the United States District Court, Central
District of California alleging patent infringement and seeking damages and
injunctive relief in an amount to be determined by the court. The Company has
answered the amended complaint, asserted various affirmative defenses and
interposed counterclaims alleging non-infringement, invalidity and
non-enforceability. The parties have reached a settlement in principle which
provides for a release of any claims regarding issued patents as of the
effective date and a standstill period of one year with respect to any other
claims.
The consolidated class actions transferred to a Multi-District Litigation
Panel of the United States District Court of the District of Maryland against
the Company and other suppliers, manufacturers and distributors of hand-held
wireless telephones alleging damages relating to exposure to radio frequency
radiation from hand-held wireless telephones is still pending. On March 16,
2005, the United States Court of Appeals for the Fourth Circuit reversed the
District Court's order dismissing the complaints on grounds of federal
pre-emption. The Fourth Circuit remanded the actions to each of their respective
state courts, except for the Naquin litigation which was remanded to the local
Federal Court. Defendants intend to file a petition for certiorari with the U.S.
Supreme Court.
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 Federal Communications Commission ("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 FCC to
determine if the manufacturers and service providers are in compliance with the
FCC's order on emergency 911 call processing capabilities. During the third
quarter of 2004, the FCC confirmed that plaintiffs' interpretation of the FCC's
second order on emergency 911 call processing capabilities was incorrect and as
a result, plaintiffs have filed a consolidated amended complaint in the United
States District Court for the Northern District of Illinois. Defendants have
moved to dismiss the consolidated amended complaint, but to date, the motion has
not been heard. 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.
21
Item 4-Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on November 1,
2004 at the Smithtown Sheraton in Smithtown, New York. Proxies for the meeting
were solicited pursuant to Regulation 14 of the Act on behalf of the Board of
Directors and five matters were voted on at the Annual Meeting, as follows:
o The election of Class A nominee's, Paul C. Kreuch, Jr., Dennis F.
McManus, Irving Halevy and Peter A. Lesser, and the election of Class
A and Class B nominee's John J. Shalam, Philip Christopher , Charles
M. Stoehr , Patrick M. Lavelle, Ann M. Boutcher and Richard A. Maddia,
as Directors of the Company until the next annual meeting.
The votes were cast for this matter as follows:
FOR AGAINST/ABSTAIN
------------ -------------------------
Class A
Paul C. Kreuch, Jr. 16,167,827 2,011,350
Dennis F. McManus 16,350,039 1,829,138
Irving Halevy 16,345,639 1,833,538
Peter A. Lesser 16,343,128 1,836,049
Class A and B
John J. Shalam 34,333,993 6,454,724
Philip Christopher 34,333,265 6,455,452
Charles M. Stoehr 34,336,658 6,450,059
Patrick M. Lavelle 34,517,937 6,270,980
Ann M. Boutcher 34,517,747 6,270,970
Richard A. Maddia 34,517,737 6,270,780
Each nominee was elected a Director of the Company.
o To approve the sale of substantially all of the assets (excluding
certain receivables) relating to our Cellular business to UTSI under
the terms of the asset purchase agreement.
The votes were cast for this matter as follows:
FOR AGAINST/ABSTAIN NOT VOTED
------------ --------------------------- ---------------
34,644,573 514,524 5,629,620
The sale of substantially all of the assets (excluding receivables)
relating to our Cellular business to UTSI was approved.
o To ratify the appointment of Grant Thornton LLP as our independent
registered public accounting firm for the fiscal year ending November
30, 2004.
The votes were cast for this matter as follows:
FOR AGAINST/ABSTAIN NOT VOTED
------------ --------------------------- ---------------
40,634,693 154,024 -
22
The selection of Grant Thornton LLP as the Company's independent
auditors was ratified.
o To approve an amendment to the 1997 Stock Option Plan.
The votes were cast for this matter as follows:
FOR AGAINST/ABSTAIN NOT VOTED
------------ --------------------------- ---------------
32,887,556 2,271,541 5,629,620
The amendment to the 1997 Stock Option Plan was approved.
o To approve an amendment to the 1999 Stock Compensation Plan.
The votes were cast for this matter as follows:
FOR AGAINST/ABSTAIN NOT VOTED
------------ --------------------------- ---------------
32,873,124 2,285,973 5,629,620
The amendment to the 1999 Stock Compensation Plan was approved.
Had the Company's Chief Executive Officer and majority shareholder
abstained from voting his Class A and Class B shares, the selected
matters would have been voted on as follows:
o To approve the sale of substantially all of the assets (excluding
certain receivables) relating to our Cellular business to UTSI under
the terms of the asset purchase agreement.
FOR AGAINST/ABSTAIN NOT VOTED
------------ --------------------------- ---------------
10,116,056 514,524 5,629,620
o To ratify the appointment of Grant Thornton LLP as our independent
registered public accounting firm for the fiscal year ending November
30, 2004.
FOR AGAINST/ABSTAIN NOT VOTED
------------ --------------------------- ---------------
16,106,176 154,024 -
o To approve an amendment to the 1997 Stock Option Plan.
FOR AGAINST/ABSTAIN NOT VOTED
------------ ------------------------- ----------------
8,359,039 2,271,541 5,629,620
o To approve an amendment to the 1999 Stock Compensation Plan.
FOR AGAINST/ABSTAIN NOT VOTED
------------ ------------------------- ----------------
8,344,607 2,285,973 5,629,620
23
PART II
Item 5-Market for the Registrant's Common Equity and Related Stockholder Matters
Market Information
The Class A Common Stock of Audiovox are traded on the Nasdaq Stock Market
under the symbol "VOXX". The following table sets forth the low and high sale
price of our Class A Common Stock, based on the last daily sale and average
daily trading volume in each of the last eight fiscal quarters:
Average
Daily
Trading
Fiscal Period High Low Volume
------------ ----------- -------------
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
2004:
First Quarter 16.70 12.30 132,780
Second Quarter 20.49 12.78 284,741
Third Quarter 17.40 14.37 170,358
Fourth Quarter 17.81 14.09 109,340
Dividends
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.
Holders
There are approximately 625 holders of record of our Class A Common Stock
and 4 holders of Class B Convertible Common Stock.
24
Equity Compensation Table
The following table sets forth information regarding the Company's equity
compensation plans in effect as of November 30, 2004:
Number of securities
Weighted average remaining available for
exercise price of future issuance under
Number of securities to outstanding equity compensation
be issued upon exercise of options, plans (excluding
outstanding options, warrants and securities reflected in
Plan Category warrants and rights rights first reporting column)
- --------------------------- -------------------------------- ----------------------- -----------------------------
Equity compensation
plans approved by
security holders 2,397,700 $11.77 274,953
Equity compensation
plans not approved
by security holders
(a) 150,000 11.12 --
---------- ------ --------
Total 2,547,700 $11.74 274,953
========== ====== ========
- -----------
(a) Represents 30,000 stock options issued to outside directors and
120,000 warrants issued to outside legal counsel. See Note 12 of Notes
to Consolidated Financial Statements.
Item 6-Selected Consolidated Financial Data
The following selected consolidated financial data for the last five years
should be read in conjunction with the consolidated financial statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of this Form 10-K.
As of and for the Years Ended November 30,
2000(2) 2001(2) 2002 2003(3) 2004
--------- ---------- ---------- ------------ --------
Consolidated Statement of Operations
Data (in thousands, except per share
data)
- -------------------------------------------
Net sales (1) $ 276,471 $ 297,702 $ 372,724 $ 517,692 $ 567,077
Operating income (loss) (1) 1,312 86 6,116 13,585 (2,125)
Net income from continuing operations(1) 5,946 2,847 896 7,992 9
Net income (loss) from discontinued
operations 19,357 (10,045) (15,176) 3,247 77,191 (4)
Extraordinary item 2,189 -- -- -- --
Cumulative effect of a change in
accounting for negative goodwill -- -- 240 -- --
--------- --------- ---------- --------- ---------
Net income (loss) $ 27,492 $ (7,198) $ (14,040) $ 11,239 $ 77,200
========= ========== ========== ========= =========
25
As of and for the Years Ended November 30,
2000(2) 2001(2) 2002 2003(3) 2004
--------- ---------- ---------- ------------ --------
Net income per common share from
continuing operations:
Basic $ 0.28 $ 0.13 $ 0.04 $ 0.36 $ 0.00
Diluted 0.26 0.13 0.04 0.36 0.00
Net income (loss) per common share:
Basic 1.29 (0.33) (0.69) 0.51 3.52
Diluted 1.22 (0.33) (0.69) 0.51 3.45
Consolidated Balance Sheet Data
Total assets $ 517,586 $ 544,497 $ 555,365 $ 583,360 $ 543,338
Working capital 305,369 284,166 292,687 304,354 362,018
Long-term obligations, less current
installments 23,468 10,040 18,250 29,639 18,598
Stockholders' equity 330,766 323,220 309,513 325,728 404,187
- -----------
(1) Amounts exclude the financial results of discontinued operations (see Note
2 of Notes to Consolidated Financial Statements).
(2) The Company 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) 2003 amounts reflect the acquisition of Recoton (see Note 5 of Notes to
Consolidated Financial Statements).
(4) 2004 amount reflects the results of the divestiture of the Cellular
business (see Note 2 of Notes to Consolidated Financial Statements).
Item 7-Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A")
This section should be read in conjunction with "Forward-Looking
Statements" below, as well as Item 1 of Part 1, "Cautionary Factors That May
Affect Future Results," and Item 8 of Part II, " Consolidated Financial
Statements and Supplementary Data."
We begin Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") with an overview of the business, including our
strategy to give the reader a summary of the goals of our business and the
direction in which our business is moving. This is followed by a discussion of
the Critical Accounting Policies and Estimates that we believe are important to
understanding the assumptions and judgments incorporated in our reported
financial results. In the next section, we discuss our Results of Operations for
fiscal 2003 compared to 2004, and for fiscal 2002 compared to 2003. We then
provide an analysis of changes in our balance sheet and cash flows, and discuss
our financial commitments in the sections entitled "Liquidity and Capital
Resources, including Contractual and Commercial Commitments," We conclude this
MD&A with a discussion of "Related Party Transactions" and "Recent Accounting
Pronouncements". All financial information, except share and per share data, is
26
presented in thousands.
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.
Business Overview and Strategy
The Company through its four wholly-owned subsidiaries: Audiovox
Electronics Corporation, American Radio Corp., Code Systems, Inc. and Audiovox
German Holdings GmbH and three majority- owned subsidiaries: Audiovox
Communications (Malaysia) Sdn. Bhd., Audiovox Holdings (M) Sdn. Bhd. and
Audiovox Venezuela, C.A. markets its products under the Audiovox(R) brand name
and other brand names, such as Jensen(R), Prestige(R), Pursuit(R), Rampage(TM),
Code-Alarm(R), Car Link(R), Movies 2 Go(R), Magnate(R), Mac Audio(R), Heco(R),
Acoustic Research(R), Advent(R), and Phase Linear, as well as private labels
through a large and diverse distribution network both domestically and
internationally. The Administrative Group consists of treasury, legal, human
resources, management information systems and corporate accounting services that
are provided to the Electronics Group. The Company reclassified Cellular results
from continuing operations and now reflects Cellular results as a discontinued
operation (refer to divestiture discussion below).
On January 4, 2005, the Company's wholly-owned subsidiary, Audiovox
Electronics Corporation, signed an asset purchase agreement to purchase certain
assets of Terk Technologies Corp. for a purchase price of $13,100, subject to a
working capital adjustment, plus contingent debentures based on achievement of
future revenue targets. This acquisition is expected to increase the Company's
market share for satellite radio products as well as accessories for HDTV
products.
The Company markets both domestically and internationally. Our products are
broken down into two major categories: Mobile Electronics and Consumer
Electronics .
Mobile Electronics products include:
o mobile video products, including overhead, headrest and portable
mobile video systems,
o autosound products including radios, speakers, amplifiers, CD
changers,
o satellite radios including plug and play models and direct connect
models,
o automotive security and remote start systems,
o navigation systems,
o rear observation systems, and
o automotive power accessories, including cruise control systems.
Consumer Electronics include:
o LCD and flat panel televisions,
o portable DVD players,
o home and portable stereos, and
o GMRS radios digital multi-media products such as personal video
recorders, MP3 players, MPG4 products.
27
From fiscal 2000 through 2004, several major events and trends have
affected the Company's results and financial conditions. Such events and trends
are discussed below.
Divestiture of Cellular Business
On November 1, 2004, the Company completed the divestiture of its Cellular
business to UTSI. The Cellular business was a major driver in the Company's
growth over the past twenty years. However, consolidation within the Cellular
industry, extensive price competition and the inability to successfully partner
with a manufacturer created a difficult challenge for the Company to compete
within the Cellular industry. The competitive nature of the Cellular business
caused inconsistency in Cellular results, which led to the Company's sale of
selected assets and certain liabilities of ACC to UTSI for a purchase price of
$165,170, subject to a working capital adjustment of $8,472 and the retention of
certain account receivables of $148,494 for a total of $322,136.
The following is a summary of the expected net proceeds as a result of the
sale of the Cellular business and related transactions:
Purchase price $165,170
Working capital adjustment 8,472
Cellular receivables retained, net 148,494
--------
Gross proceeds 322,136
Less: cash paid to Toshiba for minority interest and note 13,645
Less: payment to former Cellular employees 25,019
Less: payment of long term incentive award 1,916
Less: acquisition costs for legal, accounting and other 4,603
Less: accrued expenses of Cellular 3,092
Less: estimated taxes 36,311
Less: payment for domestic bank obligations 99,266
--------
Expected net cash proceeds from sale of Cellular business and related
transactions $138,284
========
Currently and subsequent to the sale of the Cellular business, the net
proceeds have been invested in short-term investments with the intention of
maintaining principal while generating a moderate return and maintaining
liquidity in the account's holdings. The Company plans to utilize the proceeds
to pursue strategic and complementary acquisitions or invest in the Company's
Electronics subsidiary, which has had a history of sales and profit growth.
Specifically, sales and gross profit for the Electronics Group have increased
52.1% and 49.4%, respectively from fiscal 2002. However, the Company may use all
or a portion of the proceeds for other purposes and is considering all market
opportunities.
28
As a result of the sale of the Cellular business, the Company recorded an
after-tax gain of $67,000 for the year ended November 30, 2004 which was
calculated as follows:
Purchase Price $165,170
Working capital adjustment 8,472
Less: payment to former Cellular employees 25,019
Less: acquisition costs for legal, accounting and other 4,603
Less: net assets sold 49,598
Less: non-cash charge for stock options 98
Non-cash cumulative translation gains 914
Gain on purchase of Toshiba minority interest 8,073
Less: estimated taxes 36,311
--------
Gain on sale of Cellular business, included in discontinued operations $ 67,000
========
The Company has presented Cellular's financial results in discontinued
operations for all periods presented due to the divestiture of the Cellular
business. As such, certain reclassifications have been made to prior year
amounts in order to conform to the current period presentation. The Company has
one reportable segment ("Electronics") and, unless indicated otherwise, all
amounts presented herein exclude the results of the Cellular business. Please
refer to Note 2 of the Notes to Consolidated Financial Statements for a further
discussion regarding the divestiture of the Cellular business.
Growth of Electronics Business
Electronics net sales have increased 105.1% from $276,471 in 2000 to
$567,077 in 2004. During this period, the Company's sales were impacted by the
following items:
o the growth in sales of consumer electronic products to $161,432 in
fiscal 2004 due to the introduction of new consumer goods, primarily
from portable DVD players, two-way radios and flat panel TVs,
o the introduction of satellite radio and mobile video entertainment
systems, such as video's in a bag, caused Mobile Electronics sales to
grow to approximately $405,645 in fiscal 2004,
o growth of OEM business, and
o acquisition of Recoton in fiscal 2003 and Code-Alarm, Inc. in fiscal
2002.
The increase in net sales reflects new product introductions in the Mobile
and Consumer Electronics categories as well as increased sales of Jensen
autosound and strong satellite radio sales. Net sales of Consumer Electronics
were negatively impacted in fiscal 2004 due to the decline in portable DVD
players as a result of price erosion and increased competition. In fiscal 2005,
the Company will focus its Consumer Electronics efforts on emerging technologies
such as LCD TVs, digital multimedia portables, home theater and new speaker
lines and expects these lines to be key drivers. New product introductions in
fiscal 2005 for Mobile Electronics will include satellite radio including new
direct connect models, DVD video shuttle systems for both car and home, larger
screen mobile video products, new dual all-in-one headrest systems, rear
observation systems and navigation systems with real time traffic.
Gross margins for the Company decreased to 15.9% for fiscal 2004 from 17.8%
in 2000 due to increased sales to mass merchants and increased price competition
for DVD products in the Mobile and Consumer Electronics categories. This decline
was partially offset by margins achieved from new technologies and products such
as LCD TVs and satellite radio products, as well as the growth of Audiovox
Germany.
29
Strategy
The key elements of the Company's strategy are to:
o Capitalize on niche market opportunities in the electronics industry,
o Leverage its distribution network,
o Increase market penetration by enhancing and capitalizing on the
Audiovox(R) family of brands,
o Pursue strategic and complementary acquisitions,
o Grow its international presence,
o Continue to outsource manufacturing to increase operating leverage,
and
o Continue to monitor operating expenses.
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
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 Company's
selling price to its customers is a fixed amount that is not subject to refund
or adjustment or contingent upon additional rebates.
Sales Incentives
The Company offers sales incentives to its customers in the form of (1)
co-operative advertising allowances; (2) market development funds; (3) volume
incentive rebates and (4) other trade allowances. The Company accounts for sales
incentives in accordance with EITF 01-9, "Accounting for Consideration Given by
a Vendor to a Customer (Including a Reseller of Vendor's Products)" (EITF 01-9).
The terms of sales incentives are offered from time to time and vary by
customer. 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 customers to claim the sales incentive within a
certain time period (referred to as the "claim period") and claims 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
30
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:
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 a fixed amount or is based upon a fixed percentage of the Company's sales
revenue or 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 amount or fixed percentage of the Company's sales
revenue to the customer or 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 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 Company 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 Company 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 Company has historical experience with
these sales incentive programs and 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.
Other trade allowances are additional sales incentives that the Company
provides to 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, 2003 and 2004 was $14,605
and $7,584, 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, 2002, 2003 and 2004, reversals of
previously established sales incentive liabilities amounted to $1,500, $1,803
and $3,889, 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 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, 2002, 2003 and 2004 amounted to $784, $917 and
$2,187, respectively. Unclaimed sales incentives are sales incentives earned
31
by the customer but the customer has not claimed payment from the Company within
the claim period (period after program has ended). Unclaimed sales incentives
for fiscal years ended November 30, 2002, 2003 and 2004 amounted to $716, $886
and $1,702, respectively.
The Company reverses earned but unclaimed sales incentives based upon the
expiration of the claim period of each program. If no claim period is specified
for the program, a claim period of 12 months is utilized. The Company believes
that the reversal of earned but unclaimed sales incentives upon the expiration
of the claim period is a disciplined, rational, consistent and systematic method
of reversing unclaimed sales incentives. 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
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 records charges for estimated credit losses against
operating expenses and charges for price adjustments against net sales in the
consolidated financial statements. The Company's reserve for estimated credit
losses at November 30, 2003 and 2004 was $5,558 and $6,271, respectively. 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 receivable 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 from
selling prices subsequent to the balance sheet date, indications from customers
based upon current negotiations and purchase orders. 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. The Company
recorded inventory write-downs on Electronics inventory of $2,722, $4,397 and
$5,506 for the years ended November 30, 2002, 2003 and 2004, respectively.
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
32
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.
Goodwill and Other Intangible Assets
Goodwill and Other Intangible assets consist of the excess cost over fair
value of assets acquired (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 useful 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. These impairment tests may result in
impairment losses that could have a material adverse impact on our results of
operations.
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
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 in cost of
sales based upon its actual historical return rates and repair costs at the time
of sale. The estimated liability for future warranty expense, which has been
included in accrued expenses and other current liabilities, amounted to $8,408
and $7,947 at November 30, 2003 and 2004, respectively. 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
We account for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". We record a
valuation allowance to reduce our deferred tax assets to the amount of future
tax benefit that is more likely than not to be realized. We decrease the
valuation allowance when, based on the weight of available evidence, it is more
likely than not that the amount of future tax benefit will be realized. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, there is
no assurance that the valuation allowance will not need to be increased to cover
additional deferred tax assets that may not be realized. Any increase or decline
in the valuation allowance could have a material adverse impact on our income
tax provision and net income in the period in which such determination is made.
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.
33
Results of Operations
In this discussion and analysis, we explain the general financial condition
and the results of operations for Audiovox, including the following:
o our earnings and costs in the periods presented,
o changes in earnings and costs between periods,
o sources of earnings, and
o the impact of these factors on our overall financial condition.
As you read this discussion and analysis, refer to the accompanying
consolidated statements of operations, which present the results of our
operations for the years ended November 30, 2002, 2003 and 2004. We analyze and
explain the differences between periods in the specific line items of the
consolidated statements of operations.
Management reviews the financial results of the Company based on the
performance of the Electronics Group and Administrative Group. The Electronics
Group is comprised of sales operating subsidiaries that sell Mobile and Consumer
Electronics. The Administrative Group consists of treasury, legal, human
resources, management information systems and accounting services that are
provided to the Electronics Group. In prior years, the Electronics Group had
three sales categories (Mobile, Consumer and Sound). Based on the current
marketplace and management's overall assessment of the Company, the sales
categories have been reclassified into Mobile Electronics and Consumer
Electronics, therefore eliminating the Sound category. As such, certain
reclassifications have been made to the fiscal 2002 and fiscal 2003 consolidated
financial statements in order to conform to the fiscal 2004 presentation.
Management Key Indicators
Management reviews the following 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 new product introductions.
o Gross profit margin - This indicator allows management to assess the
effectiveness of product introductions, inventory purchases and
significance of inventory write-downs.
o Operating expenses as a percentage 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
that determine the Company's ability to fund current operations and
determine if additional borrowings may be necessary for future capital
outlays.
34
Fiscal 2003 Compared to Fiscal 2004
Continuing Operations
The following tables sets forth, for the periods indicated, certain
statement of operations data for the years ended November 30, 2003 and 2004.
Net Sales
Fiscal Fiscal $ %
2003 2004 Change Change
-------- -------- --------- -------
Mobile Electronics $355,207 $405,645 $ 50,438 14.2%
Consumer Electronics 161,965 161,432 (533) (0.3)
Other 520 -- (520) (100.0)
-------- -------- --------- -------
Total net sales $517,692 $567,077 $ 49,385 9.5%
======== ======== ======== =======
Mobile Electronics sales, which represented 71.5% of net sales, increased
primarily due to a $26,093 increase in satellite radio sales and increased sales
to Original Equipment Manufacturers ("OEM"'s). The Company expects satellite
radio sales to increase as demand for satellite radio products continues to
grow. In addition, Code sales increased $12,976 as a result of increased sales
to OEM's for remote-start and security products. The increase in Mobile
Electronics was partially offset by increased competition and price erosion from
lower priced portable DVD players. In addition, overhead system sales were
negatively impacted by a decline in SUV sales combined with factory-supplied
product by OEM's.
Consumer Electronics sales, which represented 28.5% of net sales, decreased
due to price erosion and increased competition on portable DVD products. The
decline in Consumer Electronics sales was partially offset by increased demand
for flat panel TVs and increased sales of Jensen, Acoustic Research and Advent
home products. Sales were also adversely impacted by a $40,751 decline in fourth
quarter sales due to a decline in the video bag business as the category matures
and experienced competition from low priced portable DVD players.
The Company's sales were also impacted by the recent acquisition of Recoton
(Audiovox Germany) as well as the foreign operations of Malaysia and Venezuela
as follows:
Fiscal Fiscal $ %
2003 2004 Change Change
--------- --------- --------- ---------
Net sales:
Audiovox Germany $ 26,377 $ 54,832 $ 28,455 107.9%
Recoton U.S. 3,649 36,118 32,469 889.8
Malaysia 6,793 3,424 (3,369) (49.6)
Venezuela 2,887 4,535 1,648 57.1
The increase in Audiovox Germany and Recoton U.S. sales was due to the
acquisition of Recoton in July 2003, as fiscal 2004 includes twelve months of
sales activity compared to five months of sales activity in fiscal 2003. The
increase in the Company's Venezuelan subsidiary was due to economic growth in
Venezuela as a result of increased revenue to OEM's due to improved political
and economic stability. In addition, net sales of the Company's Malaysian
subsidiary continue to decline due to a shift in the Malaysian business
environment and stricter credit policies.
35
Sales incentive expense decreased $957 to $13,123 due to a $2,086 increase
in reversals, partially offset by an increase in sales. Specifically, reversals
for unearned sales incentives for the year ended November 30, 2004 increased
$1,270 as compared to 2003 due to customers not purchasing the minimum
quantities of product required during the program time period as a result of
lower than expected post holiday season sales. In addition, reversals for
unclaimed sales incentives for 2004 increased $816 due to mass merchant
customers not claiming funds within the expiration period. The Company believes
that the reversal of earned but unclaimed sales incentives upon the expiration
of the claim period is a disciplined, rational, consistent and systematic method
of reversing unclaimed sales incentives. 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. These sales incentive programs are expected to continue and will
either increase or decrease based upon competition and customer demands.
Gross Profit
Fiscal Fiscal
2003 2004
------------- --------------
Gross profit 86,229 90,091
Gross margins 16.7% 15.9%
Gross margins decreased to 15.9% for the year ended November 30, 2004 as
compared to 16.7% for the year ended November 30, 2003. Gross margins were
negatively impacted by price erosion and price competition of mobile video and
DVD products during fiscal 2004. Furthermore, inventory write-downs resulted in
gross margins to be reduced by $5,506 (1.0%) and $4,397 (0.8%) during the years
ended November 30, 2004 and 2003, respectively. The increase in write-downs was
primarily due to increased price competition for mobile video products.
The above declines in margins were offset by margins achieved in Audiovox
Germany as well as an increase in Code-Alarm margins due to an increase in sales
to OEM's. In addition, gross margins were favorably impacted from a credit of
$1,517 from one of the Company's vendors during the year ended November 30, 2004
as a result of renegotiating charges for the repair of defective inventory.
Without this credit, the Electronics Group gross margin for the year ended
November 30, 2004 would have been 15.6%. Furthermore, reversals of sales
incentives expense favorably impacted gross margins by 0.7% and 0.3% during the
years ended November 30, 2004 and 2003, respectively.
Operating Expenses and Operating Income
The following table presents the results of the Company separated by the
Electronics and Administrative Groups.
Fiscal Fiscal $ %
2003 2004 Change Change
-------- -------- -------- ------
Selling $ 22,159 $ 27,938 $ 5,779 26.1%
General and administrative 31,209 37,219 6,010 19.3
Warehousing and technical support 2,956 4,721 1,765 59.7
-------- -------- -------- ------
Electronics operating expenses 56,324 69,878 13,554 24.1
Electronics operating income 29,905 20,213 (9,692) (32.4)
Electronics other expense (365) (176) 189 51.8
-------- -------- -------- ------
Electronics pre-tax income 29,540 20,037 (9,503) (32.2)
36
Fiscal Fiscal $ %
2003 2004 Change Change
-------- -------- -------- ------
Administrative operating expenses 16,320 22,338 6,018 36.9
Administrative other income 1,399 3,436 2,037 145.6
-------- -------- -------- ------
Consolidated pre-tax income $ 14,619 $ 1,135 $ 13,484 (92.2)%
======== ======== ======== ======
Consolidated operating expenses increased $19,572, or 26.9%, for the year
ended November 30, 2004, as compared to fiscal 2003. As a percentage of net
sales, operating expenses increased to 16.3% for the year ended November 30,
2004 from 14.0% in 2003.
Electronics operating expenses increased $13,554, or 24.1%, for the year
ended November 30, 2004 from 2003. The domestic group (AEC , Code and American
Radio Corp.) accounted for $8,125, or 59.9% of the 2004 increase. The
international group (Audiovox Germany, Malaysia and Venezuela) accounted for
$5,429, or 40.1%, of the 2004 increase. As a percentage of net sales,
Electronics operating expenses increased to 12.3% for the year ended November
30, 2004 compared to 10.8% in 2003.
Electronics selling expenses increased during fiscal 2004 due to a $2,865
and $2,914 increase in the domestic group and international group, respectively.
o The increase for the domestic group was primarily due to $1,757 in
Recoton U.S. expenses as a result of a full fiscal year of sales in
fiscal 2004 as compared to five months of sales activity in fiscal
2003. Specifically, there was an increase in salesmen salaries of $807
as a result of higher employee wages and the hiring of additional
employees to support the increase in sales. Trade show expenses and
advertising expense increased $567 and $844, respectively, as a result
of increased product line and promotions to support the increase in
sales.
o The increase for the international group was due to a $3,113 increase
in Audiovox Germany expenses offset by a $199 decrease in Malaysia and
Venezuela. Audiovox Germany expenses increased $1,222 in commissions,
$615 in travel and lodging and $836 in advertising. Advertising costs
consisted primarily of product brochures and informative advertising
materials regarding the Company's product line. The increase in
Audiovox Germany expenses is a result of a full fiscal year of sales
in fiscal 2004 as compared to five months of sales activity in fiscal
2003.
Electronics general and administrative expenses increased due to a $3,802
and $2,208 increase in the domestic and international groups, respectively.
o The increase for the domestic group was primarily due to an increase
of $2,382 in professional fees due to legal costs incurred to develop,
settle and protect patent rights. The Company expects, as technology
for electronic products become more complex, the Company will have to
expend more resources on defending patent rights and obtaining patents
on new products. Corporate allocations increased $1,079 as a result of
the additional resources necessary to support the increased product
lines. Increased sales and higher director and officer premiums during
fiscal 2004 resulted in a $421 increase in insurance expense and a
$294 increase in occupancy costs than the prior year. The above
increases were partially offset by a $767 decrease in bad debt expense
due to the recovery of a previously reserved bad debt. The Company
does not consider this to be a trend in the overall accounts
receivable.
o The increase for the international group was due to an increase of
$3,336 in Audiovox Germany expenses offset by a $1,128 decline in
Malaysia and Venezuela expenses. As a result of the Recoton
acquisition in July 2003, Audiovox Germany expenses increased $2,303
in salaries and $557 in related payroll taxes and $434 in bad debt
37
expense. The increase in Audiovox German expenses is a result of a
full fiscal year of operating results in fiscal 2004 as compared to
five months of operating results in fiscal 2003 as Recoton was
acquired in July 2003. The decline in Malaysia and Venezuela expenses
was primarily due to a $1,034 decrease in employee benefits because of
a 2003 payment made to certain Venezuela employees, which did not
recur in fiscal 2004.
Electronics warehousing and technical support increased due to an increase
in direct labor of $1,671 as a result of: increased average inventory levels
during fiscal 2004, increased sales and personnel required to support the
assimilation of the Recoton technical staff. The continual increase in product
complexity has resulted in the Company hiring additional engineers and providing
added customer service.
Electronics operating income decreased to $20,213 for the year ended
November 30, 2004 due to a decline in gross margins and increased operating
expenses.
The following is a summary of administrative operating expenses:
Fiscal Fiscal $ %
2003 2004 Change Change
------- ------- -------- ------
Advertising $ 3,396 $ 4,168 $ 772 22.7%
Professional fees 4,007 6,522 2,515 62.8
Depreciation 1,576 1,178 (398) (25.3)
Insurance 742 978 236 31.8
Officers' salaries 2,606 4,661 2,055 78.9
Office salaries and other 3,993 4,831 838 21.0
------- ------- -------- ------
Total administrative operating expenses $16,320 $22,338 $ 6,018 36.9%
======= ======= ======== ======
The increase in professional fees is primarily due to $2,660 in compliance
costs for Sarbanes-Oxley Section 404 and additional audit fees. The Company
incurred significant implementation costs for Sarbanes- Oxley Section 404 in
fiscal 2004 and expects professional fees to decline in fiscal 2005. Advertising
expenses increased due to additional resources needed to promote the expanded
product lines. Officers' salaries increased primarily due to a $1,916 payment of
a long-term incentive award as a result of the sale of the Cellular business.
Other administrative operating expenses, which are mainly comprised of
accounting, IT and office salaries, increased primarily due to increased
salaries and payroll taxes.
The increase in administrative operating expenses coupled with the decline
in Electronics operating income caused consolidated operating income (loss) to
decline to ($2,125) for the year ended November 30, 2004.
Other Income (Expense)
Fiscal Fiscal $
2003 2004 Change
------- ------- -------
Interest and bank charges $(2,850) $(3,833) $ (983)
Equity in income of equity investees 3,274 4,234 960
Other, net 610 2,859 2,249
------- ------- -------
Total other income (expense) $ 1,034 $ 3,260 $ 2,226
======= ======= =======
38
Interest expense and bank charges increased primarily due to interest
incurred on German debt acquired as a result of the Recoton acquisition and
increased average borrowings from the Company's domestic credit facility during
fiscal 2004 as compared to fiscal 2003 due to increased average Electronics
inventory. The Company expects interest expense to decrease in fiscal 2005 as
the Company repaid all amounts outstanding under its domestic bank obligations
on November 1, 2004 and the Company has no outstanding amounts under its
domestic bank obligations at November 30, 2004.
Equity in income of equity investees increased primarily due to an increase
in the equity income of Audiovox Specialized Applications, LLC ("ASA") as a
result of increased sales in its Marine division and improvement in gross
margins in specialized markets. In addition, increased sales and net income of
Bliss- tel contributed towards the increase in equity income as Bliss-tel
expanded its sales force in Thailand.
Other income increased due to increased royalty income of $1,188 as a
result of royalty rights received from acquired trademarks. In addition,
included in other expense for the year ended November 30, 2003 is a civil
penalty of $620 which did not recur for fiscal 2004. Furthermore, other expense
decreased $329 as a result of lower foreign exchange devaluation in our
Venezuelan subsidiary as compared to fiscal 2003. The Company expects other
income to increase during fiscal 2005 as a result of expected returns on
short-term investments purchased in November of fiscal 2004.
Minority interest expense increased $1,324 for the year ended November 30,
2004 compared to the year ended November 30, 2003, mainly due to the write-off
of uncollectible amounts owed to the Company from its minority interest
shareholder in Audiovox Venezuela.
Provision for Income Taxes
The effective tax rate for the year ended November 30, 2004 was 42.1%
compared to 50.0% in the prior year. The decrease in the effective tax rate was
primarily due to the Company's mix of foreign and domestic earnings and
reduction of state income taxes.
Income from Discontinued Operations
As previously discussed, the Company completed it divestiture of the
Cellular business on November 1, 2004. The following is a summary of Cellular
results included within discontinued operations:
Fiscal Fiscal
2003 2004
---------- ----------
Net sales from discontinued operations $ 806,210 $1,159,439
Income from discontinued operations before income taxes 5,351 10,893
Provision for income taxes 2,104 702
---------- ----------
3,247 10,191
---------- ----------
Gain on sale of Cellular business, net of tax -- 67,000
---------- ----------
Income from discontinued operations, net of tax $ 3,247 $ 77,191
========== ==========
Income from discontinued operations, net of tax, provided income of $77,191
and $3,247 for the years ended November 30, 2004 and 2003, respectively.
Included in income from discontinued operations for the year ended November 30,
2004 is a gain of $67,000 on the sale of the Cellular business.
Net sales of Cellular were $1,159,439 and $806,210 for the years ended
November 30, 2004 and 2003, respectively. Unit sales of wireless handsets
increased by approximately 1,412,000 units for the year ended November 30, 2004,
or 30.3%, to approximately 6,069,000 units from 4,657,000 units in 2003. This
39
increase was primarily due to a lack of new product introductions in the
comparable prior year. Specifically, the Company introduced new products during
the fourth quarter of fiscal 2003, such as CDM8900 camera and color display
phones with 1x technology. The average selling price of the Company's handsets
increased to $180 per unit for the year ended November 30, 2004 from $163 per
unit in 2003.
Cellular gross profit margins decreased to 3.8% for the year ended November
30, 2004 from 4.7% in 2003, primarily due to increased price competition within
the cellular industry.
Operating expenses of Cellular were $27,644 and $29,759 for the years ended
November 30, 2004 and 2003, respectively, a decrease of $2,115. The decline in
operating expenses of Cellular was due to the closing of Quintex branches in
fiscal 2004 and a decline in commissions as a result of decreased international
sales.
Net Income
The operating structure of the Company for the year ended November 30, 2004
was structured to facilitate the operations of a combined group through November
1, 2004 of Cellular and Electronics. Due to the divestiture of Cellular in the
later part of fiscal 2004 and the internal costs necessary to unwind the
Cellular business, the Company was unable to change the operating structure of
the Company to impact the fiscal 2004 operating results. During fiscal 2005, the
Company will focus its efforts on evaluating the current business structure of
the Company in order to create operating efficiencies with the primary goal of
increasing operating income.
As a result of increased income from discontinued operations, partially
offset by a decline in income from continuing operations, net income for the
year ended November 30, 2004 was $77,200 compared to $11,239 in 2003. Earnings
per share for the year ended November 30, 2004 was $3.52 basic and $3.45 diluted
as compared to $0.51 basic and diluted for 2003. Net income was favorably
impacted by sales incentive reversals of $5,083 and $2,940 for the years ended
November 30, 2004 and 2003, respectively.
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, increased competition by manufacturers and general economic
conditions. As a result, all of its products are subject to price fluctuations
which could affect the carrying value of inventories and gross margins in the
future.
Fiscal 2002 Compared to Fiscal 2003
Continuing Operations
The following tables sets forth, for the periods indicated, certain
statement of operations data for the years ended November 30, 2002 and 2003.
Net Sales
Fiscal Fiscal $ %
2002 2003 Change Change
--------- --------- --------- -------
Net sales:
Mobile Electronics $ 285,608 $ 355,207 $ 69,599 24.4%
Consumer Electronics 86,472 161,965 75,493 87.3
Other 644 520 (124) (19.3)
--------- --------- --------- -------
Total net sales $ 372,724 $ 517,692 $ 144,968 38.9 %
========= ========= ========= ======
40
Net sales increased $144,968, or 38.9%, to $517,692 from net sales of
$372,724 in fiscal 2002. Sales of Audiovox Germany accounted for $26,377, or
18.2%, of this increase as a result of the Recoton acquisition (see Note 5).
Mobile electronics sales increased as 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. This increase in Mobile Electronics 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. Consumer Electronics sales increased primarily in sales of
DVD/video-in-a-bag and portable DVD players, as well as sales from Audiovox
Germany 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.
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
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 Germany of $26,377 since the acquisition of
Recoton on July 8, 2003.
Gross Profit
Fiscal Fiscal
2002 2003
----------------- ------------------
Gross profit 60,308 86,229
Gross margins 16.2% 16.7%
Gross profit margins increased to 16.7% in fiscal 2003 from 16.2% in fiscal
2002. This increase was due to margins achieved in Audiovox Germany 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 and Operating Income
Fiscal Fiscal $ %
2002 2003 Change Change
-------- -------- -------- ------
Selling $ 15,944 $ 22,159 $ 6,215 39.0%
General and administrative 23,571 31,209 7,638 32.4
Warehousing and technical support 1,137 2,956 1,819 160.0
-------- -------- -------- ------
Electronics operating expenses 40,652 56,324 15,672 38.6
Electronics operating income 19,656 29,905 10,249 52.1
Electronics other expense (2,240) (365) 1,875 83.7
-------- -------- -------- -----
Electronics pre-tax income 17,416 29,540 12,124 69.6
41
Fiscal Fiscal $ %
2002 2003 Change Change
-------- -------- -------- ------
Administrative operating expenses 13,540 16,320 2,780 20.5
Administrative other income (loss) (422) 1,399 1,821 431.5
-------- -------- -------- -----
Consolidated pre-tax income $ 3,454 $ 14,619 $ 11,165 323.2%
======== ======== ======== =====
Consolidated operating expenses increased $18,452, or 34.0%, for the year
ended November 30, 2003, as compared to fiscal 2002. As a percentage of net
sales, operating expenses decreased to 14.0% for the year ended November 30,
2003 from 14.5% in 2002.
Electronics operating expenses increased $15,672 in fiscal 2003, a 38.6%
increase compared to fiscal 2002. The domestic group (AEC, Code-Alarm and
American Radio) accounted for $7,888 or 50.3% of the fiscal 2003 increase. The
international group (Audiovox Germany, Malaysia and Venezuela) accounted for
$7,784 or 49.7% of the fiscal 2003 increase which was primarily due to the
Recoton acquisition.
Electronics selling expenses increased due to a $3,761 and $2,454 increase
in the domestic group and international group, respectively.
o The increase for the domestic group was primarily due to increases of
$1,359 in commissions due to an increase in commissionable sales and
salesmen 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 Germany expenses offset by a $186 decrease in
Malaysia and Venezuela. Audiovox Germany expenses were primarily
comprised of $1,285 in commissions, $241 of salesmen 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.
Electronics general and administrative expenses increased due to a $2,362
and $5,276 increase in the domestic group and international group, respectively.
o The increase for the domestic group was primarily due to an increase
of $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
Germany expenses and a $743 increase in Malaysia and Venezuela
expenses. Audiovox Germany 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
42
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.
Electronics warehouse and technical support increased 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 Germany 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.
Electronics operating income increased to $29,905 for the year ended
November 30, 2003 as a result of increased sales from new product introductions
and the Recoton acquisition, increased gross profit, partially offset by
increased operating expenses.
The following is a summary of general corporate operating expenses for the
year ended:
Fiscal Fiscal $ %
2002 2003 Change Change
------- ------- ------ ------
Advertising $ 2,416 $ 3,396 $ 980 40.6%
Professional fees 4,254 4,007 (247) (5.8)
Depreciation 2,095 1,576 (519) (24.8)
Insurance 391 742 351 89.8
Officers' salaries 857 2,606 1,749 204.1
Office salaries and other 3,527 3,993 466 13.2
------- ------- ----- ------
Total administrative operating expenses $13,540 $16,320 $ 2,780 20.5%
======= ======= ======= ======
Administrative operating expenses increased primarily due to an increase in
salaries and bonuses as a result of hiring additional employees and increased
wages, as well as an increase in advertising due to an advertising program
intended to promote overall Company awareness through media and public
relations. Other corporate operating expenses are mainly comprised of
accounting, IT and certain executive office salaries.
The increase in Electronics operating income partially offset by an
increase in administrative operating expenses resulted in consolidated operating
income to increase to $13,585 for the year ended November 30, 2003.
Other Income (Expense)
Fiscal Fiscal $
2002 2003 Change
------- ------- -------
Interest and bank charges $ (317) $(2,850) $(2,533)
Equity in income of equity investees 1,820 3,274 1,454
Other, net (4,165) 610 4,775
------- ------- -------
Total other income (expense) $(2,662) $ 1,034 $ 3,696
======= ======= =======
Interest expense and bank charges increased during fiscal 2003 from
fiscal 2002, primarily due to interest incurred on German debt acquired as a
result of the Recoton acquisition and increased average borrowings from the
Company's primary credit facility for the purchase of Electronics inventory.
43
Equity in income of equity investees increased 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.
Minority interest income increased $362 compared to fiscal 2002, primarily
due to increased losses in Audiovox Venezuela.
Provision for Income Taxes
The effective tax rate for 2002 was 83.1% as compared to 50.0% for 2003.
The decrease in the effective tax rate was principally due to and significant
losses in Venezuela during fiscal 2002 which were not deductible and the
reduction of state income taxes.
Income (Loss) From Discontinued Operations
As previously discussed, the Company completed it divestiture of the
Cellular business on November 1, 2004. The following is a summary of Cellular
included within discontinued operations:
Years Ended November 30,
--------------------------
2002 2003
--------- ---------
Net sales from discontinued operations $ 727,658 $ 806,210
Income (loss) from operations of discontinued operations before
income taxes (5,116) 5,351
Provision for income taxes 10,060 2,104
--------- ---------
Income (loss) from discontinued operations, net of tax $ (15,176) $ 3,247
========= =========
Income (loss) from discontinued operations, net of tax, provided income
(loss) of $3,247 and ($15,176) for the years ended November 30, 2003 and 2002,
respectively. Included in loss from discontinued operations for the year ended
November 30, 2002 is a pre-tax gain of $14,269 ($8,847 after provision for
deferred taxes) on the issuance of subsidiary shares.
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 Cellular 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.
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.
For fiscal 2002, gross margins were negatively impacted by inventory write-downs
44
of $13,823 or 1.9% compared to $2,817 or 0.3% in 2003. The decrease in inventory
write-downs was primarily due to Cellular maintaining lower inventory levels in
fiscal 2003, which consisted primarily of newer products as compared to fiscal
2002. 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 of Cellular were $29,759 and $34,483 for the years ended
November 30, 2003 and 2002, respectively, a decrease of $4,724. As a percentage
of net sales operating expenses decreased to 3.7% during fiscal 2003 compared to
4.7% in fiscal 2002. Excluding the $3,200 bonus provision recorded in connection
with the Toshiba transaction in 2002 (see Transactions with Toshiba) and $3,492
decrease in bad debt expense, operating expenses would have increased $1,968 or
7.1% in fiscal 2003 from fiscal 2002.
Net Income
As a result of an increase in Electronics sales and gross margins, as well
as increased income from discontinued operations net income for the year ended
November 30, 2003 was $11,239 compared to a net loss of $14,040 in 2002.
Earnings (loss) per share for the year ended November 30, 2003 was $0.51 basic
and diluted as compared to $(0.64) basic and diluted for 2002 Net income was
favorably impacted by sales incentive reversals of $2,940 and $4,716 for the
years ended November 30, 2003 and 2002, respectively.
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.
Liquidity and Capital Resources
As of November 30, 2004, the Company had working capital of $362,018, which
includes cash and cash equivalents and short-term investments of $167,646
compared with working capital of $304,354 at November 30, 2003, which includes
cash of $4,702.
The proceeds from the sale of the Cellular business, including collections
from accounts receivable, during fiscal 2004 has increased the liquidity of the
Company. The Company utilized the proceeds from the sale of the Cellular
business to repay domestic bank obligations outstanding of $99,266 at November
1, 2004. The Company plans to utilize its current cash position as well as
collections from accounts receivable to fund the current operations of the
business. However, the Company may utilize all or a portion of the current
capital resources to pursue other business opportunities, including
acquisitions.
Historically, the Company had financed its operations through a combination
of available borrowings under bank lines of credit and issuance of debt and
equity securities, which was typically dependent on the collections of accounts
receivable and purchase of inventory. The Company's fifth amended and restated
credit agreement expired on November 1, 2004 as a result of the sale of
substantially all the assets of its Cellular business to UTSI. Subsequently, the
Company obtained a credit line to fund the temporary short-term working capital
needs of the Company. This line originally expired on January 31, 2005 and was
subsequently extended to May 30, 2005, and allows aggregate borrowings of up
to $25,000 at an interest rate of Prime (or similar designations) plus 1%.
Operating activities provided cash of $28,799 and $86,706 in fiscal 2003
and 2004, respectively. Income from continuing operations provided $7,992 and $9
for operating activities in fiscal 2003 and 2004, respectively.
45
The following significant fluctuations in the balance sheet impacted cash
flow from operations:
o Cash flows from operating activities for the year ended November 30, 2004
were favorably impacted by a decrease in accounts receivable primarily from
collections. The Company retained $148,494 of Cellular receivables and the
collection of such receivables in November 2004 caused assets of
discontinued operations to provide cash of $104,944. Accounts receivable
for assets of continued operations provided cash of $23,236 and accounts
receivable turnover approximated 4.3 during for the year ended November 30,
2004 compared to 4.6 in the fiscal 2003. Accounts receivable collections
are often impacted by the timing of collections.
o Cash flow from operating activities was also favorably impacted by a
$11,823 decrease in inventory due to the increase in sales for the year
ended November 30, 2004. Inventory turnover remained steady at 3.3 during
for the year ended November 30, 2004 compared to 3.3 in the fiscal 2003.
o Cash flow from operating activities for the year ended November 30, 2004,
was impacted by a $12,392 decrease in accounts payable and accrued sales
incentives, primarily from payments made to inventory vendors and
customers. The timing of payments made can fluctuate and are often impacted
by the timing of inventory purchases and amount of inventory on hand.
Investing activities used $3,739 during the year ended November 30, 2004,
primarily from the purchase of short-term investments offset by the sale of the
Cellular business (see Note 2 to Notes to Consolidated Financial Statements). In
addition, the cash usage from investing activities was due to the purchase of
property, plant and equipment, as well as the repurchase of subsidiary shares.
Investing activities used cash of $40,122 during the year ended November 30,
2003, primarily for the acquisition of Recoton (see Note 5 to Notes to
Consolidated Financial Statements).
Financing activities used $44,580 during the year ended November 30, 2004,
primarily for the net payment of bank obligations and debt. Financing activities
for the year ended November 30, 2003 provided cash of $12,965 mainly due to debt
proceeds acquired in connection with the Recoton acquisition.
The Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At November 30,
2004, such obligations and commitments are summarized 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) $13,099 $ 552 $ 1,137 $ 1,157 $10,253
Operating leases (2) 9,061 2,997 4,931 1,133 --
------- ------- ------- ------- -------
Total contractual cash obligations $22,160 $ 3,549 $ 6,068 $ 2,290 $10,253
======= ======= ======= ======= =======
46
Amount of Commitment
Expiration per period
----------------------------------------------------------
Total
Other Commercial Amounts Less than 1-3 4-5 Over
Commitments Committed 1 Year Years Years 5 years
- -------------------------------- --------- --------- ------- ------- -------
Bank obligations (3) $ 7,694 $ 7,694 --
Commercial letters of credit (4) 959 959 -- -- --
Standby letters of credit (4) 2,358 2,358 -- -- --
Debt (5) 10,206 2,497 $ 5,004 $ 2,705 --
Unconditional purchase
obligations (6) 46,041 46,041 -- -- --
------- ------- ------- ------- -----
Total commercial
commitments $67,258 $59,549 $ 5,004 $ 2,705 --
======= ======= ======= ======= =====
(1) Represents total payments due under a capital lease obligation which has a
current and long term principal balance of $69 and $6,001, respectively at
November 30, 2004. For more information, see Note 13 of Notes to
Consolidated Financial Statements.
(2) The Company enters into operating leases in the normal course of business.
For more information, see Note 13 of Notes to Consolidated Financial
Statements.
(3) Represents amounts outstanding under the Malaysia credit facility of $2,209
and German factoring agreement of $5,485 at November 30, 2004. As of
November 30, 2004, the available line of credit for direct borrowing,
letters of credit, bankers' acceptances and other forms of credit under the
Malaysia credit facility approximated $2,905. 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. and are
partially secured by the Company under two standby letters of credit of
$800 each and are payable on demand or upon expiration of the standby
letters of credit, which expire on July 7, 2005. 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 6,000
Euros. The facilities are renewable on an annual basis. For more
information, see Note 9 of Notes to Consolidated Financial Statements.
(4) 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 to secure
certain bank obligations and insurance requirements.
(5) Represents amounts outstanding under a term loan agreement for Audiovox
Germany which was acquired in connection with the Recoton Acquisition. This
amount also includes amounts due under a call-put option with certain
employees of Audiovox Germany. For more information, see Notes 5 and 9 of
Notes to Consolidated Financial Statements.
(6) Unconditional purchase obligations represent inventory commitments. These
obligations are not recorded in the consolidated financial statements until
commitments are fulfilled and such obligations are subject to change based
on negotiations with manufacturers.
The Company guaranteed the debt of G.L.M. (a former equity investment)
beginning in December 1996, and this guarantee was not subsequently modified.
During the year ended November 30, 2004, the Company received a request for
payment in connection with this guarantee. As a result of the payment request,
the Company paid $291 on behalf of G.L.M. during the year ended November 30,
2004 and such guarantee is no longer in effect.
47
Under the asset purchase agreement for the sale of the Cellular business to
UTSI, the Company agreed to indemnify UTSI for any breach or violation by ACC
and its representations, warranties and covenants contained in the asset
purchase agreement and for other matters, subject to certain limitations.
Significant indemnification claims by UTSI could have a material adverse effect
on the Company's financial condition. The Company is not aware of any such
claim(s) for indemnification.
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.
Treasury Stock
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 and 2004. As of November 30, 2004, 1,070,957 shares were
repurchased under the Program at an average price of $7.93 per share for an
aggregate amount of $8,497.
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
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.
48
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 from increased promotional and advertising
activities from the Company's customers to end-users during the holiday season.
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.
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 was
the headquarters of the discontinued Cellular operation. Payments on the capital
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%. On November 1, 2004 the Company entered into an agreement to
sub-lease the building to UTStarcom for monthly payments of $46 through October
31, 2009. The Company also leases another facility 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, 2009 are $5,199.
During 1998, the discontinued Cellular operations entered into a
sale/leaseback transaction with the Company's principal stockholder and chief
executive officer for $2,100 of equipment, which was classified as an operating
lease. The lease required monthly payments of $34 and was terminated on November
1, 2004.
Transactions with Toshiba
Toshiba Corporation ("Toshiba") had been a minority interest shareholder in
the Company's Cellular Business ("ACC" or "Cellular ") since 1999. As previously
discussed, the Company completed its sale of the Cellular Business ("ACC" or
"Cellular ") to UTStarcom ("UTSI") on November 1, 2004. As such, Toshiba is no
longer a minority interest shareholder in the Company's former Cellular
business.
On May 29, 2002, Toshiba Corporation (Toshiba) purchased an additional 20%
of Audiovox Communications Corp. (ACC). 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) which was paid in full during the sale of Cellular to UTSI (see
Note 2 of Notes to Consolidated Financial Statements). The Note bore interest at
a per annum rate equal to 1.75% and interest was payable annually on May 31st of
each year, commencing May 31, 2003.
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 year ended November 30, 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 included in discontinued operations in the accompanying
49
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.
In connection with Toshiba's 20% purchase of ACC, the following agreements
(which became null and void on November 1, 2004 as a result of the sale to the
Cellular business to UTSI, with the exception of payments made) were entered
into:
o Stockholders agreement - provided for the composition of the board of
directors of ACC and identified certain items, other than in the
ordinary course of business, that ACC cannot do without prior approval
from Toshiba.
o Distribution arrangement - ACC would be 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.
o Employment agreement with the President and Chief Executive Officer
(the Executive) of ACC - ACC was 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 discontinued
operations in the accompanying statements of operations for the year
ended November 30, 2002. During the year ended November 30, 2002, the
Executive was paid $1,800 less an amount outstanding under a
promissory note of $651.
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 had 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.
The Company was released from the above agreements on November 1, 2004 as a
result of the sale of the Cellular business to UTSI (see Note 2 of Notes to
Consolidated Financial Statements).
Minority interest income (expense) relating to Toshiba's minority share
ownership in ACC for the years ended November 30, 2002, 2003 and 2004 was
$4,741, ($1,066) and $(2,398), respectively. Such income (expense) has been
included in discontinued operations in the accompanying statements of operations
for all periods presented.
Recent Accounting Pronouncements
In November 2004, The Financial Accounting Standards Board (FASB)
issued FASB Statement No. 151 ("Statement 151"), "Inventory Costs, an amendment
of ARB No. 43, Chapter 4". The amendments made by Statement 151 clarified that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and requires
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. Statement 151 is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005 or the
Company's fiscal year ended November 30, 2006. The Company does not expect the
adoption of Statement 151 to have a material impact on the Company's
consolidated financial statements.
In December 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R ("Statement 123R"), "Share Based Payment". Statement
123R is a revision of FASB Statement 123, "Accounting for Stock Based
50
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock issued to
Employees" (APB No.25). Statement 123R requires a public entity to measure the
cost of employee services recognized in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). Statement 123R is effective the first interim or annual period that
begins after June 15, 2005 or the Company's fourth quarter and fiscal year ended
November 30, 2005. The adoption of Statement 123R will rescind the Company's
current accounting for stock based compensation under the intrinsic method as
outlined in APB No. 25. Under APB No. 25, the issuance of stock options to
employees generally resulted in no compensation expense to the Company. The
adoption of Statement 123R will require the Company to measure the cost of stock
options based on the grant-date fair value of the award.
In December 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 153, ("Statement 153"), "Exchanges of Non-monetary Assets-an
amendment of APB Opinion No. 29". Statement 153 amends Opinion 29 to eliminate
the exception for non-monetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of non-monetary assets that
do not have commercial substance. A non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. Statement 153 is effective for fiscal
periods after June 15, 2005. The Company does not expect the adoption of
Statement 153 to have a material impact on the Company's consolidated financial
statements.
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, 2004, which are recorded at fair
value of $5,988, include a net unrealized loss of $1,284 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 $599 as of November 30, 2004. Actual results may differ.
Interest Rate Risk
The Company's earnings and cash flows are subject to fluctuations due to
changes in interest rates from its investment of available cash balances in
money market funds and investment grade corporate and U.S. government
securities. Under its current policies, the Company does not use interest rate
derivative instruments to manage exposure to interest rate changes. In addition,
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, 2004. 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
51
quoted foreign currency exchange rates as of November 30, 2004 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, 2004, 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, 2004, amounts to $3,194. Actual results may
differ.
Item 8-Consolidated Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Financial Statements Schedule
Audiovox Corporation
Form 10-K
(Page)
Report of Independent Registered Public Accounting Firm .................................................53
Consolidated Financial Statements:
Balance Sheets as of November 30, 2003 and 2004.....................................................54
Statements of Operations for the years ended November 30, 2002, 2003 and 2004.......................56
Statements of Stockholders' Equity and Comprehensive Income (Loss)for the years
ended November 30, 2002, 2003 and 2004............................................................57
Statements of Cash Flows for the years ended November 30, 2002, 2003 and 2004.......................58
Notes to Consolidated Financial Statements ..............................................................60
Schedule:
II Valuation and Qualifying Accounts..................................................................119
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Audiovox Corporation
We have audited the accompanying consolidated balance sheets of Audiovox
Corporation and subsidiaries (the "Company") as of November 30, 2004 and 2003,
and the related consolidated statements of operations, stockholders' equity and
comprehensive income (loss) and cash flows for each of the three years in the
period ended November 30, 2004. We have also audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Company's internal control over financial reporting as of
November 30, 2004, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") and our report dated March 25, 2005 expressed an unqualified
opinion on management's assessment of the effectiveness of internal control over
financial reporting and an adverse opinion on the effectiveness of internal
control over financial reporting. 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 2004 in conformity with accounting principles generally accepted in
the United States of America.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as whole. The Schedule II as of and for the years
ended November 30, 2004, 2003 and 2002 is presented for purposes of additional
analysis and is not a required part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Melville, New York
March 25, 2005
53
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
November 30, 2003 and 2004
(In thousands, except share data)
2003 2004
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 4,702 $ 43,409
Restricted cash -- 8,264
Short-term investments -- 124,237
Accounts receivable, net 141,861 119,964
Inventory 152,762 140,739
Receivables from vendors 4,463 7,028
Prepaid expenses and other current assets 10,927 14,673
Deferred income taxes 8,248 6,873
Current assets of discontinued operations 197,556 16,958
--------- ---------
Total current assets 520,519 482,145
Investment securities 9,512 5,988
Equity investments 13,132 13,092
Property, plant and equipment, net 18,598 20,418
Excess cost over fair value of assets acquired 7,532 7,019
Intangible assets 8,043 8,043
Other assets 657 413
Deferred income taxes 3,657 6,220
Non-current assets of discontinued operations 1,710 --
--------- ---------
Total assets $ 583,360 $ 543,338
========= =========
See accompanying notes to consolidated financial statements.
54
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
November 30, 2003 and 2004
(In thousands, except share data)
2003 2004
--------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 35,125 $ 26,176
Accrued expenses and other current liabilities 27,445 33,403
Accrued sales incentives 14,605 7,584
Income taxes payable 11,368 42,773
Bank obligations 39,940 7,694
Current portion of long-term debt 3,433 2,497
Current liabilities of discontinued operations 84,249 --
--------- ---------
Total current liabilities 216,165 120,127
Long-term debt 10,139 7,709
Capital lease obligation 6,070 6,001
Deferred compensation 5,280 4,888
Non-current liabilities of discontinued operations 14,985 --
--------- ---------
Total liabilities 252,639 138,725
--------- ---------
Minority interest 4,993 426
--------- ---------
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; 20,728,382 and 20,859,846
shares issued at November 30, 2003 and 2004, respectively 207 209
Class B $.01 par value; convertible 10,000,000 shares authorized; 2,260,954 shares
issued and outstanding 22 22
Paid-in capital 252,104 253,959
Retained earnings 80,635 157,835
Accumulated other comprehensive loss (1,229) (1,841)
Treasury stock, at cost, 1,072,737 and 1,070,957 shares of Class A common stock at
November 30, 2003 and 2004, respectively (8,511) (8,497)
--------- ---------
Total stockholders' equity 325,728 404,187
--------- ---------
Total liabilities and stockholders' equity $ 583,360 $ 543,338
========= =========
See accompanying notes to consolidated financial statements.
55
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended November 30, 2002, 2003 and 2004
(In thousands, except share and per share data)
2002 2003 2004
------------ ------------ ------------
Net sales $ 372,724 $ 517,692 $ 567,077
Cost of sales 312,416 431,463 476,986
------------ ------------ ------------
Gross profit 60,308 86,229 90,091
------------ ------------ ------------
Operating expenses:
Selling 18,361 25,555 32,106
General and administrative 34,550 44,133 55,389
Warehousing and technical support 1,281 2,956 4,721
------------ ------------ ------------
Total operating expenses 54,192 72,644 92,216
------------ ------------ ------------
Operating income (loss) 6,116 13,585 (2,125)
------------ ------------ ------------
Other income (expense):
Interest and bank charges (317) (2,850) (3,833)
Equity in income of equity investees 1,820 3,274 4,234
Other, net (4,165) 610 2,859
------------ ------------ ------------
Total other income (expense), net (2,662) 1,034 3,260
------------ ------------ ------------
Income from continuing operations before income taxes 3,454 14,619 1,135
Income taxes 2,872 7,303 478
Minority interest income (expense) 314 676 (648)
------------ ------------ ------------
Net income from continuing operations 896 7,992 9
Net income (loss) from discontinued operations, net of tax (including gain
of $67,000 on sale of Cellular business in fiscal 2004) (15,176) 3,247 77,191
------------ ------------ ------------
Net income (loss) before cumulative effect of a change in accounting for
negative goodwill (14,280) 11,239 77,200
Cumulative effect of a change in accounting for negative goodwill 240 -- --
------------ ------------ ------------
Net income (loss) $ (14,040) $ 11,239 $ 77,200
============ ============ ============
Income (loss) per common share (basic):
From continuing operations $ 0.04 $ 0.36 $ --
From discontinued operations (0.69) 0.15 3.52
------------ ------------ ------------
Before cumulative effect of a change in accounting for negative
goodwill (0.65) 0.51 3.52
Cumulative effect of a change in accounting for negative goodwill 0.01 -- --
------------ ------------ ------------
Net income (loss) per common share (basic) $ (0.64) $ 0.51 $ 3.52
============ ============ ============
Income (loss) per common share (diluted):
From continuing operations $ 0.04 $ 0.36 $ --
From discontinued operations (0.69) 0.15 3.45
------------ ------------ ------------
Before cumulative effect of a change in accounting for negative
goodwill (0.65) 0.51 3.45
Cumulative effect of a change in accounting for negative goodwill 0.01 -- --
------------ ------------ ------------
Net income (loss) per common share (diluted) $ (0.64) $ 0.51 $ 3.45
============ ============ ============
Weighted average number of common shares outstanding (basic) 21,850,035 21,854,610 21,955,292
============ ============ ============
Weighted average number of common shares outstanding (diluted) 21,892,651 22,054,320 22,373,134
============ ============ ============
See accompanying notes to consolidated financial statements.
56
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years Ended November 30, 2002, 2003 and 2004
(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, 2001 $ 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
Comprehensive income:
Net income -- -- -- 77,200 -- -- 77,200
Other comprehensive loss, net of tax:
Foreign currency translation adjustment,
net of reclassification adjustment
(see disclosure below) -- -- -- -- 1,319 -- 1,319
Unrealized loss on marketable securities,
net of tax effect of $1,184 -- -- -- -- (1,931) -- (1,931)
----------
Other comprehensive loss -- -- -- -- -- -- (612)
----------
Comprehensive income -- -- -- -- -- -- 76,588
Exercise of stock options into 131,464 shares of
common stock -- 2 1,522 -- -- -- 1,524
Tax benefit of stock options exercised -- -- 227 -- -- -- 227
Extension and re-measurement of stock options -- -- 98 -- -- -- 98
Issuance of 1,780 shares of treasury stock -- -- 8 -- -- 14 22
--------- --------- --------- ---------- ---------- ---------- ----------
Balances at November 30, 2004 $ 2,500 $ 231 $ 253,959 $ 157,835 $ (1,841) $ (8,497) $ 404,187
========= ========= ========= ========== ========== ========== ==========
Disclosure of reclassification amount:
Unrealized foreign currency translation gain $ 2,233
Less: reclassification adjustments for gain
included in net income (914)
----------
Net unrealized foreign currency translation gain $ 1,319
==========
See accompanying notes to consolidated financial statements.
57
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended November 30, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ (14,040) $ 11,239 $ 77,200
Net (income) loss from discontinued operations 15,176 (3,247) (77,191)
Cumulative effect of a change in accounting for negative
goodwill (240) -- --
----------- ----------- -----------
Net income (loss) from continuing operations 896 7,992 9
Adjustments to reconcile net income to net cash provided by (used in)
continuing operating activities:
Depreciation and amortization 3,666 3,525 2,723
Provision for bad debt expense 1,402 577 141
Equity in income of equity investees (1,820) (3,274) (4,234)
Other-than-temporary decline in market value of investment
security 1,158 21 --
Minority interest (314) (676) 648
Deferred income tax expense (benefit), net (2,725) (1,859) 1,669
Loss (gain) on disposal of property, plant and equipment, net (69) 255 --
Tax benefit on stock options exercised -- 216 227
Non-cash stock compensation -- 685 371
Changes in operating assets and liabilities, net of assets and liabilities
acquired:
Accounts receivable (8,045) (48,147) 23,236
Inventory (53,612) (23,269) 11,823
Receivables from vendors 466 (3,859) (2,565)
Prepaid expenses and other (8,068) (1,517) 4,878
Investment securities-trading (125) (1,312) 393
Accounts payable, accrued expenses and other current
liabilities and accrued sales incentives 19,348 28,431 (12,392)
Income taxes payable 400 6,672 29,676
Change in assets and liabilities of discontinued operations 70,512 64,338 30,103
----------- ----------- -----------
Net cash provided by operating activities 23,070 28,799 86,706
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,159) (5,257) (4,782)
Proceeds from sale of property, plant and equipment 7,250 265 212
Proceeds from distribution from an equity investee 947 1,316 4,131
Net proceeds from issuance (repurchase) of subsidiary shares 22,158 -- (6,893)
Proceeds from sale of assets to equity investee -- 3,600 --
Net proceeds from sale of Cellular business -- -- 127,317
Purchase of short-term investments -- -- (124,237)
(Purchase) proceeds of acquired business, net of acquired cash (7,106) (40,046) 513
----------- ----------- -----------
Net cash provided by (used in) investing activities 21,090 (40,122) (3,739)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings from bank obligations 403,043 277,983 1,229,068
Repayments on bank obligations (454,300) (278,544) (1,261,865)
Proceeds of convertible subordinated debentures 8,107 -- --
Principal payments on capital lease obligation (55) (61) (65)
Proceeds from exercise of stock options and warrants 132 674 1,524
Repurchase of Class A common stock (1,125) -- --
58
Audiovox Corporation
Consolidated Statements of Cash Flows (continued)
Years Ended November 30, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
----------- ----------- -----------
Proceeds from issuance of long-term debt -- 12,913 --
Principal payments on debt -- -- (12,951)
Payment of guarantee -- -- (291)
----------- ----------- -----------
Net cash provided by (used in) financing activities (44,198) 12,965 (44,580)
----------- ----------- -----------
Effect of exchange rate changes on cash (229) 302 320
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (267) 1,944 38,707
Cash and cash equivalents at beginning of period 3,025 2,758 4,702
----------- ----------- -----------
Cash and cash equivalents at end of period $ 2,758 $ 4,702 $ 43,409
=========== =========== ===========
See accompanying notes to consolidated financial statements.
59
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business and Accounting Principles
Audiovox Corporation and its subsidiaries (the Company) design and
market a diverse line of electronic products throughout the world. The
Company completed the divestiture of the Cellular Group on November 1,
2004 (see Note 2 of Notes to Consolidated Financial Statements). As
such, the Company operates in the Electronics market and has one
reportable segment ("Electronics") which is broken down into two
product categories: Mobile Electronics and Consumer Electronics.
The financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United
States of America.
(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.
Equity investments in which we exercised significant influence but do
not control and are not the primary beneficiary are accounted for
using the equity method. 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. Investments in which we
are not able to exercise significant influence over the investee are
accounted for under the cost method.
(c) Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. Such estimates include the
allowance for doubtful accounts, 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.
Actual results could differ from those estimates.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits with banks and
highly liquid money market funds with original maturities of three
months or less when purchased. Cash equivalents amounted to $0 and
$25,364 at November 30, 2003 and 2004, respectively. Cash amounts held
in foreign bank accounts amounted to $2,560 at November 30, 2004.
60
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(e) Investment Securities
The Company classifies its investment 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. Dividend and interest income are recognized when
earned.
Short-term investments consist of tax-exempt auction rate notes which
are available for sale one year or less when purchased. The Company's
overall goal for short-term investments is to invest primarily in low
risk, fixed income securities with the intention of maintaining
principal while generating a moderate return. In accordance with the
Company's investment policy, all short-term investments are invested
in "investment grade" rated securities and all investments have an Aaa
or better rating at November 30, 2004. There were no unrealized gains
or losses on short-term investments at November 30, 2004.
As of November 30, 2003 and 2004, the Company's long-term investment
securities consist of $4,232 and $1,117, respectively, of
available-for-sale investment securities, which relates to 306,000
shares of CellStar Common Stock and trading securities of $5,280 and
$4,871, respectively, which consist of mutual funds that are held in
connection with the deferred compensation plan. During fiscal 2002,
2003 and 2004, the net unrealized holding (loss)/gain on trading
securities that has been included in earnings is $(558), $656 and
$409, respectively.
The cost, gross unrealized gains and losses and aggregate fair value
of the available-for-sale investment securities as of November 30,
2003 and 2004 were as follows:
2003
-----------------------------------------------------------
Gross Other-than-
Unrealized Temporary Aggregate
Holding Impairment Fair
Cost Gain (Loss) Charge Value
------- ----------- ----------- ---------
CellStar Common Stock $ 2,401 $ 1,831 -- $ 4,232
Shintom Common Stock 21 -- $ (21) --
------- ------- ------- -------
$ 2,422 $ 1,831 $ (21) $ 4,232
======= ======= ======= =======
61
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
2004
-----------------------------------------------------------
Gross Other-than-
Unrealized Temporary Aggregate
Holding Impairment Fair
Cost Gain (Loss) Charge Value
------- ----------- ----------- ---------
Short-term investments $124,237 -- -- $124,237
======== ======= ======= ========
CellStar Common Stock $ 2,401 $(1,284) -- $ 1,117
======== ======= ======= ========
Related deferred tax assets/(liabilities) of $(696) and $488 were
recorded at November 30, 2003 and 2004, respectively, as a reduction
to the unrealized holding gain (loss) included in accumulated other
comprehensive income (loss).
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. During fiscal
2002 and 2003, the Company recorded a $1,158 and $21, respectively,
other-than-temporary impairment of its Shintom common stock due to a
decline in the value of Shintom stock. 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.
(f) 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 Company's selling price
to its customers is a fixed amount that is not subject to refund or
adjustment or contingent upon additional rebates.
62
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(g) Sales Incentives
The Company offers sales incentives to its customers in the form of
(1) co-operative advertising allowances; (2) market development funds;
(3) volume incentive rebates and (4) other trade allowances. The
Company accounts for sales incentives in accordance with EITF 01-9,
"Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of Vendor's Products)" (EITF 01-9). The terms of
sales incentives are offered from time to time and vary by customer.
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 customers to claim the sales
incentive within a certain time period (referred to as the "claim
period") and claims 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:
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 a fixed amount or is based
upon a fixed percentage of the Company's sales revenue or 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 amount, fixed
percentage of the Company's sales revenue to the customer or 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 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 Company 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 Company 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 Company has historical experience with these sales incentive
programs and 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.
63
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
Other trade allowances are additional sales incentives that the
Company provides to 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, 2003 and 2004 was
$14,605 and $7,584, 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, 2002, 2003 and 2004, reversals
of previously established sales incentive liabilities amounted to
$1,500, $1,803 and $3,889, 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 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, 2002, 2003 and 2004
amounted to $784, $917 and $2,187, respectively. Unclaimed sales
incentives are sales incentives earned by the customer but the
customer has not claimed payment from the Company within the claim
period (period after program has ended). Unclaimed sales incentives
for fiscal years ended November 30, 2002, 2003 and 2004 amounted to
$716, $886 and $1,702, respectively.
The Company reverses earned but unclaimed sales incentives based upon
the expiration of the claim period of each program. If no claim period
is specified for the program, a claim period of 12 months is utilized.
The Company believes that the reversal of earned but unclaimed sales
incentives upon the expiration of the claim period is a disciplined,
rational, consistent and systematic method of reversing unclaimed
sales incentives. 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.
64
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
A summary of the activity with respect to sales incentives is provided
below:
November 30,
---------------------------------------------
2002 2003 2004
-------- -------- --------
Opening balance $ 3,265 $ 4,626 $ 14,605
Accruals** 7,665 19,994 17,012
Payments (4,804) (8,212) (20,144)
Reversals for unearned incentives (784) (917) (2,187)
Reversals for unclaimed incentives (716) (886) (1,702)
-------- -------- --------
Ending balance $ 4,626 $ 14,605 $ 7,584
======== ======== ========
The majority of the reversals of previously established sales
incentive liabilities pertain to sales recorded in prior periods.
** Included in accruals for fiscal 2003 is $4,111 of accrued sales
incentives acquired from the acquisition of Recoton (Note 5 of Notes
to Consolidated Financial Statements).
(h) Accounts Receivable
The majority of the Company's accounts receivable are due from
companies in the 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.
Accounts receivable is comprised of the following:
November 30,
------------------------------
2003 2004
-------- --------
Trade accounts receivable and other $148,096 $126,738
Less:
Allowance for doubtful accounts 5,558 6,271
Allowance for cash discounts 677 503
-------- --------
$141,861 $119,964
======== ========
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
65
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
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.
The following is a rollforward of the allowance for doubtful accounts:
November 30,
------------------------
2003 2004
------ ------
Beginning balance $3,193 $5,558
Expense 577 141
Deductions 1,788 572
------ ------
Ending balance $5,558 $6,271
====== ======
(i) Inventory
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 from selling prices subsequent to the balance sheet
date, indications from customers based upon current negotiations and
purchase orders. 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. The Company recorded inventory write-downs on inventory of
$2,722, $4,397 and $5,506 for the years ended November 30, 2002, 2003
and 2004, respectively.
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.
66
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(j) Debt Issuance Costs
Costs incurred in connection with the restructuring of bank
obligations were capitalized. These charges were amortized over the
lives of the respective agreements resulting in amortization expense
of $379, $528 and $1,024 for the years ended November 30, 2002, 2003
and 2004, respectively. There are no such capitalized costs at
November 30, 2004 as the Company's domestic bank obligations expired
on November 1, 2004 (see Note 9 of Notes to Consolidated Financial
Statements).
(k) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. 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.
A summary of property, plant and equipment, net, is as follows:
November 30,
--------------------------
2003 2004
-------- --------
Land $ 648 $ 648
Buildings 4,244 6,384
Property under capital lease 7,142 7,142
Furniture, fixtures and displays 1,682 2,203
Machinery and equipment 4,360 4,592
Construction in progress 195 185
Computer hardware and software 10,747 12,220
Automobiles 848 976
Leasehold improvements 4,167 4,402
-------- --------
34,033 38,752
Less accumulated depreciation and amortization (15,435) (18,334)
-------- --------
$ 18,598 $ 20,418
======== ========
Accumulated depreciation and amortization includes $1,358 and $1,598
related to property under capital lease at November 30, 2003 and 2004,
respectively. Computer software includes approximately $794 and $573
of unamortized costs as of November 30, 2003 and 2004, respectively,
related to the acquisition and installation of management information
systems for internal use.
67
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
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
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.
Depreciation and amortization of property, plant and equipment
amounted to $3,666, $3,525 and $2,723 for the years ended
November 30, 2002, 2003 and 2004, respectively. Included in
depreciation and amortization expense is amortization of computer
software costs of $850, $500 and $149 for the years ended
November 30, 2002, 2003 and 2004, respectively. Included in
depreciation expense is $240 of depreciation related to property
under capital lease for each of the three years in the period
ended November 30, 2004.
(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).
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 5
of Notes to Consolidated Financial Statements).
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".
68
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
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. 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.
Goodwill
The change in carrying amount of goodwill is as follows:
November 30,
------------------------
2003 2004
------- -------
Net beginning balance $ 6,826 $ 7,532
Escrow monies collected in connection with Code-Alarm
(See Note 5 of Notes to Consolidated Financial
Statements) -- (513)
Adjustments of certain acquired assets of Code-Alarm
(Note 5 of Notes to Consolidated Financial Statements) 706 --
------- -------
Net ending balance $ 7,532 $ 7,019
======= =======
Other Intangible Assets
November 30, 2003 and 2004
---------------------------------------
Gross Total Net
Carrying Accumulated Book
Value Amortization Value
-------- ------------ --------
Patents subject to amortization $ 677 $ 677 --
Trademarks subject to amortization 34 34 --
Trademarks not subject to
amortization (Note 5 of Notes
to Consolidated Financial
Statements) 8,043 -- $8,043
------ ------ ------
Total $8,754 $ 711 $8,043
====== ====== ======
At November 30, 2004, all intangible assets subject to
amortization have been fully amortized.
69
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(m) Advertising
Excluding co-operative advertising, the Company expenses the cost of
advertising, as incurred, of $3,618, $6,371 and $8,821 for the years
ended November 30, 2002, 2003 and 2004, respectively. During the years
ended November 30, 2002, 2003 and 2004, the Company had no direct
response advertising.
(n) 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, if
applicable, 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
$8,408 and $7,947 is recorded in accrued expenses in the accompanying
consolidated balance sheets as of November 30, 2003 and 2004,
respectively. In addition, the Company records a reserve for product
repair costs which 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 $6,287 and $3,847
is recorded as a reduction to inventory in the accompanying
consolidated balance sheets as of November 30, 2003 and 2004,
respectively. Warranty claims and product repair costs expense for
each of the fiscal years ended November 30, 2002, 2003 and 2004 were
$5,500, $9,691 and $3,257, respectively.
The following table provides the changes in the Company's product
warranties and product repair costs for November 30, 2002, 2003 and
2004:
2002 2003 2004
-------- -------- --------
Beginning balance $ 7,149 $ 11,309 $ 14,695
Liabilities accrued for warranties issued
during the period 5,500 9,691 3,257
Warranty claims paid during the period (1,340) (6,305) (6,158)
-------- -------- --------
Ending balance $ 11,309 $ 14,695 $ 11,794
======== ======== ========
During the year ended November 30, 2004, the Company received a credit
of $1,517 from a vendor as a result of re-negotiating charges for the
repair of defective inventory. This credit has been included as a
reduction to the liabilities accrued for warranties issued during the
year ended November 30, 2004.
(o) Foreign Currency
Assets and liabilities of those subsidiaries and equity investees
located outside the United States whose cash flows are primarily in
70
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
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).
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 $418, $(232) and $132
for the years ended November 30, 2002, 2003 and 2004, respectively,
were included in other income (expense).
(p) 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 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 10 of Notes to Consolidated Financial Statements). 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.
(q) 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 denominators of the basic and diluted
income (loss) per common share is as follows:
Years Ended November 30,
-------------------------------------------------
2002 2003 2004
---------- ---------- ----------
Weighted average number of common shares
outstanding (denominator for net income
(loss) per common share, basic) 21,850,035 21,854,610 21,955,292
Effect of dilutive securities:
Stock options and stock warrants 42,616 199,710 417,842
---------- ---------- ----------
Weighted average number of common and
potential common shares outstanding
(denominator for net income (loss) per
common share, diluted) 21,892,651 22,054,320 22,373,134
========== ========== ==========
71
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
Stock options and stock warrants totaling 2,234,756, 1,540,000 and
366,250 for the years ended November 30, 2002, 2003 and 2004,
respectively, were not included in the net income (loss) per common
share calculation because the exercise price of these options and
warrants were greater than the average market price of common stock
during the period or these options and warrants were anti-dilutive.
(r) Supplementary Financial Statement Information
Interest income of $509, $516 and $823 for the years ended November
30, 2002, 2003 and 2004, respectively, is included in other, net, in
the accompanying consolidated statements of operations.
(s) 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 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.
(t) 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",
72
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
requires that the Company provide pro-forma information regarding net
income (loss) and net income (loss) 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 pro-forma disclosures as described in SFAS
No. 123. The following table illustrates the effect on net income
(loss) and net income (loss) 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,
-----------------------------------------
2002 2003 2004
-------- -------- --------
Net income (loss):
As reported $(14,040) $ 11,239 $ 77,200
Stock based compensation expense 864 -- --
-------- -------- --------
Pro-forma $(14,904) $ 11,239 $ 77,200
======== ======== ========
Net income (loss) per common share (basic):
As reported $ (0.64) $ 0.51 $ 3.52
Pro-forma $ (0.68) $ 0.51 $ 3.52
Net income (loss) per common share (diluted):
As reported $ (0.64) $ 0.51 $ 3.45
Pro-forma $ (0.68) $ 0.51 $ 3.45
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.
(u) Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes foreign currency
translation adjustments and unrealized gains and losses on investment
securities classified as available-for-sale.
The change in net unrealized gain (loss) on marketable securities of
$422, $1,734 and $(1,931) for the years ended November 30, 2002, 2003
and 2004 is net of tax of $260, $1,063 and $(1,184) , respectively.
During the year ended November 30, 2004, $914 of translation gains
were transferred from the cumulative foreign currency translation
account
73
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
and included in the gain on the sale of the Cellular business (See
Note 2 of Notes to Consolidated Financial Statements). The currency
translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-U.S. subsidiaries and equity
investments.
(v) New Accounting Pronouncements
In November 2004, The Financial Accounting Standards Board (FASB)
issued FASB Statement No. 151 ("Statement 151"), "Inventory Costs, an
amendment of ARB No. 43, Chapter 4". The amendments made by Statement
151 clarified that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized
as current-period charges and requires the allocation of fixed
production overheads to inventory based on the normal capacity of the
production facilities. Statement 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005 or the
Company's fiscal year ended November 30, 2006. The Company does not
expect the adoption of Statement 151 to have a material impact on the
Company's consolidated financial statements.
In December 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123R ("Statement 123R"), "Share Based
Payment". Statement 123R is a revision of FAS Statement 123,
"Accounting for Stock Based Compensation" and supersedes APB Opinion
No. 25, "Accounting for Stock issued to Employees" (APB No.25).
Statement 123R requires a public entity to measure the cost of
employee services recognized in exchange for an award of equity
instruments based on the grant-date fair value of the award (with
limited exceptions). Statement 123R is effective the first interim or
annual period that begins after June 15, 2005 or the Company's fourth
quarter and fiscal year ended November 30, 2005. The adoption of
Statement 123R will rescind the Company's current accounting for stock
based compensation under the intrinsic method as outlined in APB No.
25. Under APB No. 25, the issuance of stock options to employees
generally resulted in no compensation expense to the Company. The
adoption of Statement 123R would have no impact to the Compay if
adopted at November 30, 2004, but will require the Company to measure
the cost of stock options based on the grant-date fair value of the
award.
In December 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 153, ("Statement 153"), "Exchanges of
Non-monetary Assets-an amendment of APB Opinion No. 29". Statement 153
amends Opinion 29 to eliminate the exception for non-monetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange has commercial substance
if the future cash flows of the entity are expected to change
significantly as a result of the exchange. Statement 153 is effective
for fiscal periods after June 15, 2005. The Company does not expect
the adoption of Statement 153 to have a material impact on the
Company's consolidated financial statements.
74
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(w) 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 Company and realization
of the gain is assured.
(x) Reclassifications
Certain reclassifications have been made to the 2002 and 2003
consolidated financial statements in order to conform to the 2004
presentation.
(y) Allocating Interest Expense to Discontinued Operations
Interest expense of $3,554, $1,166 and $3,148 was allocated to
discontinued operations for the years ended November 30, 2002, 2003
and 2004, respectively. These allocations represent consolidated
interest that cannot be attributed to other operations of the Company
and such allocations were based on the required working capital needs
of the Cellular business (See Note 2 of Notes to Consolidated
Financial Statements).
(2) Discontinued Operations and Sale of Cellular Business
(a) Background and Proceeds
On November 1, 2004, the Company completed its sale (the "Sale") of
the Cellular Business ("ACC" or "Cellular ") to UTStarcom, Inc.
("UTSI") in connection with a definitive asset purchase agreement
("the agreement"),which was signed on June 11, 2004. In accordance
with the agreement, the Company's majority owned subsidiary, ACC, sold
selected assets and certain liabilities (excluding certain
receivables, inter-company accounts payable, income taxes payable,
subordinated debt and certain accrued expenses and other current
liabilities), to UTSI. The following summarizes the assets and
liabilities which were sold to UTSI:
Accounts receivable, net $ 1,628
Inventory 116,341
Prepaid expenses and other assets 985
Receivables from vendors 3,101
Property, plant and equipment, net 1,759
--------
Total assets sold 123,814
Accounts payable 56,750
Accrued expenses and other liabilities 12,827
Accrued sales incentives 4,639
--------
Total liabilities sold 74,216
--------
Net assets sold $ 49,598
========
75
As consideration for the sale, Audiovox received $165,170 ("Purchase
Price") and an additional $8,472 pursuant to a net working capital
adjustment ("the adjustment") based on the working capital of ACC at
the time of closing. In connection with the agreement, UTSI had within
30 business days of the Company's delivery of a final Closing
Statement of Net Assets to dispute the adjustment, which is included
in other current assets on the accompanying consolidated balance sheet
at November 30, 2004. The Company delivered the final Closing
Statement of Net Assets on February 2, 2005.
A portion of the Purchase Price proceeds were or will be utilized for
the following payments:
o ACC repaid Toshiba Corporation ("Toshiba"), a former minority
interest shareholder of ACC, $8,162 as payment in full of the
outstanding principal and interest of a subordinated note. In
addition, Audiovox repurchased from Toshiba, its remaining
minority interest in ACC for $5,483. As a result of this purchase
ACC released Toshiba from its obligation to continue to supply
wireless handsets to ACC and released Toshiba from all claims
that ACC or Audiovox have or may have against Toshiba (see Note 3
of Notes to Consolidated Financial Statements).
o Upon the closing, ACC's Chief Executive Officer's employment
agreement with ACC was terminated and pursuant to his employment
agreement and his long-term incentive compensation award he
received $4,000. ACC also purchased certain of his personally
held intangibles for $16,000 in order for ACC to have the ability
to convey all of the assets used in connection with the conduct
of the Cellular business to UTSI.
o Upon the closing, ACC paid $5,019 to certain employees of ACC and
its subsidiaries as a severance payment and in exchange for which
Audiovox received a release from such employees.
o Pursuant to the terms of the Agreement, 5% (or $8,255) of the
Purchase Price was placed in escrow by UTSI for 120 days after
Closing. The Company anticipates to collect these amounts in full
and such amount has been included in restricted cash on the
accompanying consolidated balance sheets.
o The Company's Chairman and Chief Executive Officer received
$1,916 upon the closing of the asset sale pursuant to an
amendment to a long-term incentive compensation award which
clarified that such payment would be paid pursuant to a sale of
the Cellular business pursuant to an asset sale. This payment has
been recorded in general and administrative expenses on the
accompanying consolidated statement of operations for the year
ended November 30, 2004.
o Estimated taxes of approximately $36,311 will be paid in
connection with the asset sale and such liability has been
recorded in income taxes payable on the accompanying consolidated
balance sheet.
76
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
o Acquisition costs for legal, accounting and other of $4,603 were
incurred to effectuate the sale.
The Company also retained certain accounts receivable related to the
Cellular business which approximated $148,494 as of November 1, 2004.
After collections subsequent to the closing, Cellular receivables of
$16,958 remain at November 30, 2004 and such assets have been
classified as current assets of discontinued operations on the
accompanying consolidated balance sheet.
The Company agreed to indemnify UTSI for any breach or violation of
ACC's and its representations, warranties and covenants contained in
the asset purchase agreement and for other matters, subject to certain
limitations. Significant indemnification claims by UTSI could have a
material adverse effect on the Company's financial condition. The
Company is not aware of any such claim(s) for indemnification.
After the closing on November 1, 2004, the following additional
agreements became effective:
o For a period of five-years after November 1, 2004, the Company
entered into a royalty free licensing agreement permitting UTSI
to use the Audiovox brand name on certain products. During such
period, the Company will not conduct, directly or indirectly, in
the Cellular business without the prior written consent of UTSI.
The Company has no separate accounting treatment for the
royalty-free license agreement with UTSI as this agreement cannot
be separated from the sale of net assets to UTSI.
o Certain ACC employee stock options under the 1997 Stock Option
Plan and 1999 Stock Compensation Plan were extended for one year
from the closing. This extension resulted in a non-cash
compensation charge of $98 due to the re-measurement of stock
options in accordance with FIN 44" Accounting for Certain
Transactions involving Stock Compensation".
o The Company will provide certain Information Technology services,
for at least six months after the closing as set forth in a
Transition Services Agreement with UTSI. As consideration for the
performance of these services, UTSI will pay the Company based on
the usage of these services as set forth in the Transition
Services Agreement. Such usage services have been included in
other income in the accompanying statements of operations and
amounted to $79 for the year ended November 30, 2004.
o The Company's credit agreement for domestic bank obligations
expired and became due upon the consummation of the sale of ACC's
assets to UTSI. As such, the Company utilized proceeds from the
sale to repay domestic bank obligations of $99,266 at November 1,
2004 (see Note 9 of Notes to Consolidated Financial Statements).
77
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(b) Gain on Sale of Cellular Business
As a result of the sale of the Cellular business, the Company recorded
a gain of $67,000 for the year ended November 30, 2004 which was
calculated as follows:
Purchase Price $165,170
Working capital adjustment 8,472
Less: payment to former Cellular employees 25,019
Less: professional fees incurred in conjunction with
divestiture 4,603
Less: net assets sold 49,598
Less: non-cash charge for stock options 98
Non-cash cumulative translation gains 914
Gain on purchase of Toshiba minority interest 8,073
Less: estimated taxes 36,311
--------
Gain on sale of Cellular business, included in discontinued
operations $ 67,000
========
(c) Financial Presentation of Discontinued Operations
In accordance with SFAS No. 144, the Company has assessed the
measurement date in accounting for the sale transaction on June 11,
2004 in connection with the date of board approval and signing of the
Agreement. Accordingly, the Company reclassified all associated assets
and liabilities as discontinued operations and recorded the results of
Cellular as a discontinued operation for all periods presented. The
following sets forth the carrying amounts of the major classes of
assets and liabilities of ACC, which are classified as assets and
liabilities of discontinued operations in the accompanying
consolidated balance sheets.
November 30,
--------------------------
2003 2004
-------- --------
Assets
Accounts receivable, net $124,560 $ 16,958
Inventory 66,902 --
Receivables from vendors 3,367 --
Prepaid expenses and other current assets 2,727 --
-------- --------
Current assets of discontinued operations $197,556 $ 16,958
======== ========
Property, plant and equipment, net $ 1,644 --
Other assets 66 --
-------- --------
Non-current assets of discontinued operations $ 1,710 --
======== ========
78
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
November 30,
--------------------------
2003 2004
-------- --------
Liabilities
Accounts payable $59,738 --
Accrued expenses and other current liabilities 15,371 --
Accrued sales incentives 7,290 --
Income taxes payable 1,850 --
------- -
Current liabilities of discontinued operations $84,249 --
======= =
Long term debt $ 8,150 --
Deferred income taxes 6,835 --
------- -
Non-current liabilities of discontinued operations $14,985 -
======= =
The following is a summary of Cellular results included within
discontinued operations:
For the Years Ended November 30,
--------------------------------------------------
2002 2003 2004
---------- ---------- ----------
Net sales from discontinued operations $ 727,658 $ 806,210 $1,159,439
Income (loss) from operations of discontinued
operations before income taxes (5,116) 5,351 10,893
Provision for income taxes 10,060 2,104 702
---------- ---------- ----------
(15,176) 3,247 10,191
Gain on sale of Cellular business, net of tax -- -- 67,000
---------- ---------- ----------
Income (loss) from discontinued operations, net of tax $ (15,176) $ 3,247 $ 77,191
========== ========== ==========
Included in income from discontinued operations are tax provisions of
$10,060, $2,104 and $37,013 for the years ended November 30, 2002,
2003 and 2004, respectively. During the year ended November 30, 2002,
the Company established valuation allowances totaling $13,090 for
state net operating loss carryforwards as well as other deferred tax
assets of Cellular . The net change in the total valuation allowance
for the years ended November 30, 2003 and 2004, was a decrease of $641
and $12,148, respectively. Such change positively impacted the
provision for income taxes during the periods indicated.
(3) Issuance of Subsidiary Shares and Transactions with Toshiba
Toshiba had been a minority interest shareholder in Cellular since 1999. As
previously discussed in Note 2, the Company completed its sale of Cellular
to UTStarcom ("UTSI") on November 1, 2004. In connection with the sale of
Cellular, the Company repurchased the minority interest in Toshiba. As
such, Toshiba is no longer a minority interest shareholder in the Company's
former Cellular business.
79
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
On May 29, 2002, Toshiba Corporation (Toshiba) purchased an additional 20%
of Audiovox Communications Corp. (ACC). 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) which was paid in full during the sale of
Cellular to UTSI (see Note 2 of Notes to Consolidated Financial
Statements). The Note bore interest at a per annum rate equal to 1.75% and
interest was payable annually on May 31st of each year, commencing May 31,
2003.
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 year ended November 30, 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.
In connection with the issuance of ACC shares to Toshiba, the Company
recorded deferred tax liabilities and valuation allowances aggregating
$6,867. These deferred tax liabilities and valuation allowances were
reversed and included in the gain on the sale of the Cellular business
during the year ended November 30, 2004 (See Note 2). This accounting is in
accordance with EITF 93-17 "Recognition of Deferred Tax Assets for a Parent
Company's Excess Tax Basis in the Stock of a Subsidiary That Is Accounted
for as a Discontinued Operation" which states the tax benefit for the
excess of outside tax basis over financial reporting basis should be
recognized when it is apparent that the temporary difference will reverse
in the foreseeable future. Based on the sale of ACC's net assets to UTSI
and the fact ACC is a dormant subsidiary, the Company has no intention to
sell the stock of ACC in the foreseeable future which would result in a
taxable transaction.
In connection with Toshiba's 20% purchase of ACC, the following agreements
(which were terminated on November 1, 2004 as a result of the sale to the
Cellular business to UTSI) were entered into:
o Stockholders agreement - provided for the composition of the board of
directors of ACC and identified certain items, other than in the
ordinary course of business, that ACC cannot do without prior approval
from Toshiba.
o Distribution arrangement - whereby ACC would be 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.
o Employment agreement with the President and Chief Executive Officer
(the Executive) of ACC - ACC was 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 discontinued
operations in the accompanying statements of operations for the year
ended November 30, 2002. During
80
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
the year ended November 30, 2002, the Executive was paid $1,800 less
an amount outstanding under a promissory note of $651.
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 had 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.
The Company was released from these agreements on November 1, 2004 as a
result of the sale of the Cellular business to UTSI.
Minority interest income (expense) relating to Toshiba's minority share
ownership in ACC for the years ended November 30, 2002, 2003 and 2004 was
$4,741, ($1,066) and $(2,398), respectively. Such income (expense) has been
included in discontinued operations in the accompanying statements of
operations for all periods presented.
(4) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
Years Ended November 30,
-------------------------------------------
2002 2003 2004
------- ---------- --------
Cash paid during the years for:
Interest, excluding bank charges $ 1,303 $ 1,857 $ 5,052
Income taxes $ 2,478 $10,556 $ 7,431
Non-cash Transactions:
During the years ended November 30, 2003 and 2004, the Company recorded a
non-cash stock compensation charge of $388 and $371, respectively, related
to the rights under the call/put options previously granted to certain
employees of Audiovox German Holdings GmbH ("Audiovox Germany") (see Note 5
of Notes to Consolidated Financial Statements).
During the year ended November 30, 2003, the Company issued warrants for
the purchase of 120,000 shares of common stock to non-employees and
recorded a charge to operations of $297,000 (Note 12 of Notes to
Consolidated Financial Statements).
As a result of stock option exercises, the Company recorded a tax benefit
of $216 and $227 during the years ended November 30, 2003 and 2004,
respectively, which is included in paid-in capital in the accompanying
consolidated financial statements.
81
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(5) 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. 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. An adjustment to the allocation of the purchase price
was made to certain acquired assets resulting in an increase to goodwill of
$706 during the year ended November 30, 2003. During the year ended
November 30, 2004, an adjustment to the purchase price was made due to the
collection of monies held in escrow at the time of closing, resulting in a
$513 decrease to goodwill. As a result of the acquisition, goodwill, as
adjusted, of $2,047 was recorded.
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 vested 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 additional warrants had
not vested at November 30, 2003 or 2004.
Recoton Audio Group
On July 8, 2003, the Company, through a newly-formed, wholly-owned
subsidiary, Audiovox Germany, 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 $1,900. 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 (see Note 9 of Notes to Consolidated
Financial Statements).
82
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
The acquisition was accounted for using the purchase method of accounting
in accordance with SFAS No. 141 which 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 values at the date of
acquisition. The results of operations of this acquisition have been
included in the consolidated financial statements from 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 acquired in the Recoton acquisition 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.
83
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
The following unaudited pro-forma financial information for the years ended
November 30, 2002 and 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
---------- ----------
(unaudited)
----------------------------
Revenue $ 577,554 $ 558,081
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 Germany, whereby these employees can
acquire up to a maximum of 20% of the Company's stated share capital in
Audiovox Germany at a call price equal to the same proportion of the actual
price paid by the Company for Audiovox Germany. 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
Germany 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 Germany 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 Germany.
Accordingly, the Company recognizes compensation expense based on 20% of
the increase in Audiovox Germany's net assets representing the incremental
change of the put price over the call option price. Compensation expense
for these options amounted to $388 and $371 for the years ended November
30, 2003 and 2004, respectively.
(6) Receivables from Vendors
The Company has recorded receivables from vendors in the amount of $4,463
and $7,028 as of November 30, 2003 and 2004, respectively. Receivables from
vendors represent prepayments on product shipments and defective product
reimbursements.
84
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(7) Equity Investments
As of November 30, 2004, the Company maintained the following equity
investments:
Percentage
Investment Ownership Function
- -------------------------- --------------- --------------------------------
Audiovox Specialized 50% Distribution of products for marine, van, Applications
RV and other specialized vehicles.
Bliss-Tel Company, Ltd. 20% Distribution of wireless products and
accessories in Thailand.
Avx Posse (Malaysia) Sdn. 29% Monitors car security commands through
Bhd. ("Posse") satellite based system in Malaysia
Protector 50% Distributor of chemical protection
treatments
The Company has recorded the following with respect to equity investees:
For The Years Ended November 30,
------------------------------------
2002 2003 2004
------ ------ ------
Net sales $3,504 $4,277 $1,302
Purchases 1,883 1,978 213
As of November 30,
------------------
2003 2004
----- -----
Accounts receivable $934 $105
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
has been provided herein:
November 30,
------------------------
2003 2004
------- ---------
Current assets $22,518 $22,008
Non-current assets 4,803 4,425
Current liabilities 4,640 4,710
Members' equity 22,681 21,723
85
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
Years Ended November 30,
------------------------------------------
2002 2003 2004
------- ------- ----------
Net sales $47,308 $47,818 $56,988
Gross profit 8,660 11,185 14,540
Operating income 3,356 5,754 7,257
Net income 3,486 5,895 7,304
The Company's share of income from ASA for fiscal 2002, 2003 and 2004 was
$1,743, $2,948 and $3,652, respectively. In addition, the Company received
distributions from ASA totaling $947, $1,316 and $4,131 during the years
ended November 30, 2002, 2003 and 2004, respectively.
As discussed in Note 5 of Notes to Consolidated Financial Statements, the
Company sold $3,600 of marine division assets to ASA which were acquired in
connection with the Recoton acquisition.
(8) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consists of the following:
November 30,
-------------------------
2003 2004
------- -------
Commissions $ 1,380 $ 1,388
Employee compensation 5,751 6,079
Professional fees and accrued settlements 500 4,746
Future warranty 8,408 7,947
Freight and duty 2,620 2,873
Other taxes payable 882 587
Royalties, advertising and other 7,904 9,783
------- -------
$27,445 $33,403
======= =======
(9) Financing Arrangements
The Company had the following financing arrangements:
November 30,
------------------------
2003 2004
------- -------
Bank Obligations
Domestic bank obligations (a) $31,709 --
Malaysia bank obligations (b) 2,721 $ 2,209
Euro factoring obligations (c) 5,510 5,485
------- -------
Total bank obligations $39,940 $ 7,694
======= =======
86
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
November 30,
-----------------------
2003 2004
------- -------
Debt
Euro term loan agreement (d) $12,962 $ 9,377
Debt to Toshiba (e) 8,107 --
Other (f) 610 829
------- -------
Total debt $21,679 $10,206
======= =======
(a) Domestic Bank Obligations
The Company's fifth amended and restated credit agreement ("the Credit
Agreement") expired on November 1, 2004 as a result of the sale of
substantially all the assets of Audiovox Communications Corp. ("ACC")
to UTSI and the purchase by the Company of Toshiba Corporation's
interest in ACC and the repayment by ACC of the Toshiba convertible
note (See Note 2 of Notes to Consolidated Financial Statements). At
November 30, 2003 outstanding domestic obligations and interest rates
under the Credit Agreement were as follows:
Outstanding Interest
Amount Rate
--------- ---------
Revolving Credit Notes $11,709 4.75%
Eurodollar Notes 20,000 3.90%
-------
$31,709
======
At November 30, 2004, the Company had an un-guaranteed credit line to
fund the temporary short-term working capital needs of the domestic
operations. This line originally expired on January 31, 2005 and was
subsequently extended to May 30, 2005, and allows aggregate borrowings
of up to $25,000 at an interest rate of Prime (or similar
designations) plus 1%. As of November 30, 2004 no amounts are
outstanding under this agreement.
(b) Malaysia Bank Obligations
The Company has revolving credit facilities in Malaysia (Malaysian
Credit Agreement) to finance additional working capital needs. As of
November 30, 2004, the available line of credit for direct borrowing,
letters of credit, bankers' acceptances and other forms of credit
approximated $2,905. The credit facilities are partially secured by
two standby letters of credit of $800 each and are payable upon demand
or upon expiration of the standby letters of credit on July 7, 2005.
The obligations of the Company under the Malaysian Credit Agreement
are also secured by the property and building owned by Audiovox
Communications Sdn. Bhd. which amounted to $711 at November 30, 2004.
During fiscal 2004, interest on the credit facility ranged from 3.65 %
to 6.8%. During fiscal 2003, interest on the credit facility ranged
from 4.75% to 6.5%.
87
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(c) Euro Factoring Obligation
The Company has a 16,000 Euro accounts receivable and inventory
factoring arrangement for the Company's subsidiary, Audiovox German
Holdings GmbH, (Audiovox Germany) which expires on October 25, 2005
and is renewable on an annual basis. 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 the Company pays 0.4% of its gross sales as a
fee for this arrangement. As of November 30, 2003 and 2004, the amount
of accounts receivable and inventory available for factoring exceeded
the amounts outstanding under this obligation.
(d) Euro Loan Agreement
On September 2, 2003, the Company's subsidiary, Audiovox Germany,
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 German
Holdings GmbH and on all brands and trademarks of the Audiovox German
Holdings Group. The term loan requires the maintenance of certain
yearly financial covenants that are calculated according to German
Accounting Standards for Audiovox German 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 $2,497 and $6,880,
respectively, at November 30, 2004.
(e) Long Term Debt to Toshiba
On May 29, 2002, an $8,107 convertible subordinated note (the Note)
was issued to Toshiba. The Note bore interest at a per annum rate
equal to 1.75% and interest is payable annually on May 31st of each
year, commencing May 31, 2003. As discussed in Notes 2 and 3 of Notes
to Consolidated Financial Statements, the Company repaid the total
amount outstanding under the Note, which approximated $8,162 at
November 1, 2004, to Toshiba during the sale of the Cellular business
to UTSI. The Note has been included in non-current liabilities of
discontinued operations at November 30, 2003 on the accompanying
consolidated balance sheet.
88
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(f) Other Debt
This amount consists primarily of a call put option owed to certain
employees of Audiovox Germany in the amount of $388 and $829 at
November 30, 2003 and 2004, respectively. For more information, see
Note 5 of Notes to Consolidated Financial Statements.
The Company guaranteed the debt of G.L.M. (a former equity investment)
beginning in December 1996, and this guarantee was not subsequently
modified. During the year ended November 30, 2004, the Company
received a request for payment in connection with this guarantee. As a
result of the payment request, the Company paid $291 on behalf of
G.L.M. during the year ended November 30, 2004 and such guarantee is
no longer in effect.
The following is a maturity table for debt and bank obligations
outstanding at November 30, 2004:
Total
Amounts
Committed 2005 2006 2007 2008 2009
---------- ------- ------- ------- ------- ------
Bank obligations $ 7,694 $ 7,694 -- -- -- --
Debt 10,206 2,497 $ 2,502 $ 2,502 $ 2,705 --
------- ------- ------- ------- ------- -----
Total $17,900 $10,191 $ 2,502 $ 2,502 $ 2,705 -
======= ======= ======= ======= ======= =====
(10) Income Taxes
The components of income (loss) from continuing operations before the provision
for income taxes are as follows:
November 30,
-------------------------------------------
2002 2003 2004
-------- -------- --------
Domestic Operations $ 4,921 $ 15,476 $ (1,270)
Foreign Operations (1,467) (857) 2,405
-------- -------- --------
$ 3,454 $ 14,619 $ 1,135
======== ======== ========
89
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
Income tax expense (benefit) was allocated as follows:
November 30,
----------------------------------------
2002 2003 2004
------- ------- -------
Statement of operations $ 2,872 $ 7,303 $ 478
Stockholders' equity:
Unrealized holding gain (loss) on
investment securities recognized for
financial reporting purposes 260 1,063 (1,184)
Tax benefit of stock options exercised (17) (216) (227)
------- ------- -------
Income tax expense (benefit) $ 3,115 $ 8,150 $ (933)
======= ======= =======
The provision for (recovery of) income taxes is comprised of:
Federal Foreign State Total
2002:
Current $ 4,540 $ 107 $ 950 $ 5,597
Deferred (2,570) 155 (310) (2,725)
------- ------- ------- -------
$ 1,970 $ 262 $ 640 $ 2,872
======= ======= ======= =======
2003:
Current $ 7,552 $ 1,257 $ 353 $ 9,162
Deferred (1,782) 138 (215) (1,859)
------- ------- ------- -------
$ 5,770 $ 1,395 $ 138 $ 7,303
======= ======= ======= =======
2004:
Current $(1,802) $ 867 $ (256) $(1,191)
Deferred 1,464 28 177 1,669
------- ------- ------- -------
$ (338) $ 895 $ (79) $ 478
======= ======= ======= =======
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,
---------------------------------------------------------------
2002 2003 2004
-------------------------- -------------------- -------------------
Tax provision at Federal statutory rates $1,209 35.0% $5,117 35.0% $ 398 35.0%
State income taxes, net of Federal benefit 640 18.5 138 0.9 (86) (7.6)
Increase (decrease) in the valuation
allowance for deferred tax assets -- -- -- -- 6 0.6
Foreign tax rate differential 867 25.1 1,695 11.6 53 4.7
Permanent and other, net 156 4.5 353 2.5 107 9.4
------ ---- ------ ---- ------ ------
$2,872 83.1% $7,303 50.0% $ 478 42.1%
====== ===== ====== ====== ====== ======
90
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
Other is a combination of various factors, including changes in the taxable
income or loss between various tax entities with differing effective tax
rates, changes in the allocation and apportionment factors between taxable
jurisdictions with differing tax rates of each tax entity, changes in tax
rates and other legislation in the various jurisdictions, and other items.
The significant components of deferred income tax expense (recovery) for
the years ended November 30, 2003 and 2004 are as follows:
November 30,
-----------------------
2003 2004
------- -------
Deferred tax expense (recovery) (exclusive of the effect of
other components listed below) $(1,859) $ 1,663
Increase (decrease) in the balance of the valuation
allowance for deferred tax assets -- 6
------- -------
$(1,859) $ 1,669
======= =======
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,
-------------------------
2003 2004
-------- --------
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts $ 853 $ 1,398
Inventory, principally due to additional costs capitalized
for tax purposes pursuant to the Tax Reform Act of
1986 1,301 464
Inventory, principally due to valuation reserve 4,134 3,431
Accrual for future warranty costs 2,083 2,174
Property, plant, equipment and certain intangibles,
principally due to depreciation and amortization 2,220 1,992
Net operating loss carryforwards, federal, state and
foreign 662 914
Accrued liabilities not currently deductible and other 36 210
Investment securities (355) 825
Deferred compensation plans 1,183 1,903
-------- --------
Total gross deferred tax assets 12,117 13,311
Less: valuation allowance (212) (218)
-------- --------
Net deferred tax assets $ 11,905 $ 13,093
======== ========
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible.
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 Company's ability to carry back future reversals
91
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
of deferred tax assets to taxes paid in current and prior years and the
Company's historical taxable income record, adjusted for unusual items,
management believes it is more likely than not that the Company will
realize the benefit of the net deferred tax assets existing at November 30,
2004. Further, management believes the existing net deductible temporary
differences will reverse during periods in which the Company 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
Company, therefore, could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
(11) 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,
----------------------------- ----------------------------
2003 2004 2003 2004
------------- -------------- ------------ --------------
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 - - - -
Class A
Common $ 0.01 60,000,000 60,000,000 19,655,645 19,788,889 One Ratably with
Stock Class B
Class B
Common Class A
Stock $ 0.01 10,000,000 10,000,000 2,260,954 2,260,954 Ten Ratably with
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 of
Directors 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 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
92
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
November 30, 2003 and 2004, 1,072,737 and 1,070,957 shares were repurchased
under the Program at an average price of $7.93 for an aggregate amount of
$8,511 and $8,497, respectively.
As of November 30, 2003 and 2004, 2,804,117 and 2,713,353 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
12 of Notes to Consolidated Financial Statements). Additional warrants are
outstanding that may be converted into shares of Code (Note 5 of Notes to
Consolidated Financial Statements).
Undistributed earnings from equity investments included in retained
earnings amounted to $6,127 and $5,649 at November 30, 2003 and 2004,
respectively.
(12) 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
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, 2002 and 2003.
As discussed in Note 2, 15,000 ACC employee stock options under the
1997 Stock Option Plan and 345,000 ACC employee stock options under
1999 Stock Compensation Plan were extended for one year from the
closing of the sale with UTSI (November 1, 2004). This extension
resulted in a non-cash compensation charge of $98 due to the
re-measurement of stock options in accordance with FASB Interpretation
(FIN) 44" Accounting for Certain Transactions involving Stock
Compensation".
At November 30, 2003 and 2004, 234,253 and 274,953 shares were
available for future grants under the terms of these plans,
respectively.
93
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(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 2002 or fiscal
2004.
Information regarding the Company's stock options and warrants is
summarized below:
Weighted
Average
Number Exercise
of Shares Price
-------------- ----------
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
Granted - -
Exercised (131,464) 11.60
Canceled/Lapsed (40,700) 13.49
----------- -------
Outstanding at November 30, 2004 2,547,700 $11.74
========== ======
Options and warrants exercisable at
November 30, 2004 2,547,700 $11.74
========== ======
94
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
Summarized information about stock options and warrants outstanding as
of November 30, 2004 is as follows:
Outstanding and Exercisable
-------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise Life
Price Number Price Remaining
Range of Shares of Shares In Years
- --------------------- ---------------- --------- -----------
$4.63 - 8.00 1,007,700 $ 7.23 2.16
$8.01 - 13.00 120,000 $ 11.02 1.60
$13.01 - 15.00 1,420,000 $ 15.00 3.84
(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. No performance- restricted accelerated
shares or performance-restricted shares were granted in fiscal 2002,
2003 or 2004.
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, 2002, 2003 and 2004.
(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.
95
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(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 discretional contribution accrual of $600 and $601 was
recorded by the Company for the United States plan in fiscal 2003 and
2004, 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.
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 $114, $135 and
$155 for the year ended November 30, 2002, 2003 and 2004,
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 $4,871 at November 30, 2004, have
been classified as trading securities (long-term) and are included in
investment securities on the accompanying consolidated balance sheet
as of November 30, 2004. 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, 2004. Compensation expense and investment income (loss)
are recorded in the accompanying consolidated statements of operations
in connection with this deferred compensation plan.
(13) Lease Obligations
During 1998, the Company entered into a 30-year capital lease for a
building with its principal stockholder and chief executive officer, which
was the headquarters of the discontinued Cellular operation. Payments on
the capital 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%. On November 1, 2004 the Company entered
into an agreement to sub-lease the building to UTStarcom
96
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
for monthly payments of $46 through October 31, 2009.
During 1998, the discontinued Cellular operations entered into a
sale/leaseback transaction with the Company's principal stockholder and
chief executive officer for $2,100 of equipment, which was classified as an
operating lease. The lease required monthly payments of $34 and was
terminated on November 1, 2004.
At November 30, 2004, 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
2005 $ 552 $ 2,997
2006 560 2,575
2007 577 2,356
2008 580 1,086
2009 577 47
Thereafter 10,253 --
------- -------
Total minimum lease payments 13,099 $ 9,061
=======
Less: minimum sublease income 2,714
-------
Net 10,385
Less: amount representing interest 4,315
-------
Present value of net minimum lease payments 6,070
Less: current installments included in accrued
expenses and other current liabilities 69
-------
Long-term obligation $ 6,001
=======
Rental expense for the above-mentioned operating lease agreements and other
leases on a month-to- month basis approximated $1,919, $2,440 and $2,475
for the years ended November 30, 2002, 2003 and 2004, respectively.
The Company leases certain facilities and equipment from its principal
stockholder and several officers. At November 30, 2004, 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:
2005 $ 562
2006 579
2007 596
2008 614
Thereafter -
--------
$2,351
======
97
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(14) 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
9 of Notes to Consolidated Financial Statements). The Company had open
commercial letters of credit of $2,541 and $959, at November 30, 2003 and
2004 respectively, of which $468 were accrued for purchases incurred as of
November 30, 2003. 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.
At November 30,2004, the Company had unconditional purchase obligations for
inventory commitments of $46,041. These obligations are not recorded in the
consolidated financial statements until commitments are fulfilled and such
obligations are subject to change based on negotiations with manufacturers.
(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, distributors, mass merchandisers,
warehouse clubs and independent retailers.
At November 30, 2003, two customers accounted for 13% and 11% of accounts
receivable. At November 30, 2004, no customer accounted for greater than
10% of accounts receivable.
During the years ended November 30, 2002 and 2004, one customer accounted
for approximately 10% and 11% of the Company's net sales, respectively.
During the year ended November 30, 2003, two customers each accounted for
approximately 10% of the Company's net sales. 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.
98
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(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, 2003 November 30, 2004
----------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- ---------- ----------
Short-term investments -- -- $124,237 $124,237
Investment securities (long-
term) $ 9,512 $ 9,512 $ 5,988 $ 5,988
Bank obligations $ 39,940 $ 39,940 $ 7,694 $ 7,694
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:
Investment Securities/Short-Term Investments
The carrying amount represents fair value, which is based upon quoted
market prices at the reporting date (Note 1 of Notes to Consolidated
Financial Statements).
Long-Term Obligations
The carrying amount of the Company's foreign debt approximates fair
value because the interest rate on the 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.
99
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
(15) Financial and Product Information About Foreign and Domestic Operations
Net sales and long-lived assets by location for the years ended November
30, 2002, 2003 and 2004 were as follows.
Net Sales Long-Lived Assets
---------------------------------------- ---------------------------------------
2002 2003 2004 2002 2003 2004
-------- -------- -------- -------- -------- --------
United States $338,687 $468,880 $486,780 $ 40,506 $ 55,256 $ 57,503
Malaysia 11,637 7,720 3,424 1,038 1,010 925
Venezuela 9,047 2,887 4,535 852 511 358
Europe -- 26,676 54,832 -- 2,407 2,407
Other foreign countries 13,353 11,529 17,506 -- -- --
-------- -------- -------- -------- -------- --------
Total $372,724 $517,692 $567,077 $ 42,396 $ 59,184 $ 61,193
======== ======== ======== ======== ======== ========
The Company operates in the Electronics market and has one reportable
segment ("Electronics") which is broken down into two major product
categories: Mobile and Consumer Electronics . Net sales for the product
categories for each of the three years in the period ended November 30,
2004 were as follows:
2002 2003 2004
-------- -------- ---------
Mobile Electronics $285,608 $355,207 $405,645
Consumer Electronics 86,472 161,965 161,432
Other 644 520 --
-------- -------- --------
Total net sales $372,724 $517,692 $567,077
======== ======== ========
(16) Related Party Transactions
The Company leases facilities and equipment from its principal stockholder
(Note 13 ). In addition, the Company entered into various transactions with
Toshiba Corporation (Note 3).
(17) Contingencies
The Company is currently, and has in the past been, a party to various
routine legal proceedings incident to the ordinary course of business. The
Company believes that the outcome of all such pending legal proceedings in
the aggregate is unlikely to have a material adverse effect on the business
or consolidated financial condition of the Company.
During the fourth quarter of 2004, several purported derivative and class
actions were filed in the Court of Chancery of the State of Delaware, New
Castle County. On January 10, 2005, Vice Chancellor Steven Lamb of the
Court of Chancery of the State of Delaware, New Castle County, granted an
order permitting the filing of a Consolidated Complaint by several
shareholders of Audiovox Corporation derivatively on behalf of Audiovox
Corporation against Audiovox Corporation, ACC and the directors of Audiovox
Corporation captioned "In Re Audiovox
100
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
Corporation Derivative Litigation". The complaint seeks (a) rescission of:
agreements; amendments to long-term incentive awards; and severance
payments pursuant to which Audiovox and ACC executives were paid from the
net proceeds of the sale of certain assets of ACC to UTStarcom, Inc., (b)
disgorgement to ACC of $16 million paid to Philip Christopher pursuant to a
Personally Held Intangibles Purchase Agreement in connection with the
UTStarcom transaction, (c) disgorgement to Audiovox of $4 million paid to
Philip Christopher as compensation for termination of his Employment
Agreement and Award Agreement with ACC, (d) disgorgement to ACC of
$1,916,477 paid to John Shalam pursuant to an Award Agreement with ACC, and
(e) recovery by ACC of $5 million in severance payments distributed by
Philip Christopher to ACC's former employees. ACC is sued as a nominal
defendant only. Defendants have filed a motion to dismiss the complaint.
Defendants intend to vigorously defend this matter. However, no assurances
regarding the outcome of this matter can be given at this point in the
litigation.
During the first quarter of 2005, the litigation commenced by Compression
Labs, Incorporated in the United States District Court for the Eastern
District of Texas, Marshall Division, against the Company and its
subsidiary Audiovox Electronics Corp. ("AEC") was dismissed without
prejudice as to the Company and settled with respect to AEC. The litigation
against Audiovox Communications Corp. ("ACC") is still pending and although
ACC intends to vigorously defend this matter, no assurances regarding the
outcome can be given at this point in the litigation.
During the third quarter of 2004, an arbitration proceeding was commenced
by the Company and several of its subsidiaries against certain Venezuelan
employees and two Venezuelan companies ("Respondents") before the American
Arbitration Association, International Centre in New York, New York,
seeking recovery of monies alleged to have been wrongfully taken by
individual Respondents and damages for fraud. Respondents asserted
counterclaims alleging that the Company engaged in certain business
practices that caused damage to Respondents. The matter was submitted to
mediation during the fourth quarter of fiscal 2004 and settled subsequent
to year end. The settlement provides, in pertinent part, for a payment (to
be made upon satisfaction of certain pre- closing conditions) from the
Company to the Respondents of $1,700,000 in consideration of which the
Company will acquire all of Respondents' ownership in the Venezuelan
companies and a release of any and all claims.
On September 17, 2004, Shintom Co. Ltd. commenced action against Audiovox
Corporation in the Chancery Court of the State of Delaware, New Castle
County, seeking recovery of the sum of $2,500,000 or the value of Audiovox
preferred stock determined as of April 16, 1987 (the date of the merger of
Audiovox Corp., a New York corporation, with Audiovox Corporation, a
Delaware corporation) which preferred stock was purchased by Shintom from
Audiovox in April 1981. In lieu of answering, the Company has moved to
dismiss the complaint. That motion is currently pending. The Company
believes that the lawsuit is baseless and it intends to vigorously defend
this matter. However, no assurance regarding the outcome of this matter can
be given at this point in the litigation.
During the second quarter of fiscal 2004, the Company, AEC and one of its
distributors of car security products, were named as defendants in a
lawsuit brought by Magnadyne Corporation in the United States District
Court, Central District of California alleging patent infringement and
seeking
101
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
damages and injunctive relief in an amount to be determined by the court.
The Company has answered the amended complaint, asserted various
affirmative defenses and interposed counterclaims alleging
non-infringement, invalidity and non-enforceability. The parties have
reached a settlement in principle which provides for a release of any
claims regarding issued patents as of the effective date and a standstill
period of one year with respect to any other claims.
The consolidated class actions transferred to a Multi-District Litigation
Panel of the United States District Court of the District of Maryland
against the Company and other suppliers, manufacturers and distributors of
hand-held wireless telephones alleging damages relating to exposure to
radio frequency radiation from hand-held wireless telephones is still
pending. On March 16, 2005, the United States Court of Appeals for the
Fourth Circuit reversed the District Court's order dismissing the
complaints on grounds of federal pre-emption. The Fourth Circuit remanded
the actions to each of their respective state courts, except for the Naquin
litigation which was remanded to the local Federal Court. Defendants intend
to file a petition for certiorari with the U.S. Supreme Court.
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. During the third quarter of 2004, the FCC confirmed that
plaintiffs' interpretation of the FCC's second order on emergency 911 call
processing capabilities was incorrect and as a result, plaintiffs have
filed a consolidated amended complaint in the United States District Court
for the Northern District of Illinois. Defendants have moved to dismiss the
consolidated amended complaint, but to date, the motion has not been heard.
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.
(18) Unaudited Quarterly Financial Data
Selected unaudited, quarterly financial data of the Company for the years
ended November 30, 2003 and 2004 appears below:
Quarter Ended
--------------------------------------------------------------
Feb. 28 May 31 Aug. 31 Nov. 30
--------- --------- --------- ---------
2003 (a)
Net sales $ 80,256 $ 111,902 $ 135,239 $ 190,295
Gross profit 13,650 16,231 22,723 33,625
Income (loss) from continuing operations (894) 899 2,283 5,704
Income (loss) from discontinued operations 2,102 1,175 (1,636) 1,606
--------- --------- --------- ---------
Net income $ 1,208 $ 2,074 $ 647 $ 7,310
========= ========= ========= =========
102
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
Quarter Ended
--------------------------------------------------------------
Feb. 28 May 31 Aug. 31 Nov. 30
--------- --------- --------- ---------
Income (loss) per common share (basic):
From continuing operations $ (0.04) $ 0.05 $ 0.11 $ 0.26
From discontinued operations 0.10 0.05 (0.08) 0.07
----------- ------------ ------------ -----------
Net income per common share (basic) $ 0.06 $ 0.10 $ 0.03 $ 0.33
============ ============ ============ ===========
Income (loss) per common share (diluted):
From continuing operations $ (0.04) $ 0.04 $ 0.10 $ 0.26
From discontinued operations 0.09 0.05 (0.07) 0.07
----------- ------------ ------------ -----------
Net income per common share (diluted) $ 0.05 $ 0.09 $ 0.03 $ 0.33
============ ============ ============ ===========
2004 (a)
Net sales $ 136,549 $ 148,019 $ 132,965 $ 149,544
Gross profit 21,325 21,584 23,218 23,964
Income (loss) from continuing operations 696 1,581 37 (2,305)
Income (loss) from discontinued operations 1,174 2,096 5,307 68,614
--------- --------- --------- ---------
Net income $ 1,870 $ 3,677 $ 5,344 $ 66,309
========= ========= ========= =========
Income (loss) per common share (basic):
From continuing operations $ 0.04 $ 0.07 $ 0.00 $ (0.10)
From discontinued operations 0.05 0.10 0.24 3.12
----------- ------------ ------------ -----------
Net income per common share (basic) $ 0.09 $ 0.17 $ 0.24 $ 3.02
============ ============ ============ ===========
Income (loss) per common share (diluted):
From continuing operations $ 0.03 $ 0.07 $ 0.00 $ (0.10)
From discontinued operations 0.05 0.09 0.24 3.12
----------- ------------ ------------ -----------
Net income per common share (diluted) $ 0.08 $ 0.16 $ 0.24 $ 3.02
============ ============ ============ ===========
(a) Amounts differ from previously filed quarterly reports. During the
quarter ended August 31, 2004, the Company began to reflect the
operations of its Cellular business in discontinued operations. See
additional detail in Note 2.
(19) Subsequent Events
On December 13, 2004, one of the Company's equity investment's, Bliss-tel
Public Company Limited ("Bliss-tel"), issued 230,000,000 shares on the SET
(Security Exchange of Thailand) for an offering price of 6.20 baht per
share. Prior to the issuance of these shares, the Company was a 20%
shareholder in Bliss-tel and subsequent to the offering the Company owns
30,000,000 shares (or approximately 13%) of Bliss-tel's outstanding stock.
As such, beginning in the quarter ended February 28, 2005, the Company will
account for the Bliss-tel investment in accordance with SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities".
On January 4, 2005, the Company's wholly-owned subsidiary, Audiovox
Electronics Corporation, signed an asset purchase agreement to purchase
certain assets of Terk Technologies Corp. for a
103
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
purchase price of $13,100, subject to a working capital adjustment, plus
contingent debentures based on achievement of future revenue targets.
On February 25, 2005, the Company entered into a plan to discontinue
ownership of the Company's majority owned subsidiary, Audiovox Malaysia
("AVM") and sell its ownership to the current minority interest
shareholder. The Company has planned to discontinue ownership of AVM due to
increased competition from non-local Original Equipment Manufacturers and
deteriorating credit quality of local customers. As a result of the
intended sale of AVM, beginning in the quarter ended February 28, 2005, the
Company will include the results of AVM within discontinued operations in
accordance with SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets".
104
Item 9-Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not Applicable
Item 9a-Controls and Procedures
Disclosure Controls and Procedures
Audiovox Corporation (the "Company") maintains disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits under the Securities and
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the SEC's rules and regulations, and that such information
is accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required financial disclosures.
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to the Securities and Exchange Act Rule 13a-15. Based upon
this evaluation as of November 30, 2004, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were not
effective for the reasons discussed below related to the weaknesses in our
internal control over financial reporting. To address the control weaknesses
described below, the Company performed additional analysis and performed other
procedures to ensure the consolidated financial statements are prepared in
accordance with generally accepted accounting principles. Accordingly,
management believes that the consolidated financial statements included in this
Annual Report on Form 10-K, fairly presents, in all material respects our
financial condition, results of operations and cash flows for the periods
presented.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
the Securities and Exchange Act Rules 13a-15(f) and 15d- 15(f). The Company's
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company;
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management
and directors of the Company; and
o Provide reasonable assurance regarding prevention and timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial statements.
105
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management evaluated the effectiveness of the Company's internal control over
financial reporting using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in internal control-Integrated
Framework. Under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
the Company conducted an evaluation of the effectiveness of its internal control
over financial reporting as of November 30, 2004. Based on that evaluation,
management concluded that the Company's internal control over financial
reporting was not effective as of November 30, 2004, because of the effect of
material weaknesses identified and more fully described below.
The Company divested its Wireless business and substantially all of the assets
and liabilities of Audiovox Communication Corporation ("ACC") on November 1,
2004. Accordingly, the Company excluded ACC from its assessment of internal
control over financial reporting, as it no longer represents a significant part
of the Company's internal control environment as of November 30, 2004. For the
year ended November 30, 2004, the operating results of ACC are classified as
discontinued operations in the Company's consolidated financial statements.
Subsequent to the divestiture of the Wireless business on November 1, 2004, ACC
had no significant operating results. ACC had total assets of approximately $17
million at November 30, 2004, which are classified as assets of the discontinued
operations. These assets, which represented trade accounts receivable, were
collected and converted to cash subsequent to November 30, 2004.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management's assessment identified the following material
weaknesses in the Company's internal control over financial reporting:
1. Deficiencies in the general controls over information technology security
and user access, including segregation of duties (automated controls to
ensure authorization, execution, monitoring and review by independent
individuals) and unrestricted access to data and business applications
existed. Accordingly, management concluded that these matters represent a
material weakness as controls over information security and access to data
and applications are necessary to have an effective control environment;
2. As a result of the divestiture of the Wireless business and the
classification of ACC as a discontinued operation, there was a lack of
appropriate review of significant transactions and the lack of documented
controls over the year-end financial closing process at ACC resulting in a
number of audit adjustments recorded by management prior to the issuance of
the financial statements. Accordingly, management concluded that this
matter represents a material weakness at November 30, 2004, even though ACC
will no longer be a significant component of the Company's control
environment or continuing operating activities as substantially all the
assets and liabilities of ACC have been sold on November 1, 2004;
3. A deficiency in the controls related to the Company's sales cut-off
procedures resulted in an audit adjustment recorded by management prior to
the issuance of the fiscal 2004 fourth quarter financial statements. The
impact of this audit adjustment resulted in a reduction of net sales and
accounts receivable of approximately $1,134 and a reduction to income from
continuing operations before income taxes of $64 ($37 on an after tax
basis) for the fiscal year ended November 30, 2004. This adjustment
occurred at one of the Company's public
106
warehouses on the last day of the fiscal fourth quarter. The Company
properly recorded this audit adjustment during fiscal 2004;
4. A deficiency in the lack of evidential documentation supporting the
approval of divisional journal entries and the existence of inadequate
segregation of duties as it relates to entering and approving corporate
journal entries existed. The divisional deficiency is a result of the
reconciliation of the manual journal entries to the Company's ERP system
not being signed as evidence of review by the individual performing the
review and the corporate deficiency relates to the reconciliation of the
manual journal entries to the Company's ERP system being performed by the
same individual who processes the journal entries into the system.
Accordingly, management concluded that this matter represents a material
weakness as controls over journal entries may materially impact all
significant accounts and business processes;
5. A deficiency in the design of the controls pertaining to the processing of
non-routine customer sales orders existed. These sales orders, which
represent 1% of consolidated net sales, require the expedited shipment of
the Company's merchandise to the customer. The specific control deficiency
identified relates to the lack of evidence supporting the approval of these
non- routine sales orders. Accordingly, management concluded that this
matter represents a material weakness as it may have a potential material
impact on net sales, accounts receivable and the Company's inventory
balances;
6. A deficiency in the lack of evidential documentation supporting the
oversight and monitoring activities of the financial statements and the
internal control environment of the Company's international subsidiary in
Germany existed. The Germany subsidiary, which was acquired in July 2003,
accounted for approximately 6% of the Company's total consolidated assets
and approximately 10% of consolidated net sales as of and for the year
ended November 30, 2004. The specific control deficiencies identified
relate to the lack of evidence documenting the review of significant
transactions, account analysis and accounting entries by the appropriate
personnel and the lack of evidence documenting the Company's oversight and
monitoring activities of its German operations even though the review
process was indeed performed. Accordingly, management concluded that these
matters represent a material weakness to the Company's overall control
environment.
The Company's testing procedures identified these deficiencies in its internal
control over financial reporting and; accordingly, these control deficiencies
have either been remediated or are in the process of being remediated subsequent
to November 30, 2004, and before the issuance of this report. The Company deems
it relevant to note that the findings outlined above were classified as material
weaknesses in accordance with the rules and regulations of the Securities and
Exchange Commission, as a more than remote possibility that a material
misstatement to the Company's interim or annual financial statements could
occur. However, substantially all the material control findings identified by
management did not cause a material misstatement or have an adverse impact to
the Company's financial position or results of operations as of and for the year
ended November 30, 2004. Refer to the specific remediation steps identified
below.
The Certifications of the Company's Chief Executive Officer and Chief Financial
Officer included as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K
includes, in paragraph 4 of such certifications, information concerning the
Company's disclosure controls and procedures and internal control over financial
reporting. Such certifications should be read in conjunction with the
information contained in this Item 9A Controls and Procedures, for a more
complete understanding of the matters covered by such certifications.
107
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of November 30, 2004, has been audited by Grant
Thornton LLP, an independent registered public accounting firm, as stated in
their report below.
Planned Remediation Efforts to Address Material Weaknesses
The Company developed remediation plans and initiated action steps designed to
address each of the material weaknesses in the internal control over financial
reporting identified above and to implement any and all corrective actions that
are required to improve the design and operating effectiveness of internal
control over financial reporting, including the enhancement of the Company's
policies, systems and procedures. The Company implemented the following measures
to remediate the numbered control deficiencies identified above:
1. Remediated the information technology security controls in connection with
user access conflicts and segregation of duties related to certain
applications and business processes to ensure there is appropriate
authorization, execution, monitoring and review by independent individuals
by implementing a turnover software package to manage the information
technology change management system and a security software solution to
manage the Company's user access security and restrict access to data and
applications;
2. The Company divested the Wireless business before year-end and ACC is no
longer a significant part of the Company's continuing operating activities.
Accordingly, all deficiencies automatically remediate themselves as the
risks associated with the related control deficiencies no longer exist
subsequent to November 30, 2004;
3. Reviewed the financial controls and policies for the Company's sales
cut-off procedures and enhanced the controls and procedures in place by
creating a computer generated report that matches sales order date to proof
of delivery date for all sales orders that are at or near the financial
statement closing date. In addition, for all international sales orders
shipped direct to customers, the Company enhanced its procedures as it will
perform a two week sales cut-off review by comparing shipping documents to
the underlying billing documents;
4. Enhanced the design of the monthly control at corporate relating to the
reconciliation of the manual journal entries to the Company's ERP system by
segregating the duties of the individual processing the manual journal
entries with the individual performing the reconciliation and to ensure the
individual performing this review procedure at the operating division is
compliant with the evidential documentation requirements supporting their
review.
5. Enhanced the design of the controls relating to the Company's non-routine
customer sales order process by requiring the warehouse personnel to check
and verify that there is evidence of an authorized signature from the
financial department (from the authorized signature sheet) before the
non-routine sales order is shipped to the customer;
6. Increase the review and adherence to the Company's policies and procedures
in connection with the fiscal 2005 monitoring activities of Section 404 of
the Sarbanes-Oxley Act of 2002 and to ensure that process owners are
compliant with the evidential documentation requirements and the rules and
regulations of the Securities and Exchange Commission that require the
appropriate evidence of review and approval of significant transactions,
account analysis and related accounting entries by implementing a
documentation and review process. In addition, management will frequently
(during the fiscal 2005 second, third and fourth quarters) measure against
the results of its fiscal 2004 remediation plans by significant business
process to ensure compliance by the Company's process
108
owners with their documented remediation plans.
The Company believes that the above measures have addressed all matters
identified as a material weakness by management and the independent registered
public accounting firm. The Company will continue to monitor the effectiveness
of its internal controls and procedures on an ongoing basis and will take
further actions, as appropriate.
Changes in Internal Control Over Financial Reporting
Except as otherwise discussed herein, there have been no significant changes in
the Company's internal control over financial reporting during the most recently
completed fiscal quarter that has materially affected, or is reasonable likely
to materially affect, the Company's internal control over financial reporting.
However, the Company made changes to the design and operation of internal
control over financial reporting during the fourth quarter in order to increase
the design and operating effectiveness of internal controls in connection with
implementing Section 404 of the Sarbanes-Oxley Act of 2002. In addition, the
Company is currently implementing enhancements to the Company's internal control
over financial reporting to address the material weaknesses described above.
109
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Audiovox Corporation
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Audiovox
Corporation and subsidiaries (the "Company") did not maintain effective internal
control over financial reporting as of November 30, 2004, because of the effect
of the material weaknesses described below, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and disposition of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment.
1. Deficiencies existed in the general controls over information
technology security and user access, including segregation of duties
(automated controls to ensure authorization, execution, monitoring
110
and review by independent individuals) and unrestricted access to data
and business applications. Accordingly, management concluded that
these matters represent a material weakness as controls over
information security and access to data and applications are necessary
to have an effective control environment;
2. As a result of the divestiture of the Wireless business and the
classification of ACC as a discontinued operation, there was a lack of
appropriate review of significant transactions and the lack of
documented controls over the year-end financial closing process at ACC
resulting in a number of audit adjustments recorded by management
prior to the issuance of the financial statements. Accordingly,
management concluded that this matter represents a material weakness
at November 30, 2004, even though ACC will no longer be a significant
component of the Company's control environment or continuing operating
activities as substantially all the assets and liabilities of ACC have
been sold on November 1, 2004;
3. A deficiency in the controls related to the Company's sales cut-off
procedures resulted in an audit adjustment recorded by management
prior to the issuance of the fiscal 2004 fourth quarter financial
statements. The impact of this audit adjustment resulted in a
reduction of net sales and accounts receivable of approximately $1,134
and a reduction to income from continuing operations before income
taxes of $64 ($37 on an after tax basis) for the fiscal year ended
November 30, 2004. This adjustment occurred at one of the Company's
public warehouses on the last day of the fiscal fourth quarter. The
Company properly recorded this audit adjustment during fiscal 2004;
4. A deficiency in the lack of evidential documentation supporting the
approval of divisional journal entries and the inadequate segregation
of duties as it relates to entering and approving corporate journal
entries existed. The divisional deficiency is a result of the
reconciliation of the manual journal entries to the Company's ERP
system not being signed as evidence of review by the individual
performing the review and the corporate deficiency relates to the
reconciliation of the manual journal entries to the Company's ERP
system being performed by the same individual who processes the
journal entries into the system. Accordingly, management concluded
that this matter represents a material weakness as controls over
journal entries may materially impact all significant accounts and
business processes;
5. A deficiency in the design of the controls pertaining to the
processing of non-routine customer sales orders existed. These sales
orders, which represent 1% of consolidated net sales, require the
expedited shipment of the Company's merchandise to the customer. The
specific control deficiency identified relates to the lack of evidence
supporting the approval of these non-routine sales orders.
Accordingly, management concluded that this matter represents a
material weakness as it may have a potential material impact on net
sales, accounts receivable and the Company's inventory balances;
6. A deficiency in the lack of evidential documentation supporting the
oversight and monitoring activities of the financial statements and
the internal control environment of the Company's international
subsidiary in Germany existed. The Germany subsidiary, which was
acquired in July 2003, accounted for approximately 6% of the Company's
total consolidated assets and approximately 10% of consolidated net
sales as of and for the year ended November 30, 2004. The specific
control deficiencies identified relate to the lack of evidence
documenting the review of significant transactions, account analysis
and accounting entries by the appropriate personnel and the lack of
evidence documenting the Company's oversight and monitoring activities
of its German operations even though the review process was indeed
performed. Accordingly, management concluded that these matters
represent a material weakness to the Company's overall control
environment.
111
These material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the fiscal 2004 consolidated
financial statements, and this report does not affect our report dated March 25,
2005 on those financial statements.
In our opinion, management's assessment that Audiovox Corporation and
subsidiaries did not maintain effective internal control over financial
reporting as of November 30, 2004, is fairly stated, in all material respects,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
Also, in our opinion, because of the effect of the material weaknesses described
above on the achievement of the objectives of the control criteria, Audiovox
Corporation and subsidiaries has not maintained effective internal control over
financial reporting as of November 30, 2004, based on criteria established in
Internal Control-Integrated Framework issued by COSO.
/s/Grant Thornton LLP
GRANT THORNTON LLP
Melville, New York
March 25, 2005
112
Item 9b - Other Information
Not Applicable
PART III
The information required by Item 10 (Directors and Executive Officers of
the Registrant, Item 11 (Executive Compensation), Item 12 (Security Ownership of
Certain Beneficial Owners and Management), Item 13 (Certain Relationships and
Related Transactions) and Item 14 (Principal Accountant Fees and Services) of
Form 10-K, and not already provided herein under "Item 1. Business - Directors
and Executive Officers of the Registrant," is included in our Proxy Statement
for the 2005 Annual meeting of Stockholders, which was filed on March 30, 2005,
and such information is incorporated herein by reference.
PART IV
Item 15-Exhibits, Financial Statement Schedules
a. Financial Statements. See Index to Consolidated Financial Statements
attached hereto.
b. Financial Statement Schedule. See Index to Consolidated Financial
Statements attached hereto.
c. Reports on Form 8-K. The Company filed four (4) reports on Form 8-K during
the fourth quarter ended November 30, 2004.
d. Exhibits. The following is a list of 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 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).
113
Exhibit
Number Description
10.2 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 First Amended and Restated Stock and Asset Purchase Agree-
ment, 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).
10.9 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).
10.10 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).
10.11 Asset Purchase Agreement, dated as of June 11, 2004, by and
among Audiovox Communications Corp., Quintex Mobile
Communications Corporation, Audiovox Communications Canada
Co., UTStarcom, Inc., UTStarcom Canada Company and, with
respect to Sections 2.05, 2.07, 2.09, 3.01, 3.02, 3.11(b),
3.30, 5.06, 5.08, 5.19, 5.20, 5.21, 5.22, 5.24 and Articles
VII - X only, Audiovox Corporation (incorporated by reference
to the Company's Form 8-K filed via EDGAR June 14, 2004).
114
Exhibit
Number Description
10.12 Voting Agreement and Irrevocable Proxy by and between
UTStarcom, Inc. and John J. Shalam (incorporated by
reference to the Company's Form 8-K filed via EDGAR June 14,
2004).
10.13 Personally Held Intangibles Purchase Agreement made and
entered into as of June 10, 2004 by and between Audiovox
Communications Corp. and Philip Christopher (incorporated by
reference to the Company's Form 8-K filed via EDGAR June 14,
2004).
10.14 Agreement and General Release made and entered into as of
June 10, 2004 among Audiovox Communications Corp., Audiovox
Corporation and Philip Christopher (incorporated by reference
to the Company's Form 8-K filed via EDGAR June 14, 2004).
10.15 Stock Purchase Agreement made and entered into as of June 10,
2004 by and among Toshiba Corporation, Audiovox
Communications Corp. and Audiovox Corporation (incorporated
by reference to the Company's Form 8-K filed via EDGAR June
14, 2004).
10.16 Agreement for Purchase of 7.5 Shares dated as of June 8, 2004
by and between Audiovox Corporation and Toshiba Corporation
(incorporated by reference to the Company's Form 8-K filed
via EDGAR June 14, 2004).
10.17 Form of Escrow Agreement (incorporated by reference to the
Company's Form 8-K filed via EDGAR August 10, 2004).
10.18 Form of Transition Services Agreement (incorporated by
reference to the Company's Form 8-K filed via EDGAR August
10, 2004).
10.19 Form of Trademark License Agreement (incorporated by
reference to the Company's Form 8-K filed via EDGAR August
10, 2004).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of Grant Thornton 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
Sarbanes-Oxley Act of 2002 (filed herewith).
115
Exhibit
Number Description
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
Sarbanes-Oxley Act of 2002 (filed herewith).
99.1 Consolidated Financial Report of Audiovox Specialized
Applications LLC (ASA) as of November 30, 2004 and 2003 and
for the Years Ended November 30, 2004, 2003 and 2002 (filed
herewith).
99.2 Consent of McGladrey & Pullen, LLP (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.
116
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
March 31, 2005 BY: /s/John J. Shalam
--------------------------------------
John J. Shalam, President
and Chief Executive Officer
117
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) and March 31, 2005
- -------------------------
John J. Shalam Director
Senior Vice President,
/s/ Charles M. Stoehr Chief Financial Officer (Principal March 31, 2005
- --------------------------
Charles M. Stoehr Financial and Accounting Officer) and
Director
/s/ Patrick M. Lavelle Director March 31, 2005
- -----------------------
Patrick M. Lavelle
/s/ Ann Boutcher Director March 31, 2005
- ----------------
Ann Boutcher
/s/ Richard A. Maddia Director March 31, 2005
- ----------------------
Richard A. Maddia
/s/ Philip Christopher Director March 31, 2005
- ----------------------
Philip Christopher
/s/ Paul C. Kreuch, Jr. Director March 31, 2005
- ------------------------
Paul C. Kreuch, Jr.
/s/ Dennis McManus Director March 31, 2005
- ------------------
Dennis McManus
/s/ Irving Halevy Director March 31, 2005
- -----------------
Irving Halevy
/s/ Peter A. Lesser Director March 31, 2005
- --------------------
Peter A. Lesser
118
SCHEDULE II
AUDIOVOX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended November 30, 2002, 2003 and 2004
(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 (b) Of Year
---------- ----------- ----------- ------------- ----------
2002 (a)
Allowance for doubtful accounts $ 2,232 $ 1,402 -- $ 441 $ 3,193
Accrued sales incentives 3,265 7,665 $ (1,500) 4,804 4,626
Reserve for warranties and product
repair costs 7,149 5,500 -- 1,340 11,309
-------- -------- -------- -------- --------
$ 12,646 $ 14,567 $ (1,500) $ 6,585 $ 19,128
======== ======== ======== ======== ========
2003 (a)
Allowance for doubtful accounts $ 3,193 $ 577 -- $ (1,788) $ 5,558
Cash discount allowances -- 1,245 -- 568 677
Accrued sales incentives 4,626 19,994 $ (1,803) 8,212 14,605
Reserve for warranties and product
repair costs 11,309 9,691 -- 6,305 14,695
-------- -------- -------- -------- ========
$ 19,128 $ 31,507 $ (1,803) $ 13,297 $ 35,535
======== ======== ======== ======== ========
2004 (a)
Allowance for doubtful accounts $ 5,558 $ 141 -- $ (572) $ 6,271
Cash discount allowances 677 2,562 -- 2,736 503
Accrued sales incentives 14,605 17,012 $ (3,889) 20,144 7,584
Reserve for warranties and product
repair costs 14,695 3,257 -- 6,158 11,794
-------- -------- -------- -------- --------
$ 35,535 $ 22,972 $ (3,889) $ 28,466 $ 26,152
======== ======== ======== ======== ========
(a) The Valuation and Qualification Accounts of the Company's former Cellular
Group are not included in the above amounts as the Company completed its
divestiture of the Cellular business on November 1, 2004. See Note 2 of
Notes to Consolidated Financial Statements.
(b) For the allowance for doubtful accounts, cash discount allowances and
accrued sales incentives, deductions represent currency effects,
chargebacks and payments made or credits issued to customers. For the
reserve for warranties and product repair costs, deductions represent
currency effects and payments for labor and parts made to service centers
and vendors for the repair of units returned under warranty.
119
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 German Holdings GmbH Germany
Code Systems, Inc. Delaware
Exhibit 21
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated March 25, 2005 accompanying the consolidated
financial statements and schedule, and management's assessment of the
effectiveness of internal control over financial reporting included in the
Annual Report of Audiovox Corporation and subsidiaries on Form 10-K for the year
ended November 30, 2004. We hereby consent to the incorporation by reference of
said reports in the Registration Statements of Audiovox Corporation on Forms S-8
(File No. 333-36762, effective May 11, 2000 and File No. 333-82073, effective
July 1, 1999).
GRANT THORNTON LLP
/s/ Grant Thornton LLP
Melville, New York
March 25, 2005
Exhibit 23
CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
I, John J. Shalam, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Audiovox Corporation
(the "Company");
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 this report;
4. The registrant's other certifying officer 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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), 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) Designed such internal controls over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) 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
d) 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 materiality affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
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, weather or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date:March 31, 2005 By: /s/ John J. Shalam
John J. Shalam
President and Chief Executive Officer
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
I, Charles M. Stoehr, Senior Vice President and Chief Financial Officer of
Audiovox Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Audiovox Corporation
(the "Company");
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 this report;
4. The registrant's other certifying officer 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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), 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) Designed such internal controls over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) 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
d) 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 materiality affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
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, weather or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 31, 2005 By:/s/ Charles M. Stoehr
---------------------------------------
Charles M. Stoehr
Senior Vice President and
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 of Audiovox Corporation (the
"Company") on Form 10-K for the period ended November 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, John J.
Shalam, the President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; 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
March 31, 2005
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 of Audiovox Corporation (the
"Company") on Form 10-K for the period ended November 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Charles
M. Stoehr, Senior Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes- Oxley Act of 2002, that:
1. The Report fully complies with Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; 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
Senior Vice President
and Chief Financial Officer
March 31, 2005
Exhibit 32.2
Audiovox Specialized Applications, LLC
And Subsidiary
Consolidated Financial Report
11.30.04
Exhibit 99.1
Contents
- ------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm
On The Financial Statements 1
- ------------------------------------------------------------------------------
Consolidated Financial Statements
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of members' equity 4
Consolidated statements of cash flows 5
Notes to financial statements 6-14
Exhibit 99.1
Report of Independent Registered Public Accounting Firm
To the Members
Audiovox Specialized Applications, LLC and Subsidiary
Elkhart, Indiana
We have audited the accompanying consolidated balance sheets of Audiovox
Specialized Applications, LLC and Subsidiary as of November 30, 2004 and 2003,
and the related consolidated statements of income, members' equity, and cash
flows for each of the three years in the period ended November 30, 2004. 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 audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 Specialized
Applications, LLC and Subsidiary as of November 30, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended November 30, 2004, in conformity with U.S. generally accepted
accounting principles.
McGladrey and Pullen, LLP
Elkhart, Indiana
December 23, 2004
Exhibit 99.1
Audiovox Specialized Applications, LLC and Subsidiary
Consolidated Balance Sheets
November 30, 2004 and 2004
2004 2003
- ---------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,679,380 $ 2,815,599
Available-for-sale securities 5,435,000 2,013,779
Trade receivables 4,806,642 5,391,051
Note receivable -- 1,000,000
Inventories 9,947,792 11,199,956
Prepaid expenses 139,532 97,952
----------- -----------
Total current assets 22,008,346 22,518,337
Leasehold Improvements and Equipment, at depreciated cost 1,777,430 1,499,544
Intangible Assets, trademark rights 2,647,623 3,003,883
Goodwill -- 300,000
----------- -----------
$26,433,399 $27,321,764
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities
Accounts payable $ 1,576,263 $ 1,855,325
Accrued expenses:
Payroll and related taxes 867,273 587,976
Warranty 2,182,000 2,016,000
Other 84,452 180,869
----------- -----------
Total current liabilities 4,709,988 4,640,170
Commitments and Contingencies
Members' equity 21,723,411 22,681,594
----------- -----------
$26,433,399 $27,321,764
=========== ===========
See Notes to Financial Statements.
Exhibit 99.1
2
Audiovox Specialized Applications, LLC and Subsidiary
Consolidated Statements of Income
Years Ended November 30, 2004, 2003 and 2002
2004 2003 2002
- ----------------------------------------------------------------------------
Net sales $ 56,988,388 $ 47,818,026 $ 47,307,819
Cost of goods sold 42,448,470 36,632,732 38,648,272
------------ ------------ ------------
8,659,547
Gross profit 14,539,918 11,185,294
Selling, general and
administrative expenses 7,283,290 5,431,752 5,303,729
------------ ------------ ------------
Operating income 7,256,628 5,753,542 3,355,818
------------ ------------ ------------
Non operating income (expense):
Investment income 48,612 142,588 130,370
Interest expense (1,275) (752) (288)
------------ ------------ ------------
47,337 141,836 130,082
------------ ------------ ------------
Net income $ 7,303,965 $ 5,895,378 $ 3,485,900
============ ============ ============
See Notes to Financial Statements.
Exhibit 99.1
3
Audiovox Specialized Applications, LLC and Subsidiary
Consolidated Statements of Members' Equity
Years Ended November 30, 2004, 2003 and 2002
2004 2003 2002
- ----------------------------------------------------------------------------------
Balance, beginning $ 22,681,594 $ 19,418,012 $ 17,825,796
Net income 7,303,965 5,895,378 3,485,900
Member distributions (8,262,148) (2,631,796) (1,893,684)
------------ ------------ ------------
Balance, ending $ 21,723,411 $ 22,681,594 $ 19,418,012
============ ============ ============
See Notes to Financial Statements.
Exhibit 99.1
4
Audiovox Specialized Applications, LLC and Subsidiary
Consolidated Statements of Cash Flows
Years Ended November 30, 2004, 2003 and 2002
2004 2003 2002
- --------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 7,303,965 $ 5,895,378 $ 3,485,900
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 582,523 991,001 883,921
Loss of disposition of equipment 227,471 13,366 245,702
Impairment loss on goodwill 300,000 -- --
Change in assets and liabilities, net of effects
of acquisitions noted below:
Decrease (increase) in:
Trade receivables 884,592 107,818 36,258
Inventories 1,318,763 553,025 1,499,521
Prepaid expenses (41,580) 31,918 20,487
Increase (decrease) in:
Accounts payable (279,063) 622,530 202,457
Accrued expenses 338,359 363,301 451,127
------------ ------------ ------------
Net cash provided by operating
activities 10,635,030 8,578,337 6,825,373
------------ ------------ ------------
Cash Flows From Investing Activities
Proceeds on sale of equipment 59,257 62,520 42,112
Purchase of leasehold improvements and
equipment (1,147,137) (534,256) (447,237)
Proceeds (disbursements) on note receivable 1,000,000 -- (1,000,000)
Proceeds from sale of available-for-sale
securities 2,013,779 7,446,218 965,000
Purchase of available-for-sale securities (5,435,000) (9,459,997) --
Purchase of Datron Corporation assets -- -- (3,000,000)
Purchase of assets from related party -- (3,600,000) --
------------ ------------ ------------
Net cash (used in) investing activities (3,509,101) (6,085,515) (3,440,125)
------------ ------------ ------------
Cash Flows From Financing Activities
Member distributions (8,262,148) (2,631,796) (1,893,684)
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents (1,136,219) (138,974) 1,491,564
Cash and cash equivalents, beginning 2,815,599 2,954,573 1,463,009
------------ ------------ ------------
Cash and cash equivalents, ending $ 1,679,380 $ 2,815,599 $ 2,954,573
============ ============ ============
See Notes to Financial Statements.
Exhibit 99.1
5
Audiovox Specialized Applications, LLC and Subsidiary
Notes to Financial Statements
Note 1. Nature of Business, Use of Estimates, and Significant Accounting
Policies
Nature of business:
Audiovox Specialized Applications ("ASA") "The Mobile Electronics Company" is an
international supplier of mobile electronics for the Automotive Industry
including: Recreational Vehicle, Van/SUV Conversion, Commercial Vehicle, Heavy
Duty Truck, Agricultural, Construction, Bus, Limousine, and Marine industries.
Its proprietary line of products include: Flexvision LCD Entertainment Systems,
including DVD and video cassette players; Voyager Rear Observation and Bus
Monitor/PA Systems and radios; Nextgen Modular Chassis Systems; Aquatronics
Marine Radios, Speakers, and Housings; Jensen Marine Radios and other
Audio/Video Products; Heavy Duty Systems, Radios and other Audio Products; and
CruiseTV satellite television systems. These products are sold to customers
throughout the world, generally on 30-day terms. ASA is headquartered in
Elkhart, Indiana and has public distribution centers in Texas and California.
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 and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant accounting policies:
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 F.O.B. Shipping Point or F.O.B.
Destination, based upon terms established with the customer. The Company's price
is fixed and determined at the time of shipment and collectability is reasonably
assured and not contingent upon the customer's resale of the product. The
customers are generally not given rights of return nor are sales incentives
provided. In the event customers are granted rights of return, the Company
records an allowance for future returns. At November 30, 2004 and 2003, no such
allowance was deemed necessary. The product sale is not subject to acceptance or
installation by Company or customer personnel.
The Company recognizes royalty revenue at the time the related product is sold
to a third party by Audiovox Corporation ("Audiovox"), a member of ASA, under
the terms of the related royalty agreement. Total royalty revenue under this
agreement for the years ended November 30, 2004, 2003, and 2002 was
approximately $2,103,000, $3,253,000, and $3,140,000 respectively.
Members' equity:
In accordance with the generally accepted method of presenting limited liability
company financial statements, the accompanying financial statements do not
include other corporate assets and liabilities of the members, including their
Exhibit 99.1
6
Audiovox Specialized Applications, LLC And Subsidiary
Notes To Financial Statements
obligation for income taxes on the net income of the limited liability company
nor any provision for income tax expense.
It is the Company's intent to distribute funds to members to cover their income
tax liabilities. No provision has been made for any material distributions which
may be made subsequent to the balance sheet date.
The LLC operating agreement does not provide for separate classes of ownership.
Audiovox and ASA Electronics Corporation share equally in all LLC events and the
related member accounts are considered equal on a fair value basis.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
CruiseTV, LLC ("CruiseTV") a wholly-owned subsidiary. All significant
intercompany accounts have been eliminated in consolidation.
Cash and cash equivalents:
The Company maintains its cash accounts in amounts which, at times, may be in
excess of insurance limits provided by the Federal Deposit Insurance
Corporation.
For purposes of the statement of cash flows, the Company considers investments
in various repurchase agreements with its bank, money market accounts and highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Available-for-sale securities:
Available-for-sale securities consist of investments in marketable debt and
equity securities. Debt securities consist primarily of obligations of
municipalities. Equity securities consist of mutual funds that are traded or
listed on national exchanges.
The Company accounts for these investments in accordance with FASB Statement No.
115. Management determines the appropriate classification of securities at the
date individual investment securities are acquired and the appropriateness of
such classification is reassessed at each balance sheet date. Since the Company
neither buys investment securities in anticipation of short-term fluctuation in
market prices nor commits to holding debt securities to their maturities, the
investments in debt and equity securities have been classified as
available-for-sale in accordance with Statement No. 115. Available-for-sale
securities are stated at fair value, and unrealized holding gains and losses, if
any, are reported as a separate component of members' equity.
Trade receivables:
Trade receivables are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Trade eceivables in the accompanying balance sheets at
Exhibit 99.1
7
Audiovox Specialized Applications, LLC And Subsidiary
Notes To Financial Statements
November 30, 2004 and 2003 are stated net of an allowance for doubtful accounts
of approximately $100,000 and $411,000 respectively. Management determines the
allowance for doubtful accounts by identifying troubled accounts and by using
historical experience applied to an aging of accounts. Trade receivables are
written off when deemed uncollectible. Recoveries of trade receivables
previously written off are recorded when received.
Inventories:
Inventories consist principally of finished goods and are stated at the lower of
cost (primarily on a weighted moving average basis) or market.
Depreciation:
Depreciation of leasehold improvements and equipment is computed principally by
the straight-line method over the following estimated useful lives:
Years
Leasehold improvements 5
Machinery and equipment 5-10
Toolding and molding 3
Transportation equipment 5
Office furniture and fixtures 10
Computer equipment 3-5
Booth displays 7
Warranties:
The Company provides a limited warranty primarily for a period of up to three
years for its products. The Company's standard warranties require the Company,
the original equipment manufacturer or its dealers to repair or replace
defective products during such warranty periods at no cost to the consumer. The
Company estimates the costs that may be incurred under its basic limited
warranty and records a liability in the amount of such costs at the time product
revenue is recognized. Factors that affect the Company's warranty liability
include the number of units sold, historical and anticipated rates of warranty
claims, and cost per claim. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary. The
Company utilizes historical trends and analytical tools to assist in determining
the appropriate loss reserve levels.
Changes in the Company's warranty liability during the years ended November 30,
2004, 2003, and 2002 are as follows:
2004 2003 2002
----------------------------------------------
Balance, beginning $ 2,016 000 $ 1,605,000 $ 1,098,000
Accruals for products sold 2,016,430 1,888,292 2,508,245
Payments made (1,850,430) (1,477,292) (2,001,245)
----------- ----------- -----------
Balance, ending $ 2,182,000 $ 2,016,000 $ 1,605,000
=========== =========== ===========
Exhibit 99.1
8
Audiovox Specialized Applications, LLC And Subsidiary
Notes To Financial Statements
Income taxes:
The members have elected to be taxed for federal and state income tax purposes
as a limited liability company under the provisions of the respective income tax
codes. Under these provisions, the members report net income of the Company on
their corporate income tax returns.
Long-lived assets, goodwill and other intangible assets:
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard ("SFAS") No. 141, Business Combinations, and
SFAS No. 142. 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.
Statement of Financial Accounting Standard ("SFAS") No. 142, Goodwill and Other
Intangible Assets, 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.
As a result of adopting the provisions of SFAS No. 142, the Company did not
record amortization expense relating to its goodwill or its trademark rights.
For intangible assets with indefinite lives, including goodwill, the Company
performed its annual impairment test, which resulted in a $300,000 impairment
adjustment during the year ended November 30, 2004 (See Note 8).
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company reviews its long-lived assets periodically to
determine potential impairment by comparing the carrying value of the long-lived
assets with the estimated future net undiscounted cash flows expected to result
from the use of the assets, including cash flows from disposition. Should the
sum of the expected future net cash flows be less that the carrying value, the
Company would recognize an impairment loss at that date. An impairment loss
would be measured by comparing the amount by which the carrying value exceeds
the fair value of the long-lived assets. The Company performed its annual
impairment test, which indicated no reduction is required.
Exhibit 99.1
9
Audiovox Specialized Applications, LLC And Subsidiary
Notes To Financial Statements
Note 2. Available-For-Sale Securities
The following is a summary of the Company's investment securities as of November
30, 2004 and 2003:
2004
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
Government bonds $ 5,435,000 $ - $ - $ 5,435,000
=========== ========== ========== ===========
2003
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------
Equity securities $ 1,378,779 $ - $ - $ 1,378,779
Corporate bonds 635,000 - - 635,000
------------- ------------ ----------- -------------
$ 2,013,779 $ - $ - $ 2,013,779
============= ============ =========== =============
The amortized cost and fair value of debt securities by contractual maturities
as of November 30, 2004 are as follows:
Amortized Fair
Cost Value
----------------------------------
Due after three years $ 5,435,000 $ 5,435,000
================= ==============
Expected maturities may differ from contractual maturities because the issuers
of certain debt securities have the right to prepay their obligations without
penalty.
A summary of proceeds from the sale of available-for-sale securities and
investment earnings for the years ended November 30, 2004, 2003, and 2002 is as
follows:
2004 2003 2002
---------------------------------------------
Proceeds from the sale of available-for-sale securities $ 2,013,779 $ 7,446,218 $ 965,000
============= ============= =============
Realized (losses) on sale of marketable securities $ (2,056) $ (24,226) $ -
Interest earned 50,668 123,639 130,370
Dividends - 43,175 -
------------- ------------- -------------
$ 48,612 $ 142,588 $ 130,370
============= ============= =============
Exhibit 99.1
10
Audiovox Specialized Applications, LLC And Subsidiary
Notes To Financial Statements
Note 3. Leasehold Improvements and Equipment
The cost of leasehold improvements and equipment and the related accumulated
depreciation at November 30, 2004 and 2003 are as follows:
2004 2003
----------------------------------
Leasehold improvements $ 587,833 $ 854,694
Machinery and equipment 898,251 925,890
Tooling and molding 755,984 1,827,151
Transportation equipment 361,550 410,958
Office furniture and fixtures 259,745 209,560
Computer equipment 574,313 701,817
Booth displays 124,224 197,595
Construction in progress 12,750 5,500
------------- -------------
3,574,650 5,133,165
Less accumulated depreciation 1,797,220 3,633,621
------------- -------------
$ 1,777,430 $ 1,499,544
============= =============
Note 4. Pledged Assets and Notes Payable
The terms of a loan agreement with a bank permit the Company to borrow a maximum
of $17,000,000, subject to a borrowing base determined by eligible accounts
receivable and inventories as defined by the agreement. At November 30, 2004 no
amount was outstanding under this agreement. Borrowings under the agreement bear
interest at prime minus 1.25% or LIBOR plus an applicable margin, at the
Company's option, are collateralized by accounts receivable, inventories, and
equipment, and are due on demand. In connection with the agreement, the Company
is subject to certain financial covenants.
Note 5. Major Vendors
For the years ended November 30, 2004, 2003, and 2002, the Company purchased
approximately 60%, 60%, and 50% of its products for resale from five vendors,
four of which were the same in all three years.
Note 6. Transactions with Related Parties and Lease Commitments
The Company is affiliated with various entities through common ownership by one
of its members, Audiovox. Transactions with Audiovox for the years ended
November 30, 2004, 2003, and 2002 are approximately as follows:
2004 2003 2002
----------------------------------------------
Net product sales $ 213,000 $ 519,000 $ 1,898,000
Royalty revenue 2,103,000 3,253,000 3,140,000
Purchases 1,302,000 2,886,000 1,916,000
The Company has a royalty agreement with Audiovox whereby the Company earns a 3%
royalty on the member's purchases of certain mobile video product from a third
party. The related revenue has been included in net sales on the income
statement.
Exhibit 99.1
11
Audiovox Specialized Applications, LLC And Subsidiary
Notes To Financial Statements
At November 30, 2004 and 2003, amounts included in trade receivables and
accounts payable resulting from the above transactions are as follows:
2004 2003
-------------------------------
Trade receivables $ 134,721 $ 679,205
Accounts payable 239,874 238,180
On August 13, 2003, the Company acquired certain assets from Audiovox. The
aggregate purchase price was $3,600,000, of which approximately $596,000 and
$3,004,000 were allocated to working capital and trademark rights respectively.
In May 2004, the Company completed its final allocation of the aggregate
purchase price and increased working capital by approximately $356,000 with a
corresponding decrease to the trademark rights. Audiovox has sublicensed its
rights in relation to the trademark to the Company and cannot terminate these
rights under the terms of the acquisition agreement. The Company has accounted
for the trademark rights as an indefinite lived intangible asset which is
subject to the provision of SFAS 142 as described in Note 1.
The Company leases warehouse, manufacturing, and office facilities from Irions
Investments, LLC, an entity related through common ownership, for approximately
$43,200 per month, plus the payment of property taxes, normal maintenance, and
insurance on the property under an agreement which expires September 2009, with
one five-year option to extend, at the Company's discretion. Monthly lease
payments are reduced by approximately $6,000 at the earlier of March 2007 or
when certain buildings, as defined by the lease agreement, included in the lease
are sold by Irions Investments, LLC.
The Company leases certain equipment from unrelated parties under agreements
that require monthly payments totaling approximately $4,500 and expire through
July 2006.
The total rental expense included in the income statements for the years ended
November 30, 2004, 2003, and 2002 is approximately $505,000, $476,000, and
$450,000, respectively, of which approximately $368,000, $336,000, and $328,000
respectively was paid to Irions Investments, LLC.
The total approximate minimum rental commitment at November 30, 2004 under the
leases is due as follows:
Related Party Other Total
--------------------------------------------
During the year ending November 30,
2005 $ 519,000 $ 54,000 $ 573,000
2006 519,000 8,000 527,000
2007 471,000 - 471,000
2008 446,000 - 446,000
Thereafter 335,000 - 335,000
------------ --------- ------------
$ 2,290,000 $ 62,000 $ 2,352,000
============ ========= ============
Exhibit 99.1
12
Audiovox Specialized Applications, LLC And Subsidiary
Notes To Financial Statements
Note 7. Employee Benefit Plans
The Company has profit-sharing and 401(k) plans for the benefit of all eligible
employees. The Company's contributions are discretionary with the Board of
Directors and are limited to amounts deductible for federal income tax purposes.
Discretionary contributions were approximately $270,000, $97,000, and $88,000
for the years ended November 30, 2004, 2003, and 2002 respectively.
The Company also maintains a discretionary employee bonus plan for the benefit
of its key executive and operating officers. The Company has paid or accrued
bonuses of approximately $1,163,000, $709,000, and $695,000 during the years
ended November 30, 2004, 2003, and 2002 respectively.
The Company has a health plan for its employees, which is self-insured for
medical and pharmaceutical claims up to $35,000 per participant and
approximately $518,000 annually in aggregate. Dental and vision coverage is
entirely self-insured. The excess loss portion of the employees' coverage has
been reinsured with a commercial carrier. The total amount of net claims and
insurance premiums for the years ended November 30, 2004, 2003, and 2002 was
approximately $458,000, $408,000, and $402,000 respectively.
Note 8. Business Combination
On March 8, 2002, CruiseTV acquired substantially all of the assets of Datron
Corporation. Datron Corporation was a manufacturer of mobile satellite
television systems for distribution generally in the United States. The
aggregate purchase price was $3,000,000 including $1,500,000 in cash, $1,244,000
in the form of a six-month promissory note, and a deferred payment of $256,000.
The deferred payment is contingent upon the satisfaction of certain warranty
claims in excess of a threshold agreed to in the purchase agreement. The full
amount of the deferred payment was released back to CruiseTV during the year
ended November 30, 2003.
The acquisition has been accounted for as a purchase and the results of
operations since the date of acquisition are included in the financial
statements. The acquisition resulted in goodwill of $300,000, all of which is
amortizable for tax purposes. The goodwill is subject to the provision of SFAS
142 as described in Note 1.
The Company determined that goodwill was impaired due to certain advances in
technology during the year ended November 30, 2004 and the balance of $300,000
was recorded as a charge against net income to selling, general and
administrative expenses.
Unaudited proforma consolidated results of operations for the year ended
November 30, 2002 as though the assets of Datron Corporation had been acquired
as of December 1, 2001 is approximately as follows:
Net sales $ 47,987,000
==================
Net income $ 3,504,000
==================
Exhibit 99.1
13
Audiovox Specialized Applications, LLC And Subsidiary
Notes To Financial Statements
Note 9. Litigation
The Company has pending legal proceedings that generally involve product
liability and employment issues. These proceedings are, in the opinion of
management, ordinary routine matters incidental to the normal business conducted
by the Company. In the opinion of management the ultimate disposition of such
proceedings are not expected to have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Note 10. Cash Flows Information
Supplemental information relative to the statements of cash flows for the years
ended November 30, 2004, 2003, and 2002 is as follows:
2004 2003 2002
--------------------------------------------
Supplemental disclosures of cash flows information:
Cash payments for interest $ 1,275 $ 752 $ 288
============== ========== ==========
Supplemental schedule of noncash investing and
financing activities:
Acquisition of Datron Corporation, March 2002:
Accounts receivable $ - $ - $ 506,000
Inventory - - 1,832,000
Equipment - - 362,000
Goodwill - - 300,000
-------------- ---------- ----------
Net cash $ - $ - $3,000,000
============== ========== ==========
Valuation of trademark rights adjustment $ 356,260 $ - $ -
============== ========== ==========
Exhibit 99.1
14
Consent of Independent Registered Public Accounting Firm
We have issued our report, dated December 23, 2004, on the consolidated
financial statements of Audiovox Specialized Applications, LLC which is included
in the Annual Report of Audiovox Corporation and subsidiaries on Form 10-K for
the year ended November 30, 2004. We hereby consent to the incorporation by
reference of our report in the Registration Statements of Audiovox Corporation
on Forms S-8 (Registration Nos. 333-36762 and 333-82073).
/s/ MCGLADREY & PULLEN, LLP
MCGLADREY & PULLEN, LLP
Elkhart, Indiana
March 31, 2005
Exhibit 99.2