UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended May 31, 2005
Commission file number 0-28839
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 231-7750
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes X No
------ ------
Number of shares of each class of the registrant's Common Stock outstanding
as of the latest practicable date.
Class Outstanding at July 5, 2005
Class A Common Stock 20,907,938 Shares
Class B Common Stock 2,260,954 Shares
1
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I - FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets at November 30,
2004 and May 31, 2005 (unaudited) 3
Consolidated Statements of Operations (unaudited) for the Three
and Six Months Ended May 31, 2004 and 2005 5
Consolidated Statements of Cash Flows (unaudited) for the Six
Months Ended May 31, 2004 and 2005 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 37
ITEM 4. CONTROLS AND PROCEDURES 38
PART II - OTHER INFORMATION 40
ITEM 1. LEGAL PROCEEDINGS 40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 41
ITEM 6. EXHIBITS 42
SIGNATURES 43
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
November 30, May 31,
2004 2005
-------- --------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 43,409 $ 17,238
Restricted cash 8,264 1,702
Short-term investments 124,237 138,070
Accounts receivable, net 118,388 105,077
Inventory 139,307 142,158
Receivables from vendors 7,028 7,606
Prepaid expenses and other current assets 14,057 5,444
Deferred income taxes 6,873 5,066
Current assets of discontinued operations 20,582 2,840
-------- --------
Total current assets 482,145 425,201
Investment securities 5,988 6,092
Equity investments 12,878 11,502
Property, plant and equipment, net 19,707 20,821
Excess cost over fair value of assets acquired 7,019 18,672
Intangible assets 8,043 8,186
Deferred income taxes 6,220 5,533
Other assets 413 350
Non-current assets of discontinued operations 925 792
-------- --------
Total assets $543,338 $497,149
======== ========
See accompanying notes to consolidated financial statements.
3
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In thousands, except share and per share data)
November 30, May 31,
2004 2005
-------- --------
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 26,004 $ 24,797
Accrued expenses and other current liabilities 32,814 23,793
Accrued sales incentives 7,584 5,890
Income taxes payable 42,790 7,523
Bank obligations 5,485 4,647
Current portion of long-term debt 2,497 1,423
Current liabilities of discontinued operations 2,953 2,468
--------- ---------
Total current liabilities 120,127 70,541
Long-term debt 7,709 7,326
Capital lease obligation 6,001 6,060
Deferred compensation 4,888 5,695
--------- ---------
Total liabilities 138,725 89,622
--------- ---------
Minority interest 426 347
--------- ---------
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; 20,859,846 and
20,877,046 shares issued at November 30, 2004 and May 31, 2005,
respectively 209 209
Class B $.01 par value; convertible 10,000,000 shares authorized;
2,260,954 shares issued and outstanding 22 22
Paid-in capital 253,959 254,177
Retained earnings 157,835 162,257
Accumulated other comprehensive loss (1,841) (3,488)
Treasury stock, at cost, 1,070,957 shares of Class A common stock (8,497) (8,497)
--------- ---------
Total stockholders' equity 404,187 407,180
--------- ---------
Total liabilities and stockholders' equity $ 543,338 $ 497,149
========= =========
See accompanying notes to consolidated financial statements.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three and Six Months Ended May 31, 2004 and 2005
(In thousands, except share and per share data)
(unaudited)
Three Months Ended Six Months Ended
---------------------------- ---------------------------
May 31, May 31,
---------------------------- ---------------------------
2004 2005 2004 2005
-------------- ------------- ------------- -------------
Net sales $ 146,884 $ 144,509 $ 282,240 $ 260,489
Cost of sales 125,488 121,710 239,716 221,619
------------ ------------ ------------ ------------
Gross profit 21,396 22,799 42,524 38,870
------------ ------------ ------------ ------------
Operating expenses:
Selling 7,503 8,315 14,644 16,306
General and administrative 10,385 12,129 22,872 24,543
Warehousing and technical support 1,500 1,771 2,469 3,238
------------ ------------ ------------ ------------
Total operating expenses 19,388 22,215 39,985 44,087
------------ ------------ ------------ ------------
Operating income (loss) 2,008 584 2,539 (5,217)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense and bank charges (866) (738) (1,829) (1,371)
Equity in income of equity investees 1,479 743 2,550 1,096
Other, net 572 3,020 1,196 7,625
------------ ------------ ------------ ------------
Total other income, net 1,185 3,025 1,917 7,350
------------ ------------ ------------ ------------
Income from continuing operations before income taxes 3,193 3,609 4,456 2,133
Income taxes (benefit) 1,608 (2,153) 2,210 (3,077)
Minority interest 5 -- 40 --
------------ ------------ ------------ ------------
Net income from continuing operations 1,590 5,762 2,286 5,210
Net income (loss) from discontinued operations, net of tax 2,087 (135) 3,261 (788)
------------ ------------ ------------ ------------
Net income $ 3,677 $ 5,627 $ 5,547 $ 4,422
============ ============ ============ ============
Net income (loss) per common share (basic):
From continuing operations $ 0.07 $ 0.26 $ 0.10 $ 0.24
From discontinued operations 0.10 -- 0.15 (0.04)
------------ ------------ ------------ ------------
Net income per common share (basic) $ 0.17 $ 0.26 $ 0.25 $ 0.20
============ ============ ============ ============
Net income (loss) per common share (diluted):
From continuing operations $ 0.07 $ 0.26 $ 0.10 $ 0.23
From discontinued operations 0.09 (0.01) 0.15 (0.03)
------------ ------------ ------------ ------------
Net income per common share (diluted) $ 0.16 $ 0.25 $ 0.25 $ 0.20
============ ============ ============ ============
Weighted average number of common shares outstanding (basic) 21,950,898 22,058,130 21,936,577 22,054,823
============ ============ ============ ============
Weighted average number of common shares outstanding (diluted) 22,436,045 22,374,225 22,345,345 22,405,042
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended May 31, 2004 and 2005
(In thousands)
(unaudited)
Six Months Ended
----------------------------
May 31,
----------------------------
2004 2005
------------ -------------
Cash flows from operating activities:
Net income $ 5,547 $ 4,422
Net (income) loss from discontinued operations (3,261) 788
--------- ---------
Net income from continuing operations 2,286 5,210
Adjustments to reconcile net income to net cash used in continuing operating
activities:
Depreciation and amortization 1,636 1,596
Provision for (recovery of) bad debt expense (521) 40
Equity in income of equity investees (2,550) (1,096)
Minority interest (40) --
Deferred income tax expense, net 1,066 2,762
Tax benefit on stock options exercised 107 33
Non-cash compensation 268 412
Gain on trading security -- (4,421)
Changes in operating assets and liabilities, net of assets and liabilities
acquired:
Accounts receivable 32,006 23,173
Inventory 5,347 5,588
Receivables from vendors (3,339) (577)
Prepaid expenses and other 4,458 955
Investment securities-trading (904) (807)
Accounts payable, accrued expenses, accrued sales incentives and other current
liabilities (20,753) (24,934)
Income taxes payable (95) (35,413)
Change in assets and liabilities of discontinued operations (47,240) 16,388
--------- ---------
Net cash used in operating activities (28,268) (11,091)
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,297) (1,626)
Proceeds from sale of property, plant and equipment 82 16
Proceeds from distribution from an equity investee 3,017 434
Purchase of short-term investments -- (107,075)
Sale of short-term investments -- 99,680
Proceeds from sale of Cellular business -- 16,736
Purchase of patent -- (150)
Escrow payment for minority interest -- (1,702)
(Purchase) proceeds of acquired businesses 513 (15,529)
--------- ---------
Net cash provided by (used in) investing activities 2,315 (9,216)
--------- ---------
Cash flows from financing activities:
Borrowings from bank obligations 557,595 --
Repayments on bank obligations (527,960) (4,574)
Principal payments on capital lease obligations (32) (34)
Proceeds from exercise of stock options 534 185
Principal payments on debt (3,810) (1,189)
--------- ---------
Net cash provided by (used in) financing activities 26,327 (5,612)
-------- ---------
Effect of exchange rate changes on cash 76 (252)
--------- ---------
Net increase (decrease) in cash and cash equivalents 450 (26,171)
Cash and cash equivalents at beginning of period 4,702 43,409
--------- ---------
Cash and cash equivalents at end of period $ 5,152 $ 17,238
========= =========
See accompanying notes to consolidated financial statements.
6
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Six Months Ended May 31, 2004 and 2005
(Dollars in thousands, except share and per share data)
(unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements of Audiovox Corporation
and subsidiaries ("Audiovox" or the "Company") were prepared in accordance
with accounting principles generally accepted in the United States of
America and include all adjustments (consisting of normal recurring
adjustments), which, in the opinion of management, are necessary to present
fairly the consolidated financial position, results of operations and cash
flows for all periods presented. The results of operations are not
necessarily indicative of the results to be expected for the full fiscal
year.
These consolidated financial statements do not include all disclosures
associated with consolidated financial statements prepared in accordance
with accounting principles generally accepted in the United States of
America. Accordingly, these statements should be read in conjunction with
the Company's consolidated financial statements and notes thereto contained
in the Company's Form 10-K for the year ended November 30, 2004.
A summary of the Company's significant accounting policies is identified in
Note 1 of Notes to Consolidated Financial Statements included in the
Company's 2004 Annual Report filed on Form 10-K. There have been no changes
to the Company's significant accounting policies subsequent to November 30,
2004.
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 amounts of
assets, liabilities, revenues and expenses reported in those financial
statements as well as the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements. These judgments can
be subjective and complex, and consequently, actual results could differ
from those estimates and assumptions. Significant estimates made by the
Company include the allowance for doubtful accounts, inventory valuation,
recoverability of deferred tax assets, valuation of long-lived assets,
accrued sales incentives and warranty reserves.
The Company has one reportable segment ("Electronics") which is organized
by product class. The Electronics Segment sells mobile electronics and
consumer electronics, primarily to mass merchants, specialty retailers, new
car dealers, original equipment manufacturers ("OEM"), independent
installers of automotive accessories and the U.S. military.
On November 1, 2004, the Company completed the divestiture of its Cellular
business (formerly known as "ACC", "Cellular" or "Wireless"). In addition,
on February 25, 2005, the Company entered into a plan to discontinue
ownership of the Company's majority-owned subsidiary, Audiovox Malaysia
("AVM"). Accordingly, the Company has presented the financial results of
Cellular and AVM as discontinued operations for all periods presented (see
Note 3 of Notes to Consolidated Financial Statements). In addition, certain
reclassifications have been made to the 2004 consolidated financial
statements in order to conform to the current period presentation.
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
(2) 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 or independent director's stock options equals the
market price of the underlying stock on the date of grant. SFAS No. 123,
"Accounting for Stock-Based Compensation", requires that the Company
provide pro-forma information regarding net income and net income per
common share as if compensation cost for the Company's stock option
programs had been determined in accordance with the fair value method
prescribed therein. The Company adopted the disclosure portion of SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
requiring more prominent pro-forma disclosures as described in SFAS No.
123. The following table illustrates the effect on net income and net
income per common share as if the Company had measured the compensation
cost for the Company's stock option programs under the fair value method in
each period presented:
For the Three Months Ended For the Six Months Ended
------------------------- ------------------------
May 31, May 31,
----------------------- -----------------------
2004 2005 2004 2005
--------- --------- --------- ---------
Net income:
As reported $ 3,677 $ 5,627 $ 5,547 $ 4,422
Stock based compensation
expense -- -- -- (44)
--------- --------- --------- ---------
Pro-forma $ 3,677 $ 5,627 $ 5,547 $ 4,378
========= ========= ========= =========
Net income per common share (basic):
As reported $ 0.17 $ 0.26 $ 0.25 $ 0.20
Pro-forma 0.17 0.26 0.25 0.20
Net income per common share (diluted):
As reported $ 0.16 $ 0.25 $ 0.25 $ 0.20
Pro-forma 0.16 0.25 0.25 0.20
(3) Discontinued Operations
On February 25, 2005 the Company entered into a plan to discontinue
ownership of the Company's majority owned subsidiary, 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 OEM's and deteriorating credit quality of local customers. The
Company plans to sell its remaining equity in AVM for $550 during the third
quarter of fiscal 2005, at which time the Company will be released from all
of its Malaysian liabilities including bank obligations. As a result of the
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
intended sale of AVM, the Company compared the carrying value of AVM's
assets on the Company's consolidated balance sheets to their estimated fair
value. As a result of this review, the Company recorded an impairment
charge of $408 within discontinued operations for the six months ended May
31, 2005 as the carrying value exceeded their estimated fair value.
On November 1, 2004, the Company completed the divestiture of its Cellular
business (formerly known as "ACC" or "Wireless") to UTStarcom, Inc. In
connection with the divestiture of Cellular, the Company recorded a
receivable for the net working capital adjustment of $8,472, which has been
included in prepaid expenses and other current assets on the accompanying
consolidated balance sheet at November 30, 2004. In addition, the Company
was required to deposit 5% of the purchase price for Cellular in an escrow
amount, which was reflected as restricted cash on the accompanying
consolidated balance sheet at November 30, 2004. During the six months
ended May 31, 2005, the Company received the working capital adjustment and
escrow amount in full.
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 144, "Accounting for the Impairment of Long-lived Assets," the Company
reclassified all associated assets and liabilities of AVM and Cellular as
assets and liabilities of discontinued operations for all periods
presented. The following sets forth the carrying amounts of the major
classes of assets and liabilities, which are classified as assets and
liabilities of discontinued operations in the accompanying consolidated
balance sheets.
November 30, May 31,
2004 2005
------- -------
Assets
Accounts receivable, net $18,534 $ 764
Inventory 1,432 1,277
Prepaid expenses and other current assets 616 799
------- -------
Current assets of discontinued operations $20,582 $ 2,840
======= =======
Property, plant and equipment, net $ 711 $ 586
Other assets 214 206
------- -------
Non-current assets of discontinued operations $ 925 $ 792
======= =======
Liabilities
Accounts payable $ 172 $ 267
Accrued expenses and other current liabilities 572 536
Bank obligations 2,209 1,665
------- -------
Current liabilities of discontinued operations $ 2,953 $ 2,468
======= =======
Included in current assets of discontinued operations at November 30, 2004
is $16,958 of Cellular accounts receivable which was subsequently
collected.
9
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
The following is a summary of financial results included within
discontinued operations:
Three Months Ended Six Months Ended
------------------ ------------------
May 31, May 31,
------------------ ------------------
2004 2005 2004 2005
-------- -------- -------- --------
Net sales from discontinued
operations $291,315 $ 743 $532,843 $ 1,457
======== ======== ======== ========
Income (loss) from discontinued
operations before income taxes 1,773 (176) 3,145 (870)
Income tax benefit 314 41 116 82
-------- -------- -------- --------
Net income (loss) from discontinued
operations, net of tax $ 2,087 $ (135) $ 3,261 $ (788)
======== ======== ======== ========
Interest expense of $921 and $1,382 was allocated to discontinued
operations for the three and six months ended May 31, 2004, respectively.
This allocation represents 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.
Included in income from discontinued operations are tax recoveries of $314
and $116 for the three and six months ended May 31, 2004, respectively. The
Company had previously established valuation allowances for state net
operating loss carryforwards as well as other deferred tax assets of
Cellular. The net change in the total valuation allowance, which resulted
from the utilization of previously fully reserved net operating loss
carryforwards of Cellular, for the three and six months ended May 31, 2004
was a decrease of $1,110 and $1,639, respectively. Such change positively
impacted the provision for income taxes during the period indicated.
(4) Net Income Per Common Share
Basic net income per common share is based upon the weighted average number
of common shares outstanding during the period. Diluted net income 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.
10
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
A reconciliation between the denominator of basic and diluted net income
per common share is as follows:
Three Months Ended Six Months Ended
---------------------------- -----------------------------
May 31, May 31,
---------------------------- -----------------------------
2004 2005 2004 2005
------------- ------------- ------------- -------------
Weighted average number of common
shares outstanding (denominator for
net income per common share, basic) 21,950,898 22,058,130 21,936,577 22,054,823
Effect of dilutive securities:
Stock options and warrants 485,147 316,095 408,768 350,219
---------- ---------- ---------- ----------
Weighted average number of common
shares and potential common shares
outstanding (denominator for net
income per common share, diluted) 22,436,045 22,374,225 22,345,345 22,405,042
========== ========== ========== ==========
Stock options and warrants totaling 1,442,800 and 2,006,977 for the three
and six months ended May 31, 2005, respectively, and stock options and
warrants totaling 732,500 for the six months ended May 31, 2004 were not
included in the net income per diluted share calculation because the
exercise price of these options and warrants was greater than the average
market price of the common stock during the period.
(5) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss of $1,841 and $3,488 at November 30,
2004 and May 31, 2005, respectively, includes the net accumulated
unrealized loss on the Company's available-for-sale investment securities
of $796 and $1,242 at November 30, 2004 and May 31, 2005, respectively, and
foreign currency translation loss of $1,045 and $2,246 at November 30, 2004
and May 31, 2005, respectively.
11
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
The Company's total comprehensive income was as follows:
Three Months Ended Six Months Ended
-------------------- --------------------
May 31, May 31,
-------------------- --------------------
2004 2005 2004 2005
------- ------- ------- -------
Net income $ 3,677 $ 5,627 $ 5,547 $ 4,422
Other comprehensive income (loss):
Foreign currency translation adjustments (253) (938) 292 (1,201)
Unrealized holding loss on available-for-
sale investment securities arising during
period, net of tax (1,265) (312) (1,472) (446)
------- ------- ------- -------
Other comprehensive loss, net of tax (1,518) (1,250) (1,180) (1,647)
------- ------- ------- -------
Total comprehensive income $ 2,159 $ 4,377 $ 4,367 $ 2,775
======= ======= ======= =======
The change in the net unrealized loss arising during the periods presented
above are net of tax benefits of $775 and $191 for the three months ended
May 31, 2004 and 2005, respectively, and $902 and $273 for the six months
ended May 31, 2005, respectively.
(6) Supplemental Cash Flow Information / Changes in Stockholders' Equity
The following is supplemental information relating to the consolidated
statements of cash flows:
Six Months Ended
----------------------------
May 31,
----------------------------
2004 2005
------------- -----------
Cash paid during the period:
Interest (excluding bank charges) $ 1,720 $ 983
Income taxes 3,815 29,899
Non-Cash Transactions
During the six months ended May 31, 2004 and 2005, the Company recorded an
unrealized holding loss relating to available-for-sale marketable
investment securities of $1,472 and $446, respectively, as a component of
accumulated other comprehensive loss.
During the six months ended May 31, 2004 and 2005, the Company recorded a
non-cash compensation charge of $268 and $412, respectively, related to the
rights under the call/put options previously granted to certain employees
of Audiovox German Holdings GmbH ("Audiovox Germany").
12
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
Changes in Stockholders' Equity
During the six months ended May 31, 2005, 17,200 stock options were
exercised into shares of Class A common stock aggregating proceeds of $185
to the Company.
(7) Business Acquisition
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. ("Terk"). The purchase price is
subject to a working capital adjustment based on the working capital of
Terk at the time of closing, plus contingent debentures with a maximum
value of $9,280 based on the achievement of future revenue targets. The
total purchase price, which includes a working capital adjustment of $1,730
and acquisition costs of $516, approximated $15,529.
The following summarizes the preliminary 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 $11,131
Inventory 9,591
Prepaid expenses and other current assets 293
Property, plant and equipment and other assets 1,210
Goodwill 11,653
-------
Total assets acquired $33,878
-------
Liabilities assumed:
Accounts payable, accrued expenses and other liabilities 14,250
Bank obligations 4,099
-------
Total liabilities assumed 18,349
-------
Cash paid $15,529
=======
The excess of the purchase price over the estimated fair value of assets
and liabilities acquired of $11,653 was allocated to goodwill. The
allocation of purchase price to assets and liabilities acquired is not
final and is subject to the completion of an independent valuation study.
The results of operations of this acquisition have been included in the
consolidated financial statements from the date of acquisition. The purpose
of this acquisition is to increase the Company's market share for satellite
radio products as well as accessories for antennas and HDTV products.
13
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
The following unaudited pro-forma financial information for the six months
ended May 31, 2004 and 2005 represents the combined results of the
Company's operations and Terk as if the Terk acquisition had occurred at
the beginning of fiscal 2004. 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.
For the Six Months Ended
-----------------------------------
May 31,
-----------------------------------
2004 2005
----------------- -----------------
(unaudited)
-----------------
Net sales $305,242 $264,323
Net income 5,084 4,345
Net income per share-diluted $ 0.23 $ 0.19
(8) Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill is as follows:
Balance at November 30, 2004 $ 7,019
Goodwill from purchase of Terk (see Note 7 of Notes to Consolidated
Financial Statements) 11,653
-------
Balance at May 31, 2005 $18,672
=======
At November 30, 2004, intangible assets consisted of the following:
Gross
Carrying Accumulated Total Net
Value Amortization Book Value
---------------- ------------------- ----------------
Patents subject to amortization $ 677 $ 677 --
Trademarks not subject to amortization 8,043 -- $8,043
------ ------ ------
Total $8,720 $ 677 $8,043
====== ====== ======
At May 31, 2005, intangible assets consisted of the following:
Gross
Carrying Accumulated Total Net
Value Amortization Book Value
---------------- ------------------- ----------------
Patents subject to amortization $ 827 $ 684 $ 143
Trademarks not subject to amortization 8,043 -- 8,043
------ ------ ------
Total $8,870 $ 684 $8,186
====== ====== ======
14
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
During the six months ended May 31, 2005, the Company purchased $150 of
patents which expire in February of 2015. The estimated aggregate
amortization expense for each of the succeeding years ending May 31, 2010
amounts to $75.
(9) Equity Investments
The Company has a 50% non-controlling ownership interest in Audiovox
Specialized Applications, Inc. ("ASA") which acts as a distributor to
specialized markets for specialized vehicles, such as RV's and van
conversions, of televisions and other automotive sound, security and
accessory products.
The following presents summary financial information for ASA. Such summary
financial information has been provided herein based upon the individual
significance of ASA to the consolidated financial information of the
Company.
November 30, May 31,
2004 2005
---------------- --------------
Current assets $22,008 $22,599
Non-current assets 4,425 4,487
Current liabilities 4,710 4,082
Members' equity $21,723 $23,004
Six Months Ended
--------------------------
May 31,
--------------------------
2004 2005
------------ ------------
Net sales $29,236 $24,489
Gross profit 9,182 7,493
Operating income 3,331 1,735
Net income $ 4,502 $ 2,148
The Company's share of income from ASA for the six months ended May 31,
2004 and 2005, was $2,251 and $1,074, respectively. In addition, the
Company received distributions from ASA totaling $434 during the six months
ended May 31, 2005, which was recorded as a reduction to equity investments
on the accompanying consolidated balance sheet.
(10) Bliss-tel Initial Public Offering
On December 13, 2004, one of the Company's former 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 fiscal 2005, the Company accounted for the
Bliss-tel investment as a trading security in accordance with FASB
15
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
Statement No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" whereby the unrealized holding gains on losses on Bliss-tel
stock are included in earnings. As a result of this transaction, the
Company recorded a net gain of $1,858 and $4,374 for the three and six
months ended May 31, 2005, respectively, which is included in other income
on the accompanying statement of operations.
As of May 31, 2005, the Bliss-tel investment had a value of $6,390 and is
reflected within short-term investments on the accompanying consolidated
balance sheet.
(11) Income Taxes
Quarterly tax provisions are generally based upon an estimated annual
effective tax rate per taxable entity, including evaluations of possible
future events and transactions, and are subject to subsequent refinement or
revision. When the Company is unable to estimate a part of its annual
income or loss, or the related tax expense or benefit, the tax expense or
benefit applicable to that item is reported in the interim period in which
the income or loss occurs.
A reconciliation of the provision for (benefit of) income taxes from
continuing operations computed at the Federal statutory rate to the
reported provision for (benefit of) income taxes is as follows:
Three Months Ended Six Months Ended
------------------------------------------ ------------------------------------------
May 31, May 31,
------------------------------------------ ------------------------------------------
2004 2005 2004 2005
---- ---- ---- ----
Tax provision at
Federal statutory
rate $ 1,118 35.0% $ 1,263 35.0% $ 1,560 35.0% $ 746 35.0%
State income taxes,
net of Federal
benefit 119 3.7 132 3.7 195 4.4 76 3.6
Foreign tax rate
differential 141 4.4 75 2.1 176 3.9 (12) (0.5)
Reversal of
accruals due to
completion of
audits -- -- (3,307) (91.6) -- -- (3,307) (155.1)
Permanent items 122 3.8 (288) (8.0) 137 3.1 (481) (22.6)
Changes in rates
and other, net 108 3.4 (28) (0.9) 142 3.2 (99) (4.7)
--- --- --- ---- --- --- --- ----
$ 1,608 50.3% $(2,153) (59.7)% $ 2,210 49.6% $(3,077) (144.3)%
======= ==== ======= ==== ======= ==== ======= =======
Changes in rates and other, net, 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. 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.
16
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
The effective tax benefit for the three and six months ended May 31, 2005,
was 59.7% and 144.3%, respectively, compared to 50.3% and 49.6% for the
comparable prior period. The effective benefit rate for 2005 was primarily
due to the favorable outcome of $3,307 in tax accrual reductions due to the
completion of certain tax examinations for the years 1994 through 2000.
(12) Accrued Sales Incentives
A summary of the activity with respect to the Company's sales incentives is
provided below:
For the Three Months Ended For the Six Months Ended
---------------------------------- -------------------------------
May 31, May 31,
---------------------------------- -------------------------------
2004 2005 2004 2005
---------------- --------------- ------------- ---------------
Opening balance $ 6,826 $ 5,450 $ 14,605 $ 7,584
Accruals 5,066 5,776* 8,033 9,636*
Payments (4,262) (4,673) (12,584) (9,346)
Reversals for unearned sales
incentives (448) -- (1,818) (733)
Reversals for unclaimed sales
incentives (198) (663) (1,252) (1,251)
---- ---- ------ ------
Ending balance $ 6,984 $ 5,890 $ 6,984 $ 5,890
======== ======== ======== ========
*Includes $1,255 of accrued sales incentives acquired from Terk (See Note
7).
(13) Product Warranties and Product Repair Costs
The following table provides a summary of the activity with respect to the
Company's product warranties and product repair costs:
Three Months Ended Six Months Ended
---------------------------- -------------------------------
May 31, May 31,
---------------------------- -------------------------------
2004 2005 2004 2005
---- ---- ---- ----
Opening balance $ 15,303 $ 11,394 $ 14,695 $ 11,794
Liabilities accrued for warranties issued
during the period 232 1,108 2,555 2,473
Warranty claims paid during the period (2,291) (1,198) (4,006) (2,963)
-------- -------- -------- --------
Ending balance $ 13,244 $ 11,304 $ 13,244 $ 11,304
======== ======== ======== ========
17
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
(14) Financing Arrangements
The Company has the following financing arrangements:
November 30, May 31,
2004 2005
---- ----
Bank Obligations
Domestic bank obligation (a) -- --
Euro asset-based and factoring obligation (b) $ 5,485 $ 4,647
Debt
Euro loan agreement (c) $ 9,377 $ 7,589
Other (d) 829 1,160
------- -------
Total debt $10,206 $ 8,749
======= =======
(a) Domestic Bank Obligations
At November 30, 2004 and May 31, 2005, the Company has an
un-guaranteed credit line to fund the temporary short-term working
capital needs of the domestic operations. This line expires on August
31, 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 and May 31, 2005, no direct amounts are outstanding
under this agreement.
(b) Euro Asset Based Lending Obligation
The Company has a 16,000 Euro accounts receivable factoring
arrangement and a 6,000 Euro Asset Based Lending ("ABL") ( finished
goods inventory and non factored accounts receivable) credit facility
for the Company's subsidiary, 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 85% of face value and payment of the remaining 15% upon
receipt from the customer of the balance of the receivable purchased.
In respect of the ABL credit facility, selected finished goods are
advanced at a 60% rate and non factored accounts receivables are
advanced at a 50% rate. The rate of interest is three months Euribor
plus 2.5%, and the Company pays 0.4% of its gross sales as a fee for
the accounts receivable factoring arrangement. As of November 30, 2004
and May 31, 2005, the amount of accounts receivable available for
factoring exceeded the amounts outstanding under this obligation.
(c) Euro Term Loan Agreement
On September 2, 2003, 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. Tranche B
has been fully repaid. Payments are due in monthly installments and
18
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
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. As a result of a loan restructuring during
April 2005, the maturity of the term loan has been prolonged to August
30, 2010 with a pre-payment option.
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 $2,497 and $6,880,
respectively, at November 30, 2004 and $1,423 and $6,166,
respectively, at May 31, 2005.
(d) Other Debt
This amount is the accumulated compensation obligation resulting from
the rights under the call put option granted to certain employees of
Audiovox Germany in the amount of $829 and $1,160 at November 30, 2004
and May 31, 2005, respectively.
(15) Contingencies and Legal Matters
The Company is currently, and has in the past been, a party to various
routine legal proceedings incident to the ordinary course of business. If
management determines, based on the underlying facts and circumstances,
that it is probable a loss will result from a litigation contingency and
the amount of the loss can be reasonably estimated, the estimated loss is
accrued for. The Company believes the specific litigation matters disclosed
below will not have a material adverse effect on the Company's financial
statements, individually or in the aggregate.
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 $16,000 paid to Philip
Christopher pursuant to a Personally Held Intangibles Purchase Agreement in
connection with the UTStarcom transaction, (c) disgorgement to Audiovox of
$4,000 paid to Philip Christopher as compensation for termination of his
Employment Agreement and Award Agreement with ACC, (d) disgorgement to ACC
of $1,916 paid to John Shalam pursuant to an Award Agreement with ACC, and
19
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
(e) recovery by ACC of $5,000 in severance payments distributed by Philip
Christopher to ACC's former employees. Defendants filed a motion to dismiss
the complaint, which was withdrawn. The Company understands that the
individual 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. The Company anticipates that defense costs, in excess of
any applicable retention, will be covered by the Company's insurance
policies. Any damages recovered by plaintiffs will be paid to the Company.
Accordingly, no estimated loss has been recorded for the aforementioned
case.
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 agreement 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 in consideration of which the Company
will acquire all of Respondents' ownership. In addition, the Company and
Respondents will release all claims. As of May 31, 2005, the satisfaction
of the aforementioned pre-closing conditions were not satisfied and the
payment for the Respondents' ownership is included in restricted cash on
the accompanying consolidated balance sheet. The Company recorded a $400
reduction to general and administrative expenses during the three months
ended May 31, 2005 as a result of a legal claim which was withdrawn from
the court.
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 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. The motion to dismiss was heard on April 5, 2005,
and the court granted the Company's motion to dismiss the complaint, but
Plaintiff has filed a Notice of Appeal with Delaware Supreme Court. The
Company intends to vigorously defend this matter; however, no assurances
regarding the outcome of this matter can be given at this point in the
litigation. Accordingly, no estimated loss has been recorded for the
aforementioned case.
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. No
assurances regarding the outcome of this matter can be given, as the
Company is unable to assess
20
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2004 and 2005
the degree of probability of an unfavorable outcome and estimated loss, if
any. Accordingly, no estimated loss has been recorded for the
aforementioned case.
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 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.
(16) New Accounting Pronouncements
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
annual period that begins after June 15, 2005 or the Company's first
quarter of fiscal 2006. 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 as discussed in Note 2 of Notes to Consolidated Financial Statements.
In June 2005, the FASB issued FASB Statement No. 154 ("Statement 154"),
"Accounting Changes and Error Corrections - a replacement of APB Opinion
No. 20 and FASB Statement No. 3". Opinion 20 previously required that most
voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the
new accounting principle. Statement 154 requires retrospective application
to prior periods' financial statements of changes in accounting principle,
unless it is impracticable to determine either the period-specific effects
or the cumulative effect of the change. Statement 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005 or the Company's first quarter ended February 28,
2007. The Company does not expect the adoption of Statement 154 to have an
impact on the consolidated financial statements.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Dollars in thousands, except share and per share data)
We begin Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) with an overview of the business. This is followed
by a discussion of the Critical Accounting 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 the three and six months ended May 31, 2004 compared to the three
and six months ended May 31, 2005. 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 presented in thousands.
Business Overview and Strategy
The Company through its four wholly-owned subsidiaries: Audiovox
Electronics Corporation, American Radio Corp., Code Systems, Inc. ("Code") 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(R), as well as private labels
through a large and diverse distribution network both domestically and
internationally.
On November 1, 2004, the Company completed the divestiture of its Cellular
business (formerly known as "ACC", "Cellular" or "Wireless"). In addition, on
February 25, 2005, the Company entered into a plan to discontinue ownership of
the Company's majority-owned subsidiary, Audiovox Malaysia ("AVM"). Accordingly,
the Company has presented the financial results of Cellular and AVM as
discontinued operations for all periods presented (see Note 3 of Notes to
Consolidated Financial Statements). In addition, certain reclassifications have
been made to the 2004 consolidated financial statements in order to conform to
the current period presentation.
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. ("Terk"). The purpose of this acquisition is
to increase the Company's market share for satellite radio products as well as
accessories for antennas and HDTV products. The purchase price is subject to a
working capital adjustment based on the working capital of Terk at the time of
closing, plus contingent debentures with a maximum value of $9,280 based on the
achievement of future revenue targets. The total purchase price, which includes
a working capital adjustment of $1,730 and acquisition costs of $516,
approximated $15,529. The results of operations of this acquisition have been
included in the consolidated financial statements from the date of
acquisition.(See Note 7 of Notes to Consolidated Financial Statements.)
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, Information Technology ("IT") 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.
22
Mobile Electronics products include:
o mobile video products, including overhead, headrest and portable
mobile video systems,
o autosound products including mobile multi-media products, 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, collision avoidance systems and
o automotive power accessories, including cruise control systems.
Consumer Electronics include:
o LCD, flat panel and under-cabinet televisions,
o portable DVD players,
o home and portable stereos,
o GMRS radios and
o Digital multi-media products such as personal video recorders, MP3
players, MPG 4 products
Critical Accounting Policies and Estimates
As disclosed in the Annual Report on Form 10-K for the fiscal year ended
November 30, 2004, the discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in conformity with general accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses reported in
those financial statements. These judgments can be subjective and complex, and
consequently, actual results could differ from those estimates. Our most
critical accounting policies and estimates relate to revenue recognition; sales
incentives; accounts receivable; inventory, goodwill and other intangible
assets; warranties and income taxes. Since November 30, 2004, there have been no
changes in our critical accounting policies and no other significant changes to
the assumptions and estimates related to them.
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 three and six months ended May 31, 2004 and 2005. We analyze
and explain the differences between periods in the specific line items of the
consolidated statements of operations.
23
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 new product introductions, inventory purchases and
pricing indicators within the specific electronics markets in which
the Company competes.
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.
Three months ended May 31, 2004 compared to three months ended May 31, 2005
Continuing Operations
Net Sales:
The following table sets forth, for the periods indicated, net sales for
the three months ended May 31, 2004 and 2005:
May 31, May 31, $ %
2004 2005 Change Change
------------ --------- ---------- --------
Mobile Electronics $121,481 $ 92,953 $(28,528) (23.5)%
Consumer Electronics 25,403 51,556 26,153 *
-------- -------- -------- ------
Total Net Sales $146,884 $144,509 $ (2,375) (1.6)%
======== ======== ======== ======
*Greater than 100 percent.
Mobile Electronics sales, which represented 64.3% of net sales, were
impacted due to significant changes within the mobile video category, such as:
o A decline in the aftermarket business due to Original Equipment
Manufacturers (OEM) including mobile video in many of their standard
option packages,
o A decline in SUV sales, and
o Price erosion as a result of discounting prices in the aftermarket in
an effort to sell inventory.
Beginning in the later part of the second quarter, the Company commenced
shipping of Mobile Video Shuttle Systems, which are expected to offset the trend
in the mobile video category. The change in the Mobile Electronics category was
24
partially offset by an increase in satellite radio sales due to additional sales
as a result of the Terk acquisition.
Consumer Electronics sales, which represented 35.7%, of net sales,
increased due to increased sales for LCD flat-panel TV's as a result of new
product introductions. During the quarter ended May 31, 2005, the Company
introduced a new and more diverse line of LCD TV's to support the increased
demand in this category. The increase in Consumer Electronics was partially
offset by a decline in portable DVD Player sales due to increased competition.
Sales incentive expense decreased $562 to $3,858 for the three months ended
May 31, 2005 as a result of a decline in sales to large retailers. Total
reversals for sales incentives increased $17 as compared to the prior year. The
decline in unearned reversals is due to increased achievement of Volume
Incentive Rebate programs. The increase in unclaimed sales incentives is due to
certain customers not claiming funds within the claim 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
May 31, May 31,
2004 2005
---- ----
Gross profit $ 21,396 $ 22,799
Gross margins 14.6% 15.8%
Gross margins increased to 15.8% for the three months ended May 31, 2005 as
compared to 14.6% for the three months ended May 31,2004. The increase in
margins is due to increased margins on existing products and new products, such
as the Terk product line, increase in LCD TV sales and decline in inventory
write-downs. Inventory write-downs impacted gross margins by $2,178 (1.5%) and
$1,253 (0.9%) during the three months ended May 31, 2004 and 2005, respectively.
The decrease in write-downs was primarily due to better inventory positions
coming out of the holiday season. Gross margins continue to be impacted by a
decline in mobile video margins due to a reduction in selling prices within the
mobile video category as a result of increased inventory levels due to the
market slow down. Furthermore, reversals of sales incentive expense favorably
impacted gross margins by 0.4% and 0.5% during the three months ended May 31,
2004 and 2005, respectively.
25
Operating Expenses and Operating Income (Loss)
The following table presents the results of the Company separated by the
Electronics and Administrative Groups.
May 31, May 31, $ %
2004 2005 Change Change
------------ ---------- ----------- ------------
Selling $ 6,461 $ 7,102 $ 641 9.9%
General and administrative 7,122 9,044 1,922 27.0
Warehousing and technical support 1,500 1,771 271 18.1
-------- -------- -------- ----
Electronics operating expenses 15,083 17,917 2,834 18.8
Electronics operating income 6,313 4,882 (1,431) (22.7)
Electronics other expense (210) (747) (537) *
-------- -------- -------- ----
Electronics pre-tax income 6,103 4,135 (1,968) (32.2)
Administrative operating expenses 4,305 4,298 (7) (0.1)
Administrative other income 1,395 3,772 2,377 *
-------- -------- -------- ----
Consolidated pre-tax income $ 3,193 $ 3,609 $ 416 13.0%
======== ======== ========
*Greater than 100 percent.
Consolidated operating expenses increased $2,827, or 14.6%, for the three
months ended May 31, 2005, as compared to 2004. As a percentage of net sales,
operating expenses increased to 15.4% for the three months ended May 31, 2005,
from 13.2% in 2004.
Electronics operating expenses increased $2,834, or 18.8%, for the three
months ended May 31, 2005 as compared to 2004. As a percentage of net sales,
Electronics operating expenses increased to 12.4% for the three months ended May
31, 2005, compared to 10.3% in 2004.
Electronics selling expenses increased during the three months ended May
31, 2005, due to a $497 increase in commissions and $242 increase in salesmen
salaries. These increases were a result of increased consumer electronics sales,
changes in compensation programs related to commissionable sales for Jensen
products and incremental selling expenses from the recently acquired Terk
product line.
Electronics general and administrative expenses increased due to the
following:
o $857 increase in bad debt expense due to recoveries of previously
reserved bad debt in the prior year. The provision for bad debt
expense for the three months ended May 31, 2005 was $324 compared to a
recovery of $533 in the prior year.
o $427 increase in professional fees due to legal costs related to
patent infringement cases. 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.
o $507 increase in occupancy costs due to the use of temporary warehouse
facilities in Audiovox Germany, and the incremental costs to operate
the Terk facility.
o $391 increase in office salaries due to incremental costs as a result
of the Terk acquisition.
26
o The above increases were partially offset by a $400 reduction to
general and administrative expenses as a result of a Venezuela legal
claim which was withdrawn from the court.
Electronics warehousing and technical support increased due to an increase
in direct labor as a result of the recent Terk acquisition and the continual
increase in product complexity which has resulted in the Company hiring
additional engineers and providing additional customer service.
The following is a summary of administrative operating expenses:
May 31, May 31, $ %
2004 2005 Change Change
----------- ------------- ----------- ------------
Advertising $ 1,043 $ 1,214 $ 171 16.4%
Professional fees 1,377 1,428 51 3.7
Depreciation 279 334 55 19.7
Insurance 244 275 31 12.7
Officers' and office salaries 1,679 1,523 (156) (9.3)
Other (317) (476) (159) (50.2)
---- ---- ---- -----
Total administrative operating expenses 4,305 4,298 (7) (0.1)
Administrative other income 1,395 3,772 2,377 *
----- ----- ----- -----
Administrative pre-tax loss $(2,910) $ (526) $ 2,384 81.9%
======= ======= ======= ====
* Greater than 100 percent
The increase in advertising is due to the timing of media print advertising
to promote the Company's family of brands. The decline in salaries is due to a
decline in compensation as a result of reduced earnings and staff reductions.
Other administrative operating expenses, which are mainly comprised of occupancy
costs, employee benefits and allocations, decreased primarily due to the Company
entering into a transition service agreement in November 2004 with UTStarcom.
The fees billed for the transition service agreement amounted to $335 for IT
services and such fees are included as a reduction to general and administrative
expenses in the consolidated statements of operations. The Company is in the
process of reducing administrative expenses as a result of the change in
business structure.
Other Income (Expense)
May 31, May 31, $
2004 2005 Change
---- ---- ------
Interest expense and bank charges $ (866) $ (738) $ 128
Equity in income of equity investees 1,479 743 (736)
Other, net 572 3,020 2,448
------- ------- -------
Total other income $ 1,185 $ 3,025 $ 1,840
======= ======= =======
Interest expense and bank charges decreased primarily due to the reduction
in outstanding bank obligations. 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 May 31, 2005. Interest expense
and bank charges during the three months ended May 31, 2005 primarily represent
expenses for debt and bank obligations of Audiovox Germany and interest for a
capital lease.
27
Equity in income of equity investees decreased primarily due to a decrease
in the equity income of ASA as a result of decreased sales due to increased
competition for van conversion products and a decline in sales to one major
customer.
Other income increased due to a $1,858 unrealized gain as a result of the
stock appreciation of the Company's investment in Bliss-tel, an existing
investment treated as a trading security. The fluctuation in Bliss-tel stock is
recorded in other income (loss) and the current appreciation in value is subject
to fluctuations in market value. In addition, interest income increased $461 to
$1,014 due to the returns on the purchase of short-term investments. 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.
Income Taxes (Benefit)
The effective tax rate for the three months ended May 31, 2005, was a
benefit of 59.7% compared to a provision of 50.3% in the prior period. The
effective tax rate for 2005 was primarily due to tax exempt interest income
earned on short-term investments during the three months ended May 31, 2005 and
the favorable outcome of $3,307 in tax accrual reductions due to the completion
of certain tax examinations.
Income (Loss) from Discontinued Operations
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. In
addition, on November 1, 2004, the Company completed the divestiture of its
Cellular business (formerly known as "ACC" or "Wireless") to UTStarcom.
The following is a summary of financial results included within
discontinued operations for the three months ended May 31, 2004 and 2005:
May 31,
------------------------------
2004 2005
------------- -------------
Net sales from discontinued operations $ 291,315 $ 743
Income (loss) from operations of
discontinued operations before
income taxes 1,773 (176)
Recovery of income taxes 314 41
--------- ---------
Income (loss) from discontinued
operations, net of tax $ 2,087 $ (135)
========= =========
Income (loss) from discontinued operations, net of tax, provided income of
$2,087 for the three months ended May 31, 2004 compared to a loss from
discontinued operations of $135 for the three months ended May 31, 2005. The
operations of AVM are included within discontinued operations for fiscal 2005
whereas AVM and ACC are included in discontinued operations for fiscal 2004. The
decline in income from discontinued operations for fiscal 2005 is primarily due
to the losses of AVM as well as the sale of ACC on November 1, 2004.
Net Income
Net income for the three months ended May 31, 2004 was $3,677 compared to
$5,627 in 2005. Earnings per share for the three months ended May 31, 2004 was
$0.17 (basic) and $0.16 (diluted) as compared to $0.26 (basic) and $0.25
(diluted) for 2005. Net income was favorably impacted by sales incentive
reversals of $836 and $663 (inclusive of amounts from discontinued operations)
for the three months ended May 31, 2004 and 2005, respectively, and a tax
28
accrual reversal of $3,307 for the three months ended May 31, 2005.
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, new product introductions, competition 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.
Six months ended May 31, 2004 compared to six months ended May 31, 2005
Continuing Operations
Net sales:
The following table sets forth, for the periods indicated, certain
statement of operations data for the six months ended May 31, 2004 and 2005:
May 31, May 31, $ %
2004 2005 Change Change
-------- --------- ---------- -------
Mobile Electronics $210,584 $167,632 $(42,952) (20.4)%
Consumer Electronics 71,656 92,857 21,201 29.6
-------- -------- -------- ----
Total net sales $282,240 $260,489 $(21,751) (7.7)%
======== ======== =========
Mobile Electronics sales, which represented 64.4% of net sales, continues
to be impacted by a shift in the mobile video category brought on by lower
portable DVD prices and increased presence by original equipment car
manufacturers. Sales were favorably impacted by the recent acquisition of Terk
in January of 2005, the Jensen(R) brands and increased Code sales due to
increased sales to its customer base which includes OEM's.
Consumer Electronics sales, which represented 35.6%, of net sales showed
growth as a result of increased demand for LCD flat-panel TV product lines.
Consumer Electronics sales were impacted by lower average selling prices for
portable DVD Players due to pricing competition.
Sales incentive expense increased $1,434 to $6,397 for the six months ended
May 31, 2005 as a result of the Company offering more sales incentive programs
to mass merchants and large retailers in an effort to increase sales. Also, the
increase in sales incentive expense is attributable to a $1,085 decrease in
unearned reversals for the six months ended May 31, 2005 due to increased
achievement of Volume Incentive Rebate programs as compared to the prior year.
Gross Profit
May 31, May 31,
2004 2005
------------ ---------------
Gross profit $42,524 $38,870
Gross margins 15.1% 14.9%
Gross margins decreased to 14.9% for the six months ended May 31, 2005 as
compared to 15.1% for the six months ended May 31, 2004. The decline in gross
margins is primarily due to gross margins of 13.9% during the first quarter of
fiscal 2005 due to a reduction in selling prices within the mobile video
category. Inventory write-downs impacted gross margins by $4,808 (1.7%) and
$2,177 (0.8%) during the six months ended May 31, 2004 and 2005, respectively.
29
The decrease in write-downs was primarily due to better inventory positions
coming out of the holiday season. In fiscal 2004, the Company experienced
significant write-downs as a result of new product introductions during the six
months ended May 31, 2004 which resulted in a decline in selling prices of older
models.
The above declines in margins were offset by margins achieved in Code,
satellite radio, as well as increased margins from the acquisition of the Terk
product line. Furthermore, reversals of sales incentive expense favorably
impacted gross margins by 1.1% and 0.8% during the six months ended May 31, 2004
and 2005, respectively.
Operating Expenses and Operating Income (Loss)
The following table presents the results of the Company separated by the
Electronics and Administrative Groups.
May 31, May 31, $ %
2004 2005 Change Change
-------- -------- --------- ---------
Selling $ 12,576 $ 14,050 $ 1,474 11.7%
General and administrative 16,792 17,893 1,101 6.6
Warehousing and technical support 2,469 3,238 769 31.1
-------- -------- -------- ----
Electronics operating expenses 31,837 35,181 3,344 10.5
Electronics operating income 10,687 3,689 (6,998) (65.5)
Electronics other income (expense) 545 (1,277) (1,822) *
-------- -------- -------- ----
Electronics pre-tax income 11,232 2,412 (8,820) (78.5)
Administrative operating expenses 8,148 8,906 758 9.3
Administrative other income 1,372 8,627 7,255 *
-------- -------- -------- ----
Consolidated pre-tax income $ 4,456 $ 2,133 $ (2,323) (52.1)%
======== ======== ========
*Greater than 100 percent.
Consolidated operating expenses increased $4,102, or 10.3%, for the six
months ended May 31, 2005, as compared to 2004. As a percentage of net sales,
operating expenses increased to 16.9% for the six months ended May 31, 2005,
from 14.2% in 2004.
Electronics operating expenses increased $3,344, or 10.5%, for the six
months ended May 31, 2005, as compared to 2004. As a percentage of net sales,
Electronics operating expenses increased to 13.5% for the six months ended May
31, 2005, compared to 11.3% in 2004.
Electronics selling expenses increased during the six months ended May 31,
2005, due to a $981 increase in commissions and $379 increase in salesmen
salaries. These increases were a result of increased consumer electronics sales,
changes in compensation programs related to commissionable sales for Jensen
products and incremental selling expenses from the recently acquired Terk
product line.
Electronics general and administrative expenses increased due to the
following:
o $321 increase in occupancy costs due to the use of temporary warehouse
facilities in Audiovox Germany, and the incremental costs to operate
the Terk facility.
o $561 increase in bad debt expense due to the recoveries of previously
reserved bad debt in the prior year. The provision for bad debt
expense was $40 for the six months ended May 31, 2005 compared to a
recovery of $521 in the prior year.
30
o An increase of $551 in professional fees due to legal costs related to
patent infringement cases.
o The above increases were partially offset by a $327 decrease in
officer salaries as a result of a decline in compensation due to
reduced earnings.
o The above increases were partially offset by a $400 reduction as a
result of a Venezuela legal claim which was withdrawn from the court.
Electronics warehousing and technical support increased due to an increase
in direct labor as a result of the recent Terk acquisition and the continual
increase in product complexity which has resulted in the Company hiring
additional engineers and providing additional customer service.
The following is a summary of administrative operating expenses:
May 31, May 31, $ %
2004 2005 Change Change
------------ ------------ ------------ ------------
Advertising $ 2,068 $ 2,257 $ 189 9.1%
Professional fees 2,334 2,613 279 12.0
Depreciation 520 645 125 24.0
Insurance 508 522 14 2.8
Officers' and office salaries 3,219 2,954 (265) (8.2)
Other (501) (85) 416 (83.0)
------- ------- ------- ----
Total administrative operating expenses 8,148 8,906 758 9.3
Administrative other income 1,372 8,627 7,255 *
------- ------- ------- ----
Administrative pre-tax loss $(6,776) $ (279) $ 6,497 *
======== ======= =======
* Greater than 100 percent
The increase in professional fees is due to legal fees incurred to defend a
derivative lawsuit. Other administrative operating expenses, which are mainly
comprised of occupancy costs, employee benefits and allocations, increased due
to an increase in occupancy costs and decrease in allocations as certain
administrative expenses were allocated to the Company's discontinued Cellular
Group in the prior year.
Other Income (Expense)
May 31, May 31, $
2004 2005 Change
------- -------- ----------
Interest expense and bank charges $(1,829) $(1,371) $ 458
Equity in income of equity investees 2,550 1,096 (1,454)
Other, net 1,196 7,625 6,429
------- ------- -------
Total other income $ 1,917 $ 7,350 $ 5,433
======= ======= =======
Interest expense and bank charges decreased primarily due to the reduction
in outstanding bank obligations. 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 May 31, 2005. Interest expense
and bank charges during the three months ended May 31, 2005 primarily represent
expenses for debt and bank obligations of Audiovox Germany and interest for a
capital lease.
31
Equity in income of equity investees decreased primarily due to a decrease
in the equity income of ASA as a result of decreased sales due to increased
competition for van conversion products and a decline in sales to one major
customer.
Other income increased due to a $4,374 unrealized gain as a result of an
initial public offering and stock appreciation of Bliss-tel stock, an existing
investment treated as a trading security. The fluctuation in Bliss-tel stock is
recorded in other income (loss) and the current appreciation in value is subject
to fluctuations in market value. In addition, interest income increased $1,294
to $1,877 due to the returns on the purchase of short-term investments.
Furthermore, other expense decreased $347 as a result of lower foreign exchange
devaluation in the Company's Venezuelan subsidiary as compared to the prior
year.
Income Tax Benefit
The effective tax rate for the six months ended May 31, 2005, was a benefit
of 144.3% compared to a provision of 49.6% in the prior period. The decrease in
the effective tax rate for 2005 was primarily due to tax exempt interest income
earned on short-term investments during the three months ended May 31, 2005 and
the favorable outcome of $3,307 in tax accrual reductions due to the completion
of certain tax examinations.
Income (Loss) from Discontinued Operations
The following is a summary of financial results included within
discontinued operations for the six months ended May 31, 2004 and 2005:
May 31, May 31,
2004 2005
-------- --------
Net sales from discontinued operations $532,843 $ 1,457
======== ========
Income (loss) from operations of discontinued
operations before income taxes 3,145 (870)
Recovery of income taxes 116 82
-------- --------
Income (loss) from discontinued operations, net of tax $ 3,261 $ (788)
======== ========
Income (loss) from discontinued operations, net of tax, provided income of
$3,261 for the six months ended May 31, 2004 compared to a loss from
discontinued operations of $788 for the six months ended May 31, 2005. Included
in loss from discontinued operations for the six months ended May 31, 2005 is a
write- down charge of $408 for AVM assets as a result of the intended sale of
AVM. The operations of AVM are now included within discontinued operations for
fiscal 2005 whereas AVM and ACC are included in discontinued operations for
fiscal 2004.
Net Income
Net income for the six months ended May 31, 2004 was $5,547 compared to
$4,422 in 2005. Earnings per share for the six months ended May 31, 2004 was
$0.25 (basic and diluted) as compared to $0.20 (basic and diluted) for 2005. Net
income was favorably impacted by sales incentive reversals of $3,936 and $1,984
(inclusive of discontinued operations) for the six months ended May 31, 2004 and
2005, respectively, and a tax accrual reversal of $3,307 for the six months
ended May 31, 2005.
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, new product introductions, competition and general economic
32
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
Cash Flows, Commitments and Obligations
As of May 31, 2005, the Company had working capital of $354,660, which
includes cash and short- term investments of $155,308 compared with working
capital of $362,018 at November 30, 2004, which includes cash and cash
equivalents and short-term investments of $167,646. The decline in working
capital is primarily due to the payment of income taxes in connection with the
sale of ACC and acquisition of Terk, partially offset by accounts receivable
collections. 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.
As of November 30, 2004 and May 31, 2005, the Company has a domestic credit
line to fund the temporary short-term working capital needs of the Company. This
line expires on August 31, 2005, and allows aggregate borrowings of up to
$25,000 at an interest rate of Prime (or similar designations) plus 1%. In
addition, the Company has a 16,000 Euro accounts receivable factoring
arrangement and a 6,000 Euro Asset Based Lending ("ABL") ( finished goods
inventory and non factored accounts receivable) credit facility for the
Company's subsidiary, Audiovox Germany which expires on October 25, 2005 and is
renewable on an annual basis.
Operating activities used cash of $11,091 for the six months ended May 31,
2005 compared to $28,268 in 2004. The decrease in cash used in operating
activities as compared to the prior year is primarily due to the collection of
accounts receivable of discontinued operations, partially offset by payments of
accrued expenses and income taxes.
The following significant fluctuations in the balance sheets impacted cash
flow from operations:
o Cash flows from operating activities for the six months ended May 31,
2005 were favorably impacted by a decrease in accounts receivable
primarily from collections. Accounts receivable turnover approximated
4.9 during for the six months ended May 31, 2005 compared to 4.5 in
the comparable period in the prior year. Overall collections of
accounts receivable and credit quality of customers has improved,
however, accounts receivable collections are often impacted by general
economic conditions.
o Cash flow from operations were impacted by a decline in inventory
purchases due to the decline in sales. Inventory turnover approximated
3.3 during for the six months ended May 31, 2005 compared to 3.2 in
the comparable period in the prior year.
o In addition, cash flow from operating activities for the six months
ended May 31, 2005, was impacted by a decrease in accrued expenses,
primarily from payments made to vendors.
o Income taxes payable decreased $35,413 during the six months ended May
31, 2005, primarily due to a tax payment made in connection with the
gain on the sale of the Cellular business in fiscal 2004.
Investing activities used $9,216 during the six months ended May 31, 2005,
primarily due to the acquisition of Terk and purchase (net of sales) of
short-term investments. The usage of cash from investing activities was
partially offset by the collection of a working capital adjustment and escrow in
connection with the sale of the sale of the Cellular business. Investing
33
activities provided cash of $2,315 during the six months ended May 31, 2004,
primarily due to a distribution received from an equity investee.
Financing activities used $5,612 during the six months ended May 31, 2005,
primarily from the payment of bank obligations which were acquired in connection
with the Terk acquisition. Financing activities for the six months ended May 31,
2004 provided cash of $26,327 mainly due to net borrowings of bank obligations.
The Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At May 31,
2005, such obligations and commitments are as follows:
Payments Due By Period
--------------------------------------------------------------------
Less than 1-3 4-5 After
Contractual Cash Obligations Total 1 Year Years Years 5 Years
- ------------------------------- -------------- ------------ ------- --------- ---------
Capital lease obligations (1) $ 12,971 $ 612 $ 1,240 $ 1,155 $ 9,964
Operating leases (2) 7,617 2,786 4,241 590 -
-------- -------- ------- ------- -------
Total contractual cash $ 20,588 $ 3,398 $ 5,481 $ 1,745 $ 9,964
obligations ======== ======= ======= ======= =======
Amount of Commitment
Expiration per period
-----------------------------------------------------------
Total
Amounts Less than 1-3 4-5 After
Other Commercial Commitments Committed 1 Year Years Years 5 years
- -------------------------------------------- ------------- ------------ --------- --------- -----------
Lines of credit (3) $ 4,647 $ 4,647
Stand-by letters of credit (4) 2,003 2,003
Commercial letters of credit (4) 291 291
Debt (5) 8,749 1,423 $4,062 $2,902 $362
Unconditional purchase obligations (6) 93,765 93,765 - - -
---------- ---------- ------ ------ -----
Total commercial commitments $ 109,455 $ 102,129 $4,062 $2,902 $362
========== ========== ====== ====== ====
(1) Represents total payments due under a capital lease obligations which
has a current and long term principal balance of $132 and $6,060,
respectively at May 31, 2005.
(2) The Company enters into operating leases in the normal course of
business.
(3) Represents amounts outstanding under the German factoring agreement at
May 31, 2005. The German credit facility consists of a 16,000 Euro
accounts receivable factoring arrangement and 6,000 Euro Asset Based
Lending Credit Facility.
(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 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.
34
(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.
Under the asset purchase agreement for the sale of the Cellular business to
UTStarcom, Inc. ("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 2004 or fiscal 2005. As of November 30, 2004 and May 31, 2005,
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.
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
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 UTSI for monthly payments of $46 until November 1,
2009. The Company also leases another facility from its principal stockholder.
Total lease payments required under the leases for the five-year period ending
May 31, 2010 are $4,641.
Recent Accounting Pronouncements
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
35
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 annual period that begins
after June 15, 2005 or the Company's first quarter of fiscal year 2006. 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 as discussed in Note 2 of Notes to Consolidated
Financial Statements.
In June 2005, the FASB issued FASB Statement No. 154 ("Statement 154"),
"Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20
and FASB Statement No. 3". Opinion 20 previously required that most voluntary
changes in accounting principle be recognized by including in net income of the
period of the change the cumulative effect of changing to the new accounting
principle. Statement 154 requires retrospective application to prior periods'
financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. Statement 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005 or
the Company's first quarter ended February 28, 2007. The Company does not expect
the adoption of Statement 154 to have an impact on the consolidated financial
statements.
Forward-Looking Statements
Except for historical information contained herein, statements made in this
Form 10-Q that would constitute forward-looking statements may involve certain
risks such as our ability to keep pace with technological advances, significant
competition in the mobile and consumer electronics businesses, quality and
consumer acceptance of newly-introduced products, our relationships with key
suppliers and customers, market volatility, non-availability of product, excess
inventory, price and product competition, new product introductions, the
dependency on key executives, the uncertain economic and political climate in
the United States and throughout the rest of the world and the potential that
such climate may deteriorate further and other risks detailed in the Company's
Form 10-K for the fiscal year ended November 30, 2004. These factors, among
others, may cause actual results to differ materially from the results suggested
in the forward- looking statements. Forward-looking statements include
statements relating to, among other things:
o growth trends in the mobile and consumer electronic businesses
o technological and market developments in the mobile and consumer
electronics businesses
o liquidity
o availability of key employees
o expansion into international markets
o the availability of new consumer and mobile electronic products
These forward-looking statements are subject to numerous risks,
uncertainties and assumptions about the Company including, among other things:
o the ability to keep pace with technological advances
o impact of future selling prices on Company profitability and inventory
carrying value
o significant competition in the mobile and consumer electronics
businesses
o quality and consumer acceptance of newly introduced products
o possible increases in warranty expense
o changes in the Company's business operations
o foreign currency risks
36
o political instability
o changes in U.S. federal, state and local and foreign laws
o changes in regulations and tariffs
o seasonality and cyclicality
o inventory obsolescence and availability
o changes in global or local economic conditions
o investments and pursuit of acquisitions
o diversification of our business
o contingent liabilities
o fluctuation in market value of short-term investments
o litigation from intellectual property rights
ITEM 3. 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 and May 31, 2005, which are
recorded at fair value of $5,988 and $12,483, respectively, include a net
unrealized loss of $1,284 and $2,003, respectively, 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 and $1,248 as of November 30, 2004 and May 31, 2005,
respectively. 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 may hedge transactions denominated in a currency other than the
functional currencies applicable to each of its various entities. The
instruments which may be used for hedging are forward contracts with banks. The
Company does not obtain collateral to support financial instruments, but
monitors the credit standing of the financial institution. The changes in market
value of such contracts have a high correlation to price changes in the currency
of the related hedged transactions. Intercompany transactions with foreign
subsidiaries and equity investments are typically not hedged. There were no
hedge transactions at November 30, 2004 or May 31, 2005.
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
37
comprehensive income. On November 30, 2004 and May 31, 2005, 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 and May 31, 2005,
amounts to $3,194 and $3,411, respectively. Actual results may differ.
ITEM 4. CONTROLS AND PROCEDURES
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 of 1934 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 Quarterly Report on Form 10-Q,
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
the Company's disclosure controls and procedures pursuant to the Securities and
Exchange Act Rule 13a- 15(e) and 15d-15(e). Based upon this evaluation as of May
31, 2005, the Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were not effective for the reasons more
fully described below related to the weakness in our internal control over
financial reporting identified during the fiscal 2004 internal control over
financial reporting evaluation in connection with Section 404 of the
Sarbanes-Oxley Act of 2002. Although progress is being made to remediate this
material weakness that was identified at November 30, 2004, additional action is
still required. To address the control weakness, the Company performed other
procedures to ensure the unaudited quarterly consolidated financial statements
are prepared in accordance with generally accepted accounting principles.
Accordingly, management believes that the consolidated financial statements
included in this Quarterly Report on Form 10-Q, fairly presents, in all material
respects our financial condition, results of operations and cash flows for the
periods presented.
Management's assessment identified the following material weakness in the
Company's internal control over financial reporting as of May 31, 2005 (this
section of Item 4. Controls and Procedures, should be read in conjunction with
Item 9A. Controls and Procedures, included in the Company's Form 10-K for the
fiscal year ended November 30, 2004, for additional information on Management's
Report on Internal Controls 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.
The Company identified this deficiency in its internal control over
financial reporting during the fiscal 2004 implementation of Section 404 of the
Sarbanes-Oxley Act of 2002 and; accordingly, this control deficiency is in the
process of being remediated subsequent to May 31, 2005. The finding discussed
above was characterized as a material weakness 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, the internal control weakness
identified by management did not cause a material misstatement or have an
adverse impact to the Company's financial position, results of operations or
control environment as of and for the three and six months ended May 31, 2005.
38
This material weakness impacted the Company's financial reporting to the extent
that certain controls were put or in the process of being put into place in
connection with user access security conflicts related to certain applications
and business processes and access to data and applications. Refer to the
specific remediation steps identified below.
Planned Remediation Efforts to Address Material Weakness
The Company developed a remediation plan and initiated action steps
designed to address the material weakness in the internal control over financial
reporting identified above and to implement 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 material weakness 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. These
remediation efforts are currently being implemented and are expected
to be completed and fully implemented before the end of fiscal 2005.
The Company believes that the measures above have addressed all matters
identified as a material weakness by management. The Company will continue to
monitor the effectiveness of its disclosure controls and procedures on an
ongoing basis and will take further actions, as appropriate.
Changes in Internal Control Over Financial Reporting
To address and remediate the material weaknesses in the Company's internal
control over financial reporting at November 30, 2004, the Company made changes
to its internal controls during the most recently completed fiscal quarter ended
May 31, 2005 that has materially affected, or is reasonable likely to materially
affect, the Company's internal controls over financial reporting. The Company
implemented the following measures to change or enhance the design and operating
effectiveness of its internal controls to remediate all material weaknesses
identified at November 30, 2004, except for the one material weakness identified
above that existed at November 30, 2004 and requires additional remediation:
1. 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;
2. 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;
3. Increased 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
39
and approval of significant transactions, account analysis and related
accounting entries by implementing a documentation and review process.
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 at November 30, 2004, except as noted above. 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.
PART II - OTHER INFORMATION
ITEM 1. 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. If
management determines, based on the underlying facts and circumstances, that it
is probable a loss will result from a litigation contingency and the amount of
the loss can be reasonably estimated, the estimated loss is accrued for. The
Company believes the specific litigation matters disclosed below will not have a
material adverse effect on the Company's financial statements, individually or
in the aggregate.
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 $16,000 paid to Philip Christopher pursuant to a
Personally Held Intangibles Purchase Agreement in connection with the UTStarcom
transaction, (c) disgorgement to Audiovox of $4,000 paid to Philip Christopher
as compensation for termination of his Employment Agreement and Award Agreement
with ACC, (d) disgorgement to ACC of $1,916 paid to John Shalam pursuant to an
Award Agreement with ACC, and (e) recovery by ACC of $5,000 in severance
payments distributed by Philip Christopher to ACC's former employees. Defendants
filed a motion to dismiss the complaint, which was withdrawn. The Company
understands that the individual 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. The Company anticipates that defense costs, in
excess of any applicable retention, will be covered by the Company's insurance
policies. Any damages recovered by plaintiffs will be paid to the Company.
Accordingly, no estimated loss has been recorded for the aforementioned case.
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 agreement 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 in
consideration of which the Company will acquire all of Respondents' ownership in
the Venezuelan companies and a release of any and all claims. As of May 31,
2005, the satisfaction of the aforementioned pre-closing conditions were not
satisfied and the payment for the Respondents' ownership is included in
restricted cash on the accompanying consolidated balance sheet.
40
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 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. The motion to dismiss
was heard on April 5, 2005, and the court granted the Company's motion to
dismiss the complaint, but Plaintiff has filed a Notice of Appeal with Delaware
Supreme Court. The Company intends to vigorously defend this matter; however, no
assurances regarding the outcome of this matter can be given at this point in
the litigation. Accordingly, no estimated loss has been recorded for the
aforementioned case.
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. No assurances regarding the outcome of this matter can be given,
as the Company is unable to assess the degree of probability of an unfavorable
outcome and estimated loss, if any. Accordingly, no estimated loss has been
recorded for the aforementioned case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 19, 2005,
at the 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 two
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 , and Patrick M. Lavelle, 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. 18,238,539 489,299
Dennis F. McManus 18,243,498 484,340
Irving Halevy 18,236,567 491,271
Peter A. Lesser 18,240,848 486,990
Class A and B
John J. Shalam 35,716,347 4,842,351
Philip Christopher 35,707,565 4,851,133
Charles M. Stoehr 35,707,944 4,850,754
Patrick M. Lavelle 35,710,010 4,848,688
Each nominee was elected a Director of the Company.
o To ratify the appointment of Grant Thornton LLP as our
independent registered public accounting firm for the fiscal year
ending November 30, 2005.
41
The votes were cast for this matter as follows:
FOR AGAINST/ABSTAIN
------------------ ---------------------------
40,404,932 153,766
The selection of Grant Thornton LLP as the Company's independent auditors
was ratified.
ITEM 6. EXHIBITS
Exhibit
Number Description
31.1 Certification of Principal Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (furnished herewith)
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.1 Certification of Principal Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2 Certification of Principal Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUDIOVOX CORPORATION
By:/s/Patrick M. Lavelle
-----------------------------------------
Patrick M. Lavelle
President and Chief
Executive Officer
Dated: July 11, 2005
By:/s/Charles M. Stoehr
------------------------------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
43
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
I, Patrick M. Lavelle, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 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:
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: July 11, 2005 By: /s/ Patrick M. Lavelle
--------------------------------------
Patrick M. Lavelle
President and Chief Executive Officer
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
I, Charles M. Stoehr, Senior Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 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:
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: July 11, 2005 By: /s/ Charles M. Stoehr
------------------------------------
Charles M. Stoehr
Senior Vice President and Chief Financial Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Audiovox Corporation (the
"Company") on Form 10-Q for the period ended May 31, 2005, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Patrick
M. Lavelle, 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 the requirements of 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/ Patrick M. Lavelle
Patrick M. Lavelle
President and Chief Executive Officer
July 11, 2005
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Audiovox Corporation (the
"Company") on Form 10-Q for the period ended May 31, 2005, 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 the requirements of 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
July 11, 2005
Exhibit 32.2
