UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended May 31, 2004
Commission file number 0-28839
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 231-7750
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 126 of the Exchange Act)
Yes X No
------ ------
1
Number of shares of each class of the registrant's Common Stock outstanding
as of the latest practicable date.
Class Outstanding at July 9, 2004
Class A Common Stock 20,785,186 Shares
Class B Common Stock 2,260,954 Shares
2
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I - FINANCIAL INFORMATION 4
ITEM 1 FINANCIAL STATEMENTS 4
Consolidated Balance Sheets at November 30,
2003 and May 31, 2004 (unaudited) 4
Consolidated Statements of Earnings (unaudited) for the Three
and Six Months Ended May 31, 2003 and May 31, 2004 5
Consolidated Statements of Cash Flows (unaudited) for the Three
and Six Months Ended May 31, 2003 and May 31, 2004 6
Notes to Consolidated Financial Statements 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 28
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 56
ITEM 4 CONTROLS AND PROCEDURES 57
PART II - OTHER INFORMATION 58
ITEM 1 LEGAL PROCEEDINGS 58
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 59
SIGNATURES 60
3
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,
2003 2004
---------- ----------
(unaudited)
Assets
Current assets:
Cash $ 4,702 $ 5,152
Accounts receivable, net 266,421 209,603
Inventory, net 219,664 276,526
Receivables from vendors 7,830 11,401
Prepaid expenses and other current assets 12,371 12,991
Deferred income taxes 9,531 7,854
--------- ---------
Total current assets 520,519 523,527
Investment securities 9,512 8,045
Equity investments 13,142 12,662
Property, plant and equipment, net 20,242 19,829
Excess cost over fair value of assets acquired 7,532 7,019
Intangible assets 8,043 8,043
Other assets 713 573
--------- ---------
$ 579,703 $ 579,698
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 94,864 $ 80,261
Accrued expenses and other current liabilities 42,816 38,037
Accrued sales incentives 21,894 11,466
Income taxes payable 13,218 11,277
Bank obligations 39,940 69,643
Current portion of long-term debt 3,433 2,747
--------- ---------
Total current liabilities 216,165 213,431
Long-term debt 18,289 15,719
Capital lease obligation 6,070 6,038
Deferred income taxes 3,178 1,645
Deferred compensation 5,280 6,185
--------- ---------
Total liabilities 248,982 243,018
--------- ---------
Minority interest 4,993 5,922
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $50 par value; 50,000 shares authorized and outstanding, liquidation
preference of $2,500 per share 2,500 2,500
Series preferred stock $.01 par value, 1,500,000 shares authorized; no shares issued or
outstanding -- --
Common stock:
Class A $.01 par value; 60,000,000 shares authorized; 20,728,382 and
20,772,846 shares issued at November 30, 2003 and May 31, 2004,
respectively; and 19,655,645 and
19,701,889 shares outstanding at November 30, 2003 and May 31, 2004, respectively 207 208
Class B $.01 par value convertible; 10,000,000 shares authorized; 2,260,954 shares issued
and outstanding 22 22
Paid-in capital 252,104 252,752
Retained earnings 80,635 86,182
Accumulated other comprehensive loss (1,229) (2,409)
Treasury stock, at cost, 1,072,737 and 1,070,957 shares of Class A common stock at
November 30, 2003 and May 31, 2004, respectively (8,511) (8,497)
--------- ---------
Total stockholders' equity 325,728 330,758
--------- ---------
Total liabilities and stockholders' equity $ 579,703 $ 579,698
========= =========
See accompanying notes to consolidated financial statements.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
For the Three and Six Months Ended May 31, 2003 and May 31, 2004
(In thousands, except share and per share data)
(unaudited)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
May 31, May 31, May 31, May 31,
2003 2004 2003 2004
------------ ------------ ------------ ------------
Net sales $ 301,010 $ 438,199 $ 597,828 $ 815,083
Cost of sales 275,398 405,751 546,748 751,269
------------ ------------ ------------ ------------
Gross profit 25,612 32,448 51,080 63,814
------------ ------------ ------------ ------------
Operating expenses:
Selling 8,275 9,979 15,577 19,899
General and administrative 12,889 14,641 25,195 31,747
Warehousing and technical support 1,394 2,319 2,793 4,022
------------ ------------ ------------ ------------
Total operating expenses 22,558 26,939 43,565 55,668
------------ ------------ ------------ ------------
Operating income 3,054 5,509 7,515 8,146
------------ ------------ ------------ ------------
Other income (expense):
Interest and bank charges (1,013) (1,961) (2,118) (3,397)
Equity in income of equity investees 743 1,520 1,114 2,523
Other, net 571 447 (527) 1,299
------------ ------------ ------------ ------------
Total other income (expense), net 301 6 (1,531) 425
------------ ------------ ------------ ------------
Income before provision for income taxes and minority interest 3,355 5,515 5,984 8,571
Provision for income taxes 918 1,294 1,958 2,094
Minority interest expense (363) (544) (743) (930)
------------ ------------ ------------ ------------
Net income $ 2,074 $ 3,677 $ 3,283 $ 5,547
============ ============ ============ ============
Net income per common share (basic) $ 0.10 $ 0.17 $ 0.15 $ 0.25
============ ============ ============ ============
Net income per common share (diluted) $ 0.09 $ 0.16 $ 0.15 $ 0.25
============ ============ ============ ============
Weighted average number of common shares outstanding (basic) 21,834,099 21,950,898 21,834,099 21,936,577
============ ============ ============ ============
Weighted average number of common shares outstanding (diluted) 21,873,875 22,436,045 21,949,521 22,345,345
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended May 31, 2003 and May 31, 2004
(In thousands)
(unaudited)
Six Months Ended
---------------------------
May 31, May 31,
2003 2004
--------- ---------
Cash flows from operating activities:
Net income $ 3,283 $ 5,547
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization 2,060 2,210
Recovery of bad debt expense (294) (37)
Equity in income of equity investees (1,114) (2,523)
Minority interest expense 743 930
Deferred income tax expense, net 45 1,066
Loss on disposal of property, plant and equipment, net 175 2
Tax benefit on stock options exercised -- 107
Non-cash stock compensation -- 268
Changes in operating assets and liabilities
Accounts receivable 27,403 56,330
Inventory 118,894 (57,139)
Receivables from vendors 2,730 (3,571)
Prepaid expenses and other assets (7,163) 1,230
Investment securities-trading (324) (904)
Accounts payable, accrued expenses and other current liabilities and accrued sales
incentives (90,533) (28,934)
Income taxes payable 2,239 (1,923)
--------- ---------
Net cash provided by (used in) operating activities 58,144 (27,341)
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (533) (1,887)
Proceeds from sale of property, plant and equipment 232 82
Proceeds from distribution from an equity investee 530 3,017
Proceeds from reduction of purchase price of acquired business -- 513
--------- ---------
Net cash provided by investing activities 229 1,725
--------- ---------
Cash flows from financing activities:
Borrowings from bank obligations 150,751 557,595
Repayments on bank obligations (187,746) (528,006)
Principal payments on capital lease obligation (30) (32)
Proceeds from exercise of stock options and warrants -- 534
Principal payments on debt -- (3,810)
Payment of guarantee -- (291)
--------- ---------
Net cash (used in) provided by financing activities (37,025) 25,990
--------- ---------
Effect of exchange rate changes on cash 16 76
--------- ---------
Net increase in cash 21,364 450
Cash at beginning of period 2,758 4,702
--------- ---------
Cash at end of period $ 24,122 $ 5,152
========= =========
See accompanying notes to consolidated financial statements.
6
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
(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, 2003.
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, allowance for cellular
deactivations, inventory valuation, recoverability of deferred tax assets,
valuation of long-lived assets, accrued sales incentives and warranty
reserves.
A summary of the Company's significant accounting policies is identified in
Note 1 of the Notes to Consolidated Financial Statements included in the
Company's 2003 Annual Report filed on Form 10-K. There have been no changes
to the Company's significant accounting policies subsequent to November 30,
2003. Certain reclassifications have been made to the 2003 consolidated
financial statements in order to conform to the 2004 presentation.
(2) Subsequent Event
On June 11, 2004, the Company's majority owned subsidiary Audiovox
Communications Corporation ("ACC") entered into a definitive asset purchase
agreement ("agreement") to sell selected assets and certain liabilities
(excluding its receivables, inter-company accounts payable, income taxes
payable, subordinated debt and certain accrued expenses), to UTStarcom,
Inc. ("UTSI") for a total purchase price of $165,100 (purchase price)
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
subject to a net working capital adjustment. While the anticipated closing
date for this transaction is expected during the fourth quarter of fiscal
2004, there can be no assurances that such transaction will close during
that period as it is subject to certain closing conditions, including
regulatory and third party approvals. The Company's Board of Directors as
well as the Board of Directors of UTSI has approved the transaction and Mr.
John Shalam, Chairman and Chief Executive Officer and majority shareholder,
has agreed to vote his shares in favor of this agreement.
Audiovox will retain the proceeds of the sale of the Wireless business. It
is the intention of Audiovox to use the proceeds to fund and grow its
consumer electronics business. However, Audiovox may use all or a portion
of the proceeds for other purposes and Audiovox will consider other market
opportunities, including acquisitions.
Pursuant to the terms of the agreement, 5% (or $8,255) of the $165,100
purchase price will be placed in escrow by UTSI for 120 days after closing
to fund the net working capital adjustment. If the net working capital
adjustment reflected at the closing is less than $40,000, then the purchase
price will be adjusted downward in an amount equal to the deficiency, and
if the net working capital balance exceeds $40,000, then the purchase price
will be adjusted upwards in an amount equal to the excess.
On or after the closing date of the sale to UTSI, the following additional
agreements have come or will become effective:
o The Company has entered into an agreement with Toshiba, ACC's minority
interest shareholder, to purchase the balance of Toshiba's shares of
ACC prior to the closing with UTSI for $13,590, which includes the
repayment of an $8,107 subordinated note (see Note 17).
o Mr. Philip Christopher (ACC Chief Executive Officer) will sell to ACC
all of his goodwill relating to or useable by ACC for a purchase price
not to exceed $16,000, as determined by a qualified independent
professional.
o ACC will pay Mr. Christopher an additional $4,000 for the termination
of his Employment and Stock Appreciation Rights Agreement on the
closing date of the sale.
o ACC will establish a $5,000 severance pool to be paid to certain
employees of ACC and its subsidiaries as a severance payment and in
exchange for which Audiovox will receive a release from such
employees.
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
o Mr. Shalam will receive a payment of $1,916 from the Company in
connection with his Long-Term Incentive Compensation Award as of May
29, 2002 which was intended to reward Mr. Shalam in the event that a
controlling interest in ACC was acquired by a third party.
o For a period of five years after the closing, the Company will enter
into a royalty free licensing agreement permitting UTSI to use the
Audiovox brand name on certain products.
o The Company will provide certain services, that are currently provided
to ACC, for at least six months after the closing as set forth in the
Transition Services Agreement. As consideration for the performance of
these services, UTSI will pay the Company based on the usage of these
services as set forth in the Transition Services Agreement.
In addition, the Company and UTSI have agreed to use reasonable commercial
efforts to negotiate and agree upon the form of sublease for space at
Wireless Boulevard in Hauppauge, New York and Marquardt Avenue in Cerritos,
California, as these locations are ACC's primary locations.
Based upon review of FASB Statement No. 144, "Accounting for the Impairment
of Long- lived Assets," the Company has assessed the measurement date in
accounting for the sale transaction on June 11, 2004 in connection with the
date of board approval and signing of the agreement. Beginning in the third
quarter of fiscal 2004, financial results for ACC will be recorded as
discontinued operations through the date the sale transaction is closed.
The following sets forth the carrying amounts of the major classes of
assets and liabilities of ACC, which will be part of the disposal group as
of May 31, 2004:
May 31, 2004
(unaudited)
Assets
Inventory, net $ 129,158
Prepaid expenses and other current assets 5,346
Property, plant and equipment, net 1,686
Other assets 34
---------
Total Assets $ 136,224
=========
9
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
May 31, 2004
Liabilities
Accounts payable $ 54,554
Accrued expenses and other current liabilities 13,158
Accrued sales incentives 4,482
Long-term debt 38
----------
Total Liabilities $ 72,232
==========
(3) 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.
A reconciliation between the numerators and denominators of the basic and
diluted income per common share is as follows:
Three Months Ended Six Months Ended
-------------------------- -----------------------------
May 31, May 31,
2003 2004 2003 2004
----------- ----------- ----------- -----------
Net income (numerator) $ 2,074 $ 3,677 $ 3,283 $ 5,547
=========== =========== =========== ===========
Weighted average number of common
shares outstanding (denominator for net
income per common share, basic) 21,834,099 21,950,898 21,834,099 21,936,577
Effect of dilutive securities:
Stock options and warrants 39,776 485,147 115,422 408,768
----------- ----------- ----------- -----------
Weighted average number of common
shares and potential common shares
outstanding (denominator for net
income per common share, diluted) 21,873,875 22,436,045 21,949,521 22,345,345
=========== =========== =========== ===========
Net income per common share (basic) $ 0.10 $ 0.17 $ 0.15 $ 0.25
=========== =========== =========== ===========
Net income per common share (diluted) $ 0.09 $ 0.16 $ 0.15 $ 0.25
=========== =========== =========== ===========
Stock options and warrants totaling 2,416,164 and 2,002,182 for the three
and six months ended May 31, 2003, respectively, were not included in the
net income per common share calculation because the exercise price of
10
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
these options were greater than the average market price of the common
stock during the period.
Stock options and warrants totaling 732,500 for the six months ended May
31, 2004, were not included in the net income per common share calculation
because the exercise price of these options were greater than the average
market price of the common stock during the period.
(4) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss of $1,229 and $2,409 at November 30,
2003 and May 31, 2004, respectively, on the accompanying consolidated
balance sheets includes the net accumulated unrealized gain (loss) on the
Company's available-for-sale investment securities of $1,135 and $(337) at
November 30, 2003 and May 31, 2004, respectively, and foreign currency
translation adjustments of $(2,364) and $(2,072) at November 30, 2003 and
May 31, 2004, respectively.
The Company's total comprehensive income was as follows:
Three Months Ended Six Months Ended
---------------------- -------------------
May 31, May 31,
2003 2004 2003 2004
------- ------- ------- -------
Net income $ 2,074 $ 3,677 $ 3,283 $ 5,547
Other comprehensive income (loss):
Foreign currency translation adjustments 835 (253) 1,520 292
Unrealized holding gain (loss) on
available-for-sale investment
securities arising during period, net of
tax (29) (1,265) 93 (1,472)
------- ------- ------- -------
Other comprehensive income (loss), net of
tax 806 (1,518) 1,613 (1,180)
------- ------- ------- -------
Total comprehensive income $ 2,880 $ 2,159 $ 4,896 $ 4,367
======= ======= ======= =======
The change in the net unrealized gain (loss) arising during the periods
presented above are net of tax provision (benefit) of $(18) and $(775) for
the three months ended May 31, 2003 and May 31, 2004, respectively, and $57
and $(902) for the six months ended May 31, 2003 and May 31, 2004,
respectively.
11
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
(5) 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, May 31,
2003 2004
------ -----
Cash paid during the period:
Interest (excluding bank charges) $ 1,063 $ 1,720
Income taxes (net of refunds) $ (219) $ 3,815
Changes in Stockholders' Equity
During the six months ended May 31, 2004, 44,464 stock options were
exercised into shares of Class A Common Stock aggregating proceeds of $534
to the Company.
During the six months ended May 31, 2003 and May 31, 2004, the Company
recorded an unrealized holding gain (loss) relating to available-for-sale
marketable investment securities, net of deferred taxes, of $93 and
$(1,472), respectively, as a component of accumulated other comprehensive
income (loss).
As a result of stock option exercises, the Company recorded a tax benefit
of $107 during the six months ended May 31, 2004 which is included in
paid-in capital in the accompanying consolidated balance sheet.
Non-Cash Transactions
During the six months ended May 31, 2004, the Company recorded a non-cash
stock compensation charge of $268 related to the rights under the call/put
options previously granted to certain employees of Audiovox German Holdings
GmbH (Audiovox Germany) (Note 6).
12
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
(6) Business Acquisitions
Code-Alarm, Inc.
On March 15, 2002, Code Systems, Inc. (Code), a wholly-owned subsidiary of
Audiovox Electronics Corp. (AEC), a wholly-owned subsidiary of the Company,
purchased certain assets of Code-Alarm, Inc., an automotive security
product company. The purpose of this acquisition was to expand brand
recognition and improve OEM production with manufacturers. The results of
operations of Code-Alarm, Inc. are included in the accompanying
consolidated financial statements from the date of purchase. The purchase
price consisted of approximately $7,100, paid in cash at the closing, and a
debenture (CSI Debenture) whose value is linked to the future earnings of
Code. The payment of any amount under the terms of the CSI Debenture is
based on performance and is scheduled to occur in the first calendar
quarter of 2006.
The Company accounted for the transaction in accordance with the purchase
method of accounting. An adjustment to the allocation of the purchase price
was made to certain acquired assets resulting in an increase to goodwill of
$706 during the year ended November 30, 2003. During the three and six
months ended May 31, 2004, an adjustment to the purchase price was made due
to the collection of monies held in escrow at the time of closing,
resulting in a $3 and $513 decrease to goodwill, respectively. As a result
of the acquisition, goodwill, as adjusted, of $2,047 was recorded.
Simultaneous with this business acquisition, the Company entered into a
purchase and supply agreement with a third party. Under the terms of this
agreement, the third party will purchase or direct its suppliers to
purchase certain products from the Company. In exchange for entering into
this agreement, the Company issued 50 warrants in its subsidiary, Code,
which vest immediately. These warrants were deemed to have minimal value
based upon the then current value of Code. Furthermore, the agreement calls
for the issuance of additional warrants based upon the future operating
performance of Code.
Based upon the contingent nature of the debenture and warrants, no
recognition was given to the CSI debenture or warrants as the related
contingencies were not considered probable and such warrants had not vested
at November 30, 2003 or May 31, 2004.
Recoton Audio Group
On July 8, 2003, the Company, through a newly-formed, wholly-owned
subsidiary, acquired in cash (i) certain accounts receivable, inventory and
13
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
trademarks from the U.S. audio operations of Recoton Corporation (the "U.S.
audio business") or (Recoton) and (ii) the outstanding capital stock of
Recoton German Holdings GmbH (the "international audio business"), the
parent holding company of Recoton's Italian, German and Japanese
subsidiaries, for $40,046, net of cash acquired, including transaction
costs of $1.9 million. The primary reason for this transaction was to
expand the product offerings of AEC and to obtain certain long-standing
trademarks such as Jensen(R), Acoustic Research(R) and others. The Company
also acquired an obligation with a German financial institution as a result
of the purchase of the common stock of Recoton German Holdings GmbH. This
obligation is secured by the acquired company's accounts receivable and
inventory.
The results of operations of this acquisition have been included in the
consolidated financial statements from the date of acquisition (July 8,
2003).
The following unaudited pro-forma financial information for the three and
six months ended May 31, 2003 represents the combined results of the
Company's operations and the Recoton acquisition as if the Recoton
acquisition had occurred at the beginning of the year of acquisition
(December 1, 2002). 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 period.
Three Months Ended Six Months Ended
------------------- ----------------
May 31, 2003
-------------------------------------
Revenue $316,223 $632,447
Net loss (4,872) (9,745)
Net loss per share-basic and diluted (0.23) (0.45)
On August 29, 2003, the Company entered into a call/put option agreement
with certain employees of Audiovox Germany, whereby these employees can
acquire up to a maximum of 20% of the Company's stated share capital in
Audiovox Germany at a call price equal to the same proportion of the actual
price paid by the Company for Audiovox Germany. The put options cannot be
exercised until the later of (i) November 30, 2008 or (ii) the full
repayment (including interest) of an inter-company loan granted to Audiovox
Germany in the amount of 5.3 million Euros. Notwithstanding the lapse of
these time periods, the put options become immediately exercisable upon (i)
the sale of Audiovox Germany or (ii) the termination of employment or death
of the employee. The put price to be paid to the employee upon exercise
will be the then net asset value per share of Audiovox Germany.
Accordingly, the Company recognizes compensation expense based on 20% of
the increase in Audiovox Germany's net assets representing the incremental
14
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
change of the put price over the call option price. Compensation expense
for these options amounted to $268 for the six months ended May 31, 2004.
(7) Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill is as follow:
Net beginning balance at November 30, 2003 $ 7,532
Escrow monies collected in connection with Code-Alarm (Note 6) (513)
-------
Net ending balance at May 31, 2004 $ 7,019
=======
At November 30, 2003 and May 31, 2004, intangible assets consisted of the
following:
November 30, 2003
and May 31, 2004
------------------------------------------------
Gross
Carrying Accumulated Total Net
Value Amortization Book Value
--------- ------------ -----------
Patents subject to amortization $ 677 $ 677 --
Trademarks subject to amortization 34 34 --
Trademarks not subject to amortization 8,043 -- $8,043
------ ------ ------
Total $8,754 $ 711 $8,043
====== ====== ======
At May 31, 2004, all trademarks and patents subject to amortization have
been fully amortized.
(8) Segment Information
The Company has two reportable segments which are organized by products:
Wireless and Electronics. The Wireless Segment markets wireless handsets
and accessories through domestic and international wireless carriers and
their agents, independent distributors and retailers. The Electronics
Segment sells autosound, mobile electronics and consumer electronics,
primarily to mass merchants, specialty retailers, new car dealers, original
equipment manufacturers (OEM), independent installers of automotive
accessories and the U.S. military.
15
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
The Company's chief decision maker evaluates performance of the segments
based upon income before provision for income taxes and minority interest.
The accounting policies of the segments are the same as those for the
Company as a whole. The Company allocates interest and certain shared
expenses, including treasury, legal and human resources, to the segments
based upon estimated usage. Certain items are maintained at the Company's
corporate headquarters (Corporate) and are not allocated to the segments.
Such items primarily include costs associated with accounting and certain
executive officer salaries and bonuses and certain items including
investment securities, equity investments, deferred income taxes,
jointly-used fixed assets and debt. The jointly-used fixed assets are the
Company's management information systems, which are used by the Wireless
and Electronics Segments and Corporate. A portion of the management
information systems costs, including depreciation and amortization expense,
are allocated to the segments based upon estimates made by management.
During the six months ended May 31, 2003 and May 31, 2004, certain
advertising costs of $1,813 and $2,068, respectively, were not allocated to
the segments. These costs pertained to an advertising campaign that was
intended to promote overall Company awareness, rather than individual
segment products. In addition, during the six months ended May 31, 2004,
the corporate allocation to the Electronics Segment was reduced by $618 in
order to offset costs incurred in the Company's Venezuelan subsidiary that
were considered to be a consolidated cost of the Company. Segment
identifiable assets are those which are directly used in or identified to
segment operations.
Consolidated
Wireless Electronics Corporate Totals
Three Months Ended
May 31, 2003
Net sales $189,107 $111,903 $ -- $301,010
Income before provision for income
taxes and minority interest 1,486 5,262 (3,393) 3,355
Three Months Ended
May 31, 2004
Net sales $290,181 $148,018 -- $438,199
Income before provision for income
taxes and minority interest 2,090 6,089 $ (2,664) 5,515
16
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
Consolidated
Wireless Electronics Corporate Totals
Six Months Ended
May 31, 2003
Net sales $405,669 $192,159 $ -- $597,828
Income before provision for income
taxes and minority interest 4,735 7,752 (6,503) 5,984
Total assets 175,637 195,337 59,677 430,651
Goodwill, net -- 2,910 4,602 7,512
Six Months Ended
May 31, 2004
Net sales $530,516 $284,567 $ -- $815,083
Income before provision for income
taxes and minority interest 3,610 11,243 (6,282) 8,571
Total assets 240,220 297,354 42,124 579,698
Goodwill, net -- 2,417 4,602 7,019
(9) Equity Investments
As of November 30, 2003 and May 31, 2004, the Company's 72% owned
subsidiary, Audiovox Communications Sdn. Bhd., had a 29% ownership interest
in Avx Posse (Malaysia) Sdn. Bhd. (Posse) which monitors car security
commands through a satellite based system in Malaysia. In addition, the
Company had a 20% ownership interest in Bliss- tel which distributes
cellular telephones and accessories in Thailand, and the Company had a 50%
non-controlling ownership interests in two other entities: 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; and G.L.M. Wireless Communications, Inc. (G.L.M.) which
is in the cellular telephone, pager and communications business in the New
York metropolitan area.
The following presents summary financial information for ASA. Such summary
financial information has been provided herein based upon the individual
significance of this unconsolidated equity investment to the consolidated
financial information of the Company. Furthermore, based upon the lack of
significance to the consolidated financial information of the Company, no
summary financial information for the Company's other equity investments
17
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
has been provided herein:
November 30, May 31,
2003 2004
------------ -------------
Current assets $22,518 $21,664
Non-current assets 4,803 4,252
Current liabilities 4,640 4,701
Members' equity 22,681 21,215
Six Months Ended
----------------------------
May 31, 2003 May 31, 2004
------------ -------------
Net sales $20,898 $29,236
Gross profit 5,862 9,182
Operating income 1,082 3,331
Net income 2,193 4,502
The Company's share of income from this unconsolidated equity investment
for the six months ended May 31, 2003 and May 31, 2004 was $1,097 and
$2,251, respectively. In addition, the Company received distributions from
ASA totaling $3,017 during the six months ended May 31, 2004, and were
recorded as a reduction to equity investments on the accompanying
consolidated balance sheet.
(10) 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.
18
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to the reported provision for income taxes is as follows:
Three Months Ended Six Months Ended
May 31, May 31,
2003 2004 2003 2004
-------------- ------------------ ----------------- -----------------
Tax provision at Federal
statutory rate $ 1,175 35.0% $ 1,930 35.0% $ 2,095 35.0% $ 3,000 35.0%
State income taxes, net of
Federal benefit 207 6.2 191 3.5 426 7.1 336 3.9
Decrease in beginning-of-
the-year balance of the
valuation allowance for
deferred tax assets (566) (16.9) (1,110) (20.1) (1,005) (16.8) (1,639) (19.1)
Foreign tax rate
differential (62) (1.9) 159 2.9 405 6.8 54 0.6
Non-deductible changes in
rates and other, net 164 5.0 124 2.2 37 0.6 343 4.0
------- ----- ------- ------ ------- ------ ------- ------
$ 918 27.4% $ 1,294 23.5% $ 1,958 32.7% $ 2,094 24.4%
======= ===== ======= ====== ======= ====== ======= ======
Other is a combination of various factors, including changes in the taxable
income or loss between various tax entities with differing effective tax
rates, changes in the allocation and apportionment factors between taxable
jurisdictions with differing tax rates of each tax entity, changes in tax
rates and other legislation in the various jurisdictions, and other items.
The effective tax rate for the three and six months ended May 31, 2004, was
23.5% and 24.4%, respectively, compared to 27.4% and 32.7% for the
comparable periods in the prior year.
The net change in the total valuation allowance, which resulted from the
utilization of fully reserved net operating loss carryforwards by the
Wireless Segment, for the three and six months ended May 31, 2004, was a
decrease of $1,110 and a decrease of $1,639, respectively. A valuation
allowance is provided when it is more likely than not that some portion, or
all, of the deferred tax assets will not be realized. The Company has
established valuation allowances for net operating loss carryforwards as
well as other deferred tax assets of the Wireless Segment. Based on the
Electronics Segment's ability to carry back future reversals of deductible
temporary differences to taxes paid in current and prior years and the
Electronics Segment's historical taxable income record, adjusted for
unusual items, management believes it is more likely than not that the
Electronics Segment will realize the benefit of the net deferred tax assets
existing at May 31, 2004.
19
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
(11) Accrued Sales Incentives
A summary of the activity with respect to sales incentives for the three
and six months ended May 31, 2003 and May 31, 2004, respectively, on a
segment and consolidated basis is provided below:
For the three months ended May 31, 2003
Wireless Electronics Total
Opening balance $ 8,641 $ 4,561 $ 13,202
Accruals 5,784 2,370 8,154
Payments (10,953) (1,763) (12,716)
Reversals for unearned sales incentive (51) (240) (291)
Reversals for unclaimed sales incentives (104) -- (104)
-------- -------- --------
Ending balance $ 3,317 $ 4,928 $ 8,245
======== ======== ========
For the six months ended May 31, 2003
Wireless Electronics Total
Opening balance $ 7,525 $ 4,626 $ 12,151
Accruals 11,336 4,335 15,671
Payments (15,226) (3,062) (18,288)
Reversals for unearned sales incentive (51) (240) (291)
Reversals for unclaimed sales incentives (267) (731) (998)
-------- -------- --------
Ending balance $ 3,317 $ 4,928 $ 8,245
======== ======== ========
For the three months ended May 31, 2004
Wireless Electronics Total
Opening Balance $ 3,655 $ 6,826 $ 10,481
Accruals 4,517 5,066 9,583
Payments (3,500) (4,262) (7,762)
Reversals for unearned sales incentives (70) (448) (518)
Reversals for unclaimed sales incentives (120) (198) (318)
-------- -------- --------
Ending balance $ 4,482 $ 6,984 $ 11,466
======== ======== ========
20
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
For the six months ended May 31, 2004
Wireless Electronics Total
Opening Balance $ 7,289 $ 14,605 $ 21,894
Accruals 8,140 8,033 16,173
Payments (10,081) (12,584) (22,665)
Reversals for unearned sales incentives (728) (1,818) (2,546)
Reversals for unclaimed sales incentives (138) (1,252) (1,390)
-------- -------- --------
Ending balance $ 4,482 $ 6,984 $ 11,466
======== ======== ========
The majority of the reversals of previously established sales incentive
liabilities pertain to sales recorded in prior periods.
(12) 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,
2003 2004 2003 2004
---------- ---------- --------- ----------
Opening balance $ 16,280 $ 19,691 $ 15,410 $ 18,512
Liabilities accrued for warranties
issued during the period 2,926 1,007 4,884 3,941
Warranty claims paid during the
period (2,316) (2,507) (3,404) (4,262)
-------- -------- -------- --------
Ending balance $ 16,890 $ 18,191 $ 16,890 $ 18,191
======== ======== ======== ========
(13) Financing Arrangements
(a) Bank Obligations
The Company's principal source of liquidity is its revolving credit
agreement which expires July 27, 2004. The Company is currently
negotiating with the bank to extend this agreement, of which no
assurance can be given. At November 30, 2003 and May 31, 2004, the
credit agreement provided for $150,000 of available credit, including
$10,000 for foreign currency borrowings.
21
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
Under the credit agreement, the Company may obtain credit through
direct borrowings and letters of credit. The obligations of the
Company under the credit agreement are guaranteed by certain of the
Company's subsidiaries and are secured by accounts receivable,
inventory and the Company's shares of ACC common stock. The credit
agreement also allows for commitments up to $50,000 in forward
exchange contracts. On April 16, 2004, the Company and its lenders
executed a Tenth Amendment to the respective credit agreement. The
Amendment, among other things, amends and restates the definition of
"Borrowing Base" to allow the Company to borrow against inventory at
any time.
Outstanding domestic obligations under the credit agreement at
November 30, 2003 and May 31, 2004 were as follows:
November 30, May 31,
2003 2004
------------ -------
Revolving Credit Notes $11,709 $11,084
Eurodollar Notes 20,000 50,000
------- -------
$31,709 $61,084
======= =======
The Company's ability to borrow under its credit facility is a maximum
aggregate amount of $150,000, subject to certain conditions, based
upon a formula taking into account the amount and quality of its
accounts receivable and inventory. The credit agreement contains
several covenants requiring, among other things, minimum levels of
pre-tax income and minimum levels of net worth. Additionally, the
agreement includes restrictions and limitations on payments of
dividends, stock repurchases and capital expenditures.
The Company was in compliance with its bank covenants at November 30,
2003 and May 31, 2004. While the Company has historically been able to
obtain waivers for compliance violations, there can be no assurance
that future negotiations with its lenders would be successful or that
the Company will not violate covenants in the future, therefore,
resulting in amounts outstanding to be payable upon demand. This
credit agreement has no cross covenants with other credit facilities.
The Company also has revolving credit facilities in Malaysia
(Malaysian Credit Agreement) to finance additional working capital
needs. The credit facilities are partially secured by two standby
letters which approximate $800 each and expire in July 2004. The
Company is currently negotiating with the bank to extend this agree-
22
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
ment, of which no assurance can be given. In addition, the
obligations of the Company are also secured by the property and
building owned by Audiovox Communications Sdn. Bhd. Outstanding
obligations under the Malaysian Credit Agreement at November 30, 2003
and May 31, 2004 were approximately $2,721 and $2,676, respectively.
At May 31, 2004, the Company had additional outstanding standby
letters of credit aggregating $671 which expire in July 2004.
(b) Debt/Loan Agreement
On September 2, 2003, the Company's subsidiary, Audiovox German
Holdings GmbH, (Audiovox Germany) borrowed 12 million Euros under a
new term loan agreement. This agreement was for a 5-year term loan
with a financial institution consisting of two tranches. Tranche A is
for 9 million Euros and Tranche B is for 3 million Euros. The term
loan matures on August 30, 2008. Payments are due in 60 monthly
installments and interest accrues at (i) 2.75% over the Euribor rate
for Tranche A and (ii) 3.5% over the three months Euribor rate for
Tranche B. Any amount repaid may not be reborrowed. The term loan
becomes immediately due and payable if a change of control occurs
without permission of the financial institution.
Audiovox Corporation guarantees 3 million Euros of this term loan. The
term loan is secured by the pledge of the stock of Audiovox German
Holdings GmbH and on all brands and trademarks of the Audiovox German
Holdings Group. The term loan requires the maintenance of certain
yearly financial covenants that are calculated according to German
Accounting Standards for Audiovox German Holdings. Should any of the
financial covenants not be met, the financial institution may charge a
higher interest rate on any outstanding borrowings. The short and long
term amounts outstanding under this agreement were $3,226 and $9,736,
respectively, at November 30, 2003 and $2,747 and $7,568,
respectively, at May 31, 2004, and have been included in the
accompanying consolidated balance sheet.
(c) Factoring / Working Capital Arrangements
The Company has available a 16,000 Euro factoring arrangement and
5,000 Euro working capital arrangement with a German financial
institution for its German operations. Selected accounts receivable
are purchased from the Company on a non- recourse basis at 80% of face
value and payment of the remaining 20% upon receipt from the customer
of the balance of the receivable purchased. The rate of interest is
23
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
Euribor plus 2.5%, and the Company pays 0.4% of its gross sales as a
fee for this arrangement. The amount outstanding under the working
capital agreement was $5,510 and $5,883 at November 30, 2003 and May
31, 2004, respectively, and has been included in bank obligations in
the accompanying consolidated balance sheet.
(14) Payment of Guarantee
At November 30, 2003, the Company had guaranteed the borrowings of one of
its 50%- owned equity investees (G.L.M.) at a maximum of $300. The Company
guaranteed the debt of G.L.M. beginning in December 1996, and this
guarantee was not modified. During the three months ended May 31, 2004, the
Company received a request for payment in connection with this guarantee.
As a result of the payment request, the Company paid $291 on behalf of
G.L.M. during the three months ended May 31, 2004.
(15) Contingencies
The Company is currently, and has in the past been, a party to routine
litigation incidental to its business. From time to time, the Company
receives notification of alleged violations of registered patent holders'
rights. The Company has either been indemnified by its manufacturers in
these matters, obtained the benefit of a patent license or has decided to
vigorously defend such claims.
The Company and ACC, along with other manufacturers of wireless phones and
cellular service providers, were named as defendants in two class action
lawsuits alleging non- compliance with FCC ordered emergency 911 call
processing capabilities. These lawsuits were consolidated and transferred
to the United States District Court for the Northern District of Illinois,
which in turn referred the cases to the Federal Communications Commission
("FCC") to determine if the manufacturers and service providers are in
compliance with the FCC's order on emergency 911 call processing
capabilities. The Company and ACC intend to vigorously defend this matter.
However, no assurances regarding the outcome of this matter can be given at
this point in the litigation.
During 2001, the Company, along with other suppliers, manufacturers and
distributors of hand-held wireless telephones, was named as a defendant in
five class action lawsuits alleging damages relating to exposure to radio
frequency radiation from hand-held wireless telephones. These class actions
have been consolidated and transferred to a Multi-District Litigation Panel
before the United States District Court of the District of Maryland. On
March 5, 2003, Judge Catherine C. Blake of the United States District Court
for the District of Maryland granted the defendants' consolidated motion to
dismiss these complaints.
24
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
Plaintiffs have appealed to the United States Circuit Court of Appeals,
Fourth Circuit. The appeal pending before the United States Circuit Court
of Appeals, Fourth Circuit in the consolidated class action lawsuits
(Pinney, Farina, Gilliam, Gimpelson and Naquin) against ACC and other
suppliers, manufacturers and distributors as well as wireless carriers of
hand- held wireless telephones alleging damages relating to risk of
exposure to radio frequency radiation from the wireless telephones has not
yet been heard. It is anticipated that the appeal will be heard in
September 2004.
During the third quarter of fiscal 2003, a certain Venezuelan employee, who
is also a minority shareholder in Audiovox Venezuela, submitted a claim to
the Venezuela Labor Court for severance compensation of approximately $560.
The Court approved the claim and it was paid and expensed by Audiovox
Venezuela in the third quarter of fiscal 2003. The Company is challenging
the payment of this claim and will seek reimbursement from the Venezuelan
shareholders or the Company's insurance carrier. During the second quarter
of fiscal 2004, the Company instituted arbitration procedures against the
Venezuelan shareholders and their affiliated companies alleging breach of
contract, breach of fiduciary duty and fraud. The Venezuelan shareholders
and their affiliated companies have interposed affirmative defenses and
counterclaims. This arbitration is pending before the International Centre
for Dispute Resolution in New York, New York. The Company intends to
vigorously pursue and defend this matter.
During the second quarter of fiscal 2004, the Company, AEC and one of its
distributors of car security products, were named as defendants in a
lawsuit brought by Magnadyne Corporation in the United States District
Court, Central District of California alleging patent infringement and
seeking damages and injunctive relief. The Company has answered the amended
complaint, asserted various affirmative defenses and interposed
counterclaims alleging non-infringement, invalidity and non-enforceability.
AEC is due to respond to the amended complaint by July 20, 2004 and intends
to answer, assert affirmative defenses and interpose counterclaims as well.
To date, there has been no discovery. The Company and AEC 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 does not expect the outcome of any pending litigation,
separately and in the aggregate, to have a material adverse effect on its
business, consolidated financial position or results of operations.
25
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
(16) New Accounting Pronouncements
The Financial Accounting Standard Board ("FASB") issued an exposure draft
entitled "Share-Based Payment, an Amendment of FASB Statements Nos. 123 and
95." This exposure draft would require stock-based compensation to
employees to be recognized as a cost in the financial statements and that
such cost be measured according to the fair value of the stock options. In
the absence of an observable market price for the stock awards, the fair
value of the stock options would be based upon a valuation methodology that
takes into consideration various factors, including the exercise price of
the option, the expected term of the option, the current price of the
underlying shares, the expected volatility of the underlying share price,
the expected dividends on the underlying shares and the risk-free interest
rate. The proposed requirements in the exposure draft would be effective
for the first fiscal year beginning after December 15, 2004. The FASB
intends to issue a final Statement in late 2004. The Company will continue
to monitor communications on this subject from the FASB in order to
determine the impact on the Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51", which addresses consolidation by business enterprises of variable
interest entities (VIEs) either: (1) that do not have sufficient equity
investment at risk to permit the entity to finance its activities without
additional subordinated financial support, or (2) in which the equity
investors lack an essential characteristic of a controlling financial
interest. In December 2003, the FASB completed deliberations of proposed
modifications to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date of the
VIE. The adoption of FIN 46 did not have an impact on the Company's
consolidated financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
"Revenue Recognition" (SAB No. 104), which codifies, revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition", in order to make
this interpretive guidance consistent with current authoritative accounting
and auditing guidance and SEC rules and regulations. The changes noted in
SAB No. 104 did not have a material effect on our consolidated results of
operations, consolidated financial position or consolidated cash flows.
(17) Other Subsequent Events
On June 8, 2004, Audiovox purchased 5% of ACC stock from Toshiba, an ACC
minority shareholder for $1,410. As a result of this purchase, Audiovox
26
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Six Months Ended May 31, 2003 and May 31, 2004
(Dollars in thousands, except share and per share data)
currently owns 80% ofACC's stock. As discussed in Note 2, Audiovox and
Toshiba subsequently entered into an agreement pursuant to which Toshiba
would sell its remaining 20% of ACC's stock to Audiovox at the closing of
the transactions between Audiovox, ACC and UTStarcom. Contingent upon
closing with UTStarcom, Toshiba would receive total cash consideration of
$15 million pursuant to its agreements with Audiovox and ACC, including the
repayment of an $8.1 million convertible note from ACC to Toshiba and the
$1,410 that was paid to Toshiba for its 5% of the ACC shares.
On June 16, 2004, the Company and its Lenders executed an Eleventh
Amendment to the Company's Fourth Amended and Restated Credit Agreement.
The Amendment allows the Company to sell certain of its accounts receivable
free of the Bank's security interest.
27
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company markets its products under the Audiovox(R) brand name and other
brand names, such as Jensen(R), Magnate(R), Mac Audio(R), Heco(R), Acoustic
Research(R) and Advent(R), as well as private labels through a large and diverse
distribution network both domestically and internationally. The Company operates
through two primary marketing groups: Wireless and Electronics.
Wireless consists of Audiovox Communications Corp. (ACC), a majority-owned
subsidiary of Audiovox Corporation, and Quintex Mobile Communications Corp.
(Quintex), a wholly-owned subsidiary of ACC. ACC markets wireless handsets and
accessories primarily on a wholesale basis to wireless carriers in the United
States and carriers overseas primarily in the CDMA (Code Division Multiple
Access) market. Quintex is a small operation for the direct sale of handsets,
accessories and wireless telephone service. Quintex also receives customer
service awards (residual fees) and activation commissions from the carriers.
Residuals are paid by the carriers based upon the pricing plan of customers
activated by Quintex for a period of time (1-3 years). Quintex also sells a
small volume of electronics products not related to wireless which are
categorized as "other sales". As described below, the Company is in the process
of selling the Wireless business.
The Electronics Group consists of four wholly-owned subsidiaries: Audiovox
Electronics Corporation (AEC), American Radio Corp., Code Systems, Inc. (Code)
and Audiovox German Holdings GmbH (Audiovox Germany) and three majority-owned
subsidiaries: Audiovox Communications (Malaysia) Sdn. Bhd., Audiovox Holdings
(M) Sdn. Bhd. and Audiovox Venezuela, C.A. The Electronics Group markets, both
domestically and internationally, automotive sound and security systems,
electronic car accessories, home and portable sound products, two-way radios,
in-vehicle video systems, flat-screen televisions, DVD players and navigation
systems. Sales are made through an extensive distribution network of mass
merchandisers and others. In addition, the Company sells some of its products
directly to automobile manufacturers on an OEM basis. American Radio Corp. is
also involved on a limited basis in the wireless marketplace and these sales are
categorized as "other sales".
The Company allocates interest and certain shared expenses, including
treasury, legal, human resources and information systems, to the marketing
groups based upon both actual and estimated usage. General expenses and other
income items that are not readily allocable are not included in the results of
the two marketing groups.
Critical Accounting Policies
As disclosed in the annual report on Form 10-K for the fiscal year ended
November 30, 2003, the discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in conformity with accounting principles generally
accepted in the United States. The preparation of these financial 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 relate to revenue recognition; sales incentives; accounts receivable;
28
inventory; goodwill and other intangible assets; warranties and income taxes.
Since November 30, 2003, there have been no changes in our critical accounting
policies and no other significant changes to the assumptions and estimates
related to them.
Subsequent Event
On June 11, 2004, the Company's majority owned subsidiary Audiovox
Communications Corporation ("ACC") entered into a definitive asset purchase
agreement ("agreement") to sell selected assets and certain liabilities
(excluding its receivables, inter-company accounts payable, income taxes
payable, subordinated debt and certain accrued expenses), to UTStarcom, Inc
("UTSI") for a total purchase price of $165,100 (purchase price) subject to a
net working capital adjustment. While the anticipated closing date for this
transaction is expected during the fourth quarter of fiscal 2004, there can be
no assurances that such transaction will close during that period as it is
subject to certain closing conditions, including regulatory and third party
approvals. The Company's Board of Directors as well as the Board of Directors of
UTSI has approved the transaction and Mr. John Shalam, Chairman and Chief
Executive Officer and majority shareholder, has agreed to vote his Audiovox
shares in favor of this agreement.
Audiovox will retain the proceeds of the sale of the Wireless business. It
is the intention of Audiovox to use the proceeds to fund and grow its consumer
electronics business. However, Audiovox may use all or a portion of the proceeds
for other purposes and Audiovox will consider other market opportunities,
including acquisitions.
Pursuant to the terms of the agreement, 5% (or $8,255) of the $165,100
purchase price will be placed in escrow by UTSI for 120 days after closing to
fund the net working capital adjustment. If the net working capital adjustment
reflected at the closing is less than $40,000, then the purchase price will be
adjusted downward in an amount equal to the deficiency, and if the net working
capital balance exceeds $40,000, then the purchase price will be adjusted
upwards in an amount equal to the excess.
On or after the closing date of the sale to UTSI, the following additional
agreements have come or will become effective:
o The Company has entered into an agreement with Toshiba, ACC's minority
interest shareholder, to purchase the balance of Toshiba's shares of
ACC prior to the closing with UTSI for $13,590, which includes the
repayment of an $8,107 subordinated note (see Note 17).
o Mr. Philip Christopher (ACC Chief Executive Officer) will sell to ACC
all of his goodwill relating to or useable by ACC for a purchase price
not to exceed $16,000, as determined by a qualified independent
professional.
o ACC will pay Mr. Christopher an additional $4,000 for the termination
of his Employment and Stock Appreciation Rights Agreement on the
closing date of the sale.
29
o ACC will establish a $5,000 severance pool to be paid to certain
employees of ACC and its subsidiaries as a severance payment and in
exchange for which Audiovox will receive a release from such
employees.
o Mr. Shalam will receive a payment of $1,916 from the Company in
connection with his Long-Term Incentive Compensation Award as of May
29, 2002 which was intended to reward Mr. Shalam in the event that a
controlling interest in ACC was acquired by a third party.
o For a period of five years after the closing, the Company will enter
into a royalty free licensing agreement permitting UTSI to use the
Audiovox brand name on certain products.
o The Company will provide certain services, that are currently provided
to ACC, for at least six months after the closing as set forth in the
Transition Services Agreement. As consideration for the performance of
these services, UTSI will pay the Company based on the usage of these
services as set forth in the Transition Services Agreement.
In addition, the Company and UTSI have agreed to use reasonable commercial
efforts to negotiate and agree upon the form of sublease for space at Wireless
Boulevard in Hauppauge, New York and Marquardt Avenue in Cerritos, California as
these locations are ACC's primary locations.
Based upon review of FASB Statement No. 144, "Accounting for the Impairment
of Long- lived Assets," the Company has assessed the measurement date in
accounting for the sale transaction on June 11, 2004 in connection with the date
of board approval and signing of the agreement. Beginning in the third quarter
of fiscal 2004, financial results for ACC will be recorded as discontinued
operations through the date the sale transaction is closed, which is expected in
the fourth quarter of fiscal 2004. The following sets forth the carrying amounts
of the major classes of assets and liabilities of ACC, which will be part of the
disposal group as of May 31, 2004:
May 31, 2004
--------------
(unaudited)
Assets
Inventory, net $ 129,158
Prepaid expenses and other current assets 5,346
Property, plant and equipment, net 1,686
Other assets 34
---------
Total Assets $ 136,224
=========
Liabilities
Accounts payable $ 54,554
Accrued expenses and other current liabilities 13,158
Accrued sales incentives 4,482
Long-term debt 38
----------
Total Liabilities $ 72,232
==========
30
Results of Operations
The following table sets forth, for the periods indicated, certain
statement of earnings data for the Company expressed as a percentage of net
sales:
Three Months Ended Six Months Ended
--------------------------- ----------------------------
May 31, May 31,
2003 2004 2003 2004
------ ------ ------ ------
Net sales:
Wireless
Wireless products 61.5% 65.1% 66.2% 63.8%
Activation commissions 1.2 1.0 1.5 1.2
Residual fees 0.2 0.1 0.2 0.1
Other -- -- -- --
------ ------ ------ ------
Total Wireless 62.9 66.2 67.9 65.1
------ ------ ------ ------
Electronics
Mobile electronics 24.6 19.3 20.9 16.4
Consumer electronics 9.2 4.3 7.4 6.8
Sound 3.3 10.2 3.8 11.7
Other -- -- -- --
------ ------ ------ ------
Total Electronics 37.1 33.8 32.1 34.9
------ ------ ------ ------
Total net sales 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of sales 91.5 92.6 91.5 92.2
------ ------ ------ ------
Gross profit 8.5 7.4 8.5 7.8
Selling 2.7 2.3 2.6 2.4
General and administrative 4.3 3.3 4.2 3.9
Warehousing and technical support 0.5 0.5 0.5 0.5
------ ------ ------ ------
Total operating expenses 7.5 6.1 7.3 6.8
------ ------ ------ ------
Operating income 1.0 1.3 1.3 1.0
Interest and bank charges (0.3) (0.4) (0.4) (0.4)
Equity in income in equity investees 0.2 0.3 0.2 0.3
Other, net 0.2 0.1 (0.1) 0.2
------ ------ ------ ------
Income before provision for income
taxes and minority interest 1.1 1.3 1.0 1.1
Provision for income taxes 0.3 0.3 0.3 0.3
Minority interest expense (0.1) (0.1) (0.1) (0.1)
------ ------ ------ ------
Net income 0.7% 0.9% 0.6% 0.7%
====== ====== ====== ======
Management Key Indicators
Management reviews the following financial and non-financial indicators to
assess the performance of the Company's operating results:
o Net sales by product class - Management reviews this indicator in
order to determine sales trends for certain product classes as this
indicator is directly impacted by unit sales and new product
introductions.
31
o Gross profit margin - This indicator allows management to assess the
effectiveness of product introductions, timing of product acceptances
and significance of inventory write- downs.
o Operating expenses as a 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.
o Major acquisitions and transactions- Management consistently monitors
the aforementioned key indicators as well as economic and industry
conditions during consideration of major acquisitions and
transactions.
Consolidated Results
Three months ended May 31, 2003 compared to three months ended May 31, 2004
The net sales and percentage of net sales by marketing group and product
line for the three months ended May 31, 2003 and May 31, 2004 are reflected in
the following table:
Three Months Ended
-------------------------------------------------
May 31, 2003 May 31, 2004
---------------------- --------------------
Net sales:
Wireless
Wireless products $185,174 61.5 % $285,228 65.1 %
Activation commissions 3,444 1.2 4,441 1.0
Residual fees 489 0.2 512 0.1
-------- ------ -------- ------
Total Wireless 189,107 62.9 290,181 66.2
-------- ------ -------- ------
Electronics
Mobile electronics 74,108 24.6 84,438 19.3
Consumer electronics 27,762 9.2 18,978 4.3
Sound 9,928 3.3 44,602 10.2
Other 105 -- -- --
-------- ------ -------- ------
Total Electronics 111,903 37.1 148,018 33.8
-------- ------ -------- ------
Total $301,010 100.0% $438,199 100.0%
======== ====== ======== ======
32
Net Sales
Net sales for the three months ended May 31, 2004 increased $137,189,
or 45.6% to $438,199 as compared with $301,010 in 2003.
Wireless Group sales were $290,181 for the three months ended May 31, 2004,
a 53.4% increase from sales of $189,107 in 2003. Unit sales of wireless handsets
increased 43.9% to approximately 1,596,000 units for the three months ended May
31, 2004 from approximately 1,109,000 units in 2003. This increase was primarily
due to increased sales of products introduced during the fourth quarter of
fiscal 2003, such as camera and color display phones with CDMA 1x technology.
The average selling price of the Company's handsets increased to $170 per unit
for the three months ended May 31, 2004 from $161 per unit in 2003 due to higher
selling prices of new product introductions.
Electronics Group sales increased in all product lines, except consumer
electronics, as sales for the three months ended May 31, 2004, were $148,018, a
32.3% increase from sales of $111,903 in 2003. This increase was largely due to
increased sales in the sound and mobile electronics product lines as a result of
new product introductions and the addition of $12,728 in sales by Audiovox
Germany, which was formed in July 2003 as a result of the acquisition of Recoton
(see Note 6 to the consolidated financial statements). Excluding Audiovox
Germany, sales by the Company's international subsidiaries decreased $155 or
7.0% during the three months ended May 31, 2004, primarily due to a $542
decrease in Malaysia as a result of lower OEM sales. This decrease was partially
offset by a $382 increase in Venezuela due to economic growth in Venezuela as a
result of improved political stability.
Sales were also impacted by a $988 increase in sales incentive expense
primarily in the Electronics Group, offset by a decline in the Wireless Group.
Trends will be discussed in further detail in each individual marketing group
MD&A discussion.
Gross Profit
The consolidated gross profit margin for the three months ended May 31,
2004 was 7.4%, compared to 8.5% in 2003. Margins in the Wireless Group were 3.7%
compared to 5.0% in 2003. Margins in the Electronics Group remained steady at
14.5%. Consolidated gross margins were adversely impacted by the increase in
sales of the Wireless Group as compared to the prior year. The Wireless Group
represented a larger percentage of sales during the second quarter of fiscal
2004 then 2003 and since wireless products carry lower margins than the
Electronics Group, it caused consolidated margins to decline. Trends will be
discussed in further detail in each individual marketing group MD&A discussion.
Operating Expenses
Operating expenses increased $4,381 to $26,939 for the three months ended
May 31, 2004, as compared to $22,558 in 2003. Audiovox Germany accounted for
$3,061, or 69.9%, of the increase in operating expenses for the quarter. Major
components of the increase in operating expenses were in direct labor,
advertising, insurance and office salaries, primarily in the Electronics Group
33
as a result of recent acquisitions and general growth in business. As a
percentage of net sales, operating expenses decreased to 6.1% for the three
months ended May 31, 2004 from 7.5% in 2003. Trends will be discussed in further
detail in each individual marketing group MD&A discussion.
Operating income for the three months ended May 31, 2004 was $5,509
compared to $3,054 for the prior year.
Other Income and Expense
Interest expense and bank charges increased $948 during the three months
ended May 31, 2004, primarily due to interest incurred on German debt acquired
as a result of the Recoton acquisition and increased average borrowings from the
Company's primary credit facility during the second quarter of fiscal 2004 as
compared to the second quarter of fiscal 2003 due to increased purchases of
wireless inventory.
Equity in income of equity investees increased $777 for the three months
ended May 31, 2004 as compared to the three months ended May 31, 2003. The
increase in equity in income of equity investees was primarily due to an
increase in the equity income of ASA as a result of increased sales and
improvement in gross margins in specialized markets. In addition, increased
sales and net income of Bliss-tel contributed towards the increase in equity
income.
Other income decreased $124 during the second quarter of 2004 as compared
to 2003. The decline in the fair market value of investment securities under the
Company's deferred compensation plan resulted in a $321 decrease to other income
as compared to the prior year, which is offset by a corresponding decrease to
general and administrative expenses. The above decrease was partially offset by
an increase in royalty income as a result of royalty rights received during the
Recoton acquisition.
Minority interest expense increased $181 for the three months ended May 31,
2004 compared to the three months ended May 31, 2003, primarily due to the
increased earnings of ACC.
Provision for Income Taxes
The effective tax rate for the three months ended May 31, 2004 was 23.5%
compared to 27.4% for the comparable period in the prior year. The decrease in
the effective tax rate was primarily due to the reduction of the Wireless
segment's valuation allowance, and the Company's mix of foreign and domestic
earnings.
Net Income
As a result of strong sales in both divisions offset by a decline in
Wireless gross margins and increased operating expenses, net income for the
three months ended May 31, 2004 was $3,677 compared to $2,074 in 2003. Earnings
per share for the three months ended May 31, 2004 was $0.17 (basic) and $0.16
(diluted) as compared to $0.10 (basic) and $0.09 (diluted) for 2003.
34
Six months ended May 31, 2003 compared to six months ended May 31, 2004
The net sales and percentage of net sales by marketing group and product
line for the six months ended May 31, 2003 and May 31, 2004 are reflected in the
following table:
Six Months Ended
----------------------------------------------
May 31, 2003 May 31, 2004
---------------------- --------------------
Net sales:
Wireless
Wireless products $395,885 66.2% $519,638 63.8%
Activation commissions 8,612 1.5 9,756 1.2
Residual fees 1,024 0.2 1,122 0.1
Other 148 -- -- --
-------- ------ -------- ------
Total Wireless 405,669 67.9 530,516 65.1
-------- ------ -------- ------
Electronics
Mobile electronics 125,198 20.9 133,987 16.4
Consumer electronics 44,257 7.4 55,449 6.8
Sound 22,472 3.8 95,131 11.7
Other 232 -- -- --
-------- ------ -------- ------
Total Electronics 192,159 32.1 284,567 34.9
-------- ------ -------- ------
Total $597,828 100.0% $815,083 100.0%
======== ====== ======== ======
Net Sales
Net sales for the six months ended May 31, 2004 increased $217,255 or 36.3%
to $815,083 as compared with $597,828 in 2003.
Wireless Group sales were $530,516 for the six months ended May 31, 2004,
a 30.8% increase from sales of $405,669 in 2003. Unit sales of wireless handsets
increased 24.1% to approximately 2,854,000 units for the six months ended May
31, 2004 from approximately 2,300,000 units in 2003. This increase was primarily
due to increased sales of products introduced during the fourth quarter of
fiscal 2003, such as camera and color display phones with CDMA 1x technology.
The average selling price of the Company's handsets increased to $174 per unit
for the six months ended May 31, 2004 from $166 per unit in 2003 due to higher
selling prices of new product introductions.
Electronics Group sales increased in all product lines as sales for the six
months ended May 31, 2004, were $284,567, a 48.1% increase from sales of
$192,159 in 2003. This increase was largely due to increased sales in the sound
and consumer electronics product lines as a result of new product introductions
and the addition of $28,461 in sales by Audiovox Germany, which was formed in
July 2003 as a result of the acquisition of Recoton. (See Note 6 to the
consolidated financial statements.) Excluding Audiovox Germany, sales by the
Company's international subsidiaries decreased $536 or 11.6% during the six
months ended May 31, 2004, primarily due to a $1,493 decrease in Malaysia as a
35
result of lower OEM sales. This decrease was partially offset by a $1,063
increase in Venezuela due to economic growth in Venezuela as a result of
improved political stability.
Sales were also impacted by a $2,145 decrease in sales incentive expense
primarily in the Wireless Group offset by an increase in the Electronics Group.
Trends will be discussed in further detail in each individual marketing group
MD&A discussion.
Gross Profit
Both the Wireless Group and the Electronics Group experienced a decline in
margins, as the consolidated gross profit margin for the six months ended May
31, 2004 was 7.8%, compared to 8.5% in 2003. Margins in the Wireless Group were
3.9% compared to 5.2% in 2003. Margins in the Electronics Group were 15.1%
compared to 15.5% in 2003. Even though margins are down in both Groups, the
change in the mix of sales between Wireless and Electronics has affected the
consolidated margins in a favorable way. The Electronics Group represented a
larger percentage of sales for the six months ended May 31, 2004 as compared to
2003 and, since Electronics' products carry higher margins, it partially offset
the decline in Wireless. Trends will be discussed in further detail in each
individual marketing group MD&A discussion.
Operating Expenses
Operating expenses increased $12,103 to $55,668 for the six months ended
May 31, 2004, as compared to $43,565 in 2003. Audiovox Germany accounted for
$7,266, or 60.0%, of the increase in operating expenses for the six months ended
May 31, 2004. Major components of the increase in operating expenses were in
direct labor, commissions, advertising, office salaries and professional fees,
primarily in the Electronics Group as a result of recent acquisitions and
general growth in business. As a percentage of net sales, operating expenses
decreased to 6.8% for the six months ended May 31, 2004 from 7.3% in 2003.
Trends will be discussed in further detail in each individual marketing group
MD&A discussion.
Operating income for the six months ended May 31, 2004 was $8,146 compared
to $7,515 for the prior year.
Other Income and Expense
Interest expense and bank charges increased $1,279 during the six months
ended May 31, 2004, primarily due to interest incurred on German debt acquired
as a result of the Recoton acquisition, and increased average borrowings from
the Company's primary credit facility during fiscal 2004 as compared to the
prior period in fiscal 2003 due to increased purchases of wireless inventory.
Equity in income of equity investees increased $1,409 for the six months
ended May 31, 2004 as compared to the six months ended May 31, 2003. The
increase in equity in income of equity investees was primarily due to an
increase in the equity income of ASA as a result of increased sales and
improvement in gross margins. In addition, increased sales and net income of
36
Bliss-tel contributed towards the increase in equity income.
Other income increased $1,826 during the six months ended May 31, 2004 as
compared to the similar period in 2003. Increased royalty income of $599 during
fiscal 2004 contributed to the increase in other income as a result of royalty
rights received during the Recoton acquisition. In addition, the appreciation in
the fair market value of investment securities under the Company's deferred
compensation plan resulted in a $192 increase to other income as compared to the
prior period, which is offset by a corresponding increase to general and
administrative expenses. Furthermore, other expense decreased $250 as a result
of lower foreign exchange devaluation in our Venezuelan subsidiary as compared
to fiscal 2003. During the six months ended May 31, 2003, other expense was
impacted by a $757 loss on foreign exchange translation due to devaluation of
the Venezuela currency.
Minority interest expense increased $187 for the six months ended May 31,
2004 compared to the six months ended May 31, 2003, primarily due to the
increased earnings of Venezuela.
Provision for Income Taxes
The effective tax rate for the six months ended May 31, 2004 was 24.4%
compared to last year's 32.7% for the comparable period. The decrease in the
effective tax rate was primarily due to the reduction of the Wireless Segment's
valuation allowance and the Company's mix of foreign and domestic earnings.
Net Income
As a result of strong sales in both divisions and increased other income
offset by decreased gross margins and increased operating expenses, net income
for the six months ended May 31, 2004 was $5,547 compared to $3,283 in 2003.
Earnings per share for the six months ended May 31, 2004 was $0.25 (basic and
diluted) as compared to $0.15 (basic and diluted) for 2003.
37
Wireless Results
Three months ended May 31, 2003 compared to three months ended May 31, 2004
The following table sets forth for the periods indicated certain statements
of earnings data for Wireless expressed as a percentage of net sales:
Three Months Ended
-----------------------------------------------
May 31, 2003 May 31, 2004
------------------- -------------------
Net sales:
Wireless products $ 185,174 97.9% $ 285,228 98.3%
Activation commissions 3,444 1.9 4,441 1.5
Residual fees 489 0.2 512 0.2
--------- ------ --------- ------
Total net sales 189,107 100.0 290,181 100.0
Gross profit 9,382 5.0 10,865 3.7
Operating expenses
Selling 2,706 1.4 2,419 0.8
General and administrative 3,915 2.1 4,476 1.5
Warehousing and technical support 699 0.4 819 0.3
--------- ------ --------- ------
Total operating expenses 7,320 3.9 7,714 2.6
--------- ------ --------- ------
Operating income 2,062 1.1 3,151 1.1
Other expense (576) (0.3) (1,061) (0.4)
--------- ------ --------- ------
Pre-tax income $ 1,486 0.8% $ 2,090 0.7%
========= ====== ========= ======
Net Sales
Net sales increased $101,074, or 53.4% to $290,181 for the three months
ended May 31, 2004 from 2003. Unit sales of wireless handsets increased by
approximately 487,000 units for the three months ended May 31, 2004, or 43.9%,
to approximately 1,596,000 units from 1,109,000 units in 2003. This increase was
primarily due to increased sales of products introduced during the fourth
quarter of fiscal 2003, such as camera and color display phones with CDMA 1x
technology. The average selling price of the Company's handsets increased to
$170 per unit for the three months ended May 31, 2004 from $161 per unit in
2003. This increase was due to higher selling prices of newly-introduced models,
such as the camera phone. The Company expects selling prices for digital phones
to increase as enhancements in digital technology expand digital capabilities.
Net sales were also impacted by a decrease in sales incentives expense of
$1,302 net of reversals of $190. This decrease was primarily due to a decline in
sales incentive programs with large wireless carriers as compared to the prior
year. Sales incentive programs are expected to continue as the Company
introduces new technology and products. The Company expects, due to market
conditions, customer consolidation and planned introductions of new products, it
could experience higher sales incentives expense in the future.
38
Gross Profit
Gross profit margins decreased to 3.7% for the three months ended May 31,
2004 from 5.0% in 2003, primarily due to increased price competition within the
wireless industry. As a result of increased price competition, older phone
models are sold at lower prices due to short product life cycles and are
negatively impacted by introductions of new phones with enhanced technology. The
declining margins achieved on older phone models was partially offset by margins
achieved on new product introductions with enhanced technologies, such as the
camera phone. In addition, the decline in gross margin was offset by a $1,302
decrease in sales incentive expense, net of reversals of $190.
No inventory write-downs were recorded by the Company during the second
quarter of fiscal 2004 or 2003. At May 31, 2004, the Company had on hand
approximately 12,500 units of previously written-down inventory which, after
write-down, had an approximate extended value of $400. The Company plans to sell
these items to its existing customers during the year. The Company expects that
as new products are introduced, existing models on hand are effected by price
competition from our competitors and demand by our customers, it could
experience write-downs in the future.
Gross margins included reimbursements from a vendor for software upgrades
on sold inventory of $74 and $136 for the three months ended May 31, 2003 and
May 31, 2004, respectively. The increase in upgrade reimbursements is due to the
timing of product enhancements, and these reimbursements could fluctuate in the
future depending on the amount of technology upgraded into each product. Without
these reimbursements, gross margins would have been lower by 0.04% and 0.05% for
the three months ended May 31, 2003 and May 31, 2004, respectively. On occasion,
the Company negotiates to receive price protection in the event the selling
price to its customers is less than the purchase price from the vendor. No such
price protection was recorded by the Company during the second quarter of fiscal
2003 or 2004.
Operating Expenses
Operating expenses increased $394 for the three months ended May 31, 2004
as compared to 2003. However, as a percentage of net sales, operating expenses
decreased to 2.6% during three months ended May 31, 2004, compared to 3.9% in
2003.
Selling expenses decreased $287 for the three months ended May 31, 2004
compared to 2003, primarily as a result of:
o $261 decrease in commissions as a result of a decline in international
sales to South America and Mexico. Generally, commissions paid in
connection with international sales are higher than domestic sales. In
addition, two Quintex branches were closed during the second quarter
of fiscal 2004 which caused commissions to decline for the period.
o $131 decrease in salesmen salaries due to the closing of two Quintex
branches during fiscal 2004.
39
o As a result of the increase in sales growth, the above decreases were
partially offset by a $120 increase in travel and lodging, which
requires more travel to suppliers in the Far East to support the
increased product volume.
General and administrative expenses increased $561 for the three months
ended May 31, 2004 compared to 2003 primarily as a result of:
o $632 increase in bad debt expense primarily due to the fiscal 2003
recovery of a bad debt previously written off which did not reoccur
during the three months ended May 31, 2004. In addition, bad debt
expense increased for the three months ended May 31, 2004 as a result
of a guarantee payment on behalf of one of the Company's equity
investees (See Note 14 of Notes to Consolidated Financial Statements).
The Company does not consider this increase to be a trend in overall
accounts receivable.
o Corporate allocations which increased $53 due to additional corporate
services for MIS costs in connection with the Company's web-site.
o Numerous insurance policy premiums paid by the Company are calculated
based on sales and inventory positions. As such, the increase in sales
activity and increased inventory on hand caused insurance expense to
increase $50.
o The above increases were offset by a $232 decrease in professional
fees as a result of legal expenses incurred in the prior period to
defend a class action law suit relating to alleged damages from
exposure to radio frequency radiation. Such legal costs were not
incurred during the quarter ended May 31, 2004, as the aforementioned
complaint was dismissed in March 2003 and an appeal is not expected to
be heard until September 2004 (See Note 15 of the Notes to
Consolidated Financial Statements).
Warehousing and technical support expense increased $120 for the three
months ended May 31, 2004 as compared to the similar period in the prior year.
The increase in warehouse and technical support expense was primarily due to an
increase in direct labor and technical support as a result of additional
engineering and customer service costs necessary to support the increase in
sales and technological complexity of wireless products.
Pre-Tax Income
As a result of increased sales and improved operating expense efficiency,
partially offset by decline in gross margins, pre-tax income for the three
months ended May 31, 2004 was $2,090, compared to $1,486 for 2003.
Management believes that the wireless industry is extremely competitive and
that this competition could affect gross margins and the carrying value of
inventories in the future as new competitors enter the marketplace. The Company
competes against suppliers with significantly greater financial resources and
who are able to offer more extensive advertising and greater promotions than the
Company does. This pressure from increased competition is further enhanced by
the consolidation of many of Wireless' customers into a smaller group, dominated
40
by only a few, large customers. Also, timely delivery and carrier acceptance of
new product could affect our quarterly performance. Our suppliers have to
continually add new products in order for Wireless to improve its margins and
gain market share. These new products require extensive testing and software
development which could delay entry into the market and affect our sales in the
future. In addition, given the anticipated emergence of new technologies in the
wireless industry, the Company will need to sell existing inventory quantities
of current technologies to avoid further write-downs to market.
Six months ended May 31, 2003 compared to six months ended May 31, 2004
The following table sets forth for the periods indicated certain statements
of earnings data for Wireless expressed as a percentage of net sales:
Six Months Ended
--------------------------------------------------
May 31, 2003 May 31, 2004
--------------------- --------------------
Net sales:
Wireless products $ 395,885 97.6% $ 519,638 98.0%
Activation commissions 8,612 2.1 9,756 1.8
Residual fees 1,024 0.3 1,122 0.2
Other 148 -- -- --
--------- ------ --------- ------
Total net sales 405,669 100.0 530,516 100.0
Gross profit 21,199 5.2 20,906 3.9
Operating expenses
Selling 5,369 1.3 5,126 0.9
General and administrative 8,247 2.0 8,972 1.7
Warehousing and technical support 1,412 0.4 1,553 0.3
--------- ------ --------- ------
Total operating expenses 15,028 3.7 15,651 2.9
--------- ------ --------- ------
Operating income 6,171 1.5 5,255 1.0
Other expense (1,436) (0.4) (1,645) (0.3)
--------- ------ --------- ------
Pre-tax income $ 4,735 1.1% $ 3,610 0.7%
========= ====== ========= ======
Net Sales
Net sales increased $124,847, or 30.8% to $530,516 for the six months ended
May 31, 2004 from 2003. Unit sales of wireless handsets increased by
approximately 554,000 units for the six months ended May 31, 2004, or 24.1%, to
approximately 2,854,000 units from 2,300,000 units in 2003. This increase was
primarily due to increased sales of products introduced during the fourth
quarter of fiscal 2003, such as camera and color display phones with CDMA 1x
technology. The average selling price of the Company's handsets increased to
$174 per unit for the six months ended May 31, 2004 from $166 per unit in 2003.
This increase was due to higher selling prices of newly- introduced models, such
as the camera phone. The Company expects selling prices for digital phones to
increase as enhancements in digital technology expand digital capabilities.
41
Net sales were also impacted by a decrease in sales incentives expense of
$3,744 net of reversals of $866. This decrease was primarily due to a decline in
sales incentive programs with large wireless carriers as compared to the prior
year. Sales incentive programs are expected to continue as the Company
introduces new technology and products. The Company expects, due to market
conditions, customer consolidation and planned introductions of new products, it
could experience higher sales incentives expense in the future.
Gross Profit
Gross profit margins decreased to 3.9% for the six months ended May 31,
2004 from 5.2% in 2003, primarily due to increased price competition within the
wireless industry. As a result of increased price competition, older phone
models are sold at lower prices due to short product life cycles and are
negatively impacted by introductions of new phones with enhanced technology. The
declining margins achieved on older phone models was offset by margins achieved
on new product introductions with enhanced technologies, such as the camera
phone. In addition, the decline in gross margin was offset by a $3,744 decrease
in sales incentive expense, net of reversals of $866.
No inventory write-downs were recorded by the Company during the six months
ended May 31, 2004 or 2003. The Company expects that as new products are
introduced, existing models on hand are effected by price competition from our
competitors and demand by our customers, it could experience write-downs in the
future.
Gross margins included reimbursements from a vendor for software upgrades
on sold inventory of $123 and $948 for the six months ended May 31, 2003 and May
31, 2004, respectively. The increase in upgrade reimbursements is due to the
timing of product enhancements, and these reimbursements could fluctuate in the
future depending on the amount of technology upgraded into each product. Without
these reimbursements, gross margins would have been lower by 0.03% and 0.18% for
the six months ended May 31, 2003 and May 31, 2004, respectively. On occasion,
the Company negotiates to receive price protection in the event the selling
price to its customers is less than the purchase price from the vendor. No such
price protection was recorded by the Company during the six months ended May 31,
2003 or 2004.
Operating Expenses
Operating expenses increased $623 for the six months ended May 31, 2004 as
compared to 2003. However, as a percentage of net sales, operating expenses
decreased to 2.9% during six months ended May 31, 2004, compared to 3.7% in
2003.
Selling expenses decreased $243 for the six months ended May 31, 2004
compared to 2003, primarily as a result of:
o $210 decrease in commissions as a result of a decline in international
sales to South America and Mexico. Generally, commissions paid in
connection with international sales are higher than domestic sales. In
addition, two Quintex branches were closed during the second quarter
of fiscal 2004 which caused commissions to decline for the period.
42
o $204 decrease in salesmen salaries due to the winding down of
operations and closing of two Quintex branches during fiscal 2004.
o As a result of the increase in sales growth, the above decreases were
partially offset by a $122 increase in travel and lodging, which
requires more travel to suppliers in the Far East to support the
increased product volume.
General and administrative expenses increased $725 for the six months ended
May 31, 2004 compared to 2003 primarily as a result of:
o $552 increase in bad debt expense primarily due to the fiscal 2003
recovery of a bad debt previously written off which did not reoccur
during the six months ended May 31, 2004. In addition, bad debt
expense increased for the three months ended May 31, 2004 as a result
of a guarantee payment on behalf of one of the Company's equity
investees (See Note 14 of Notes to Consolidated Financial Statements).
o Corporate allocations which increased $193 due to additional corporate
services for MIS costs in connection with the Company's web-site.
o Numerous insurance policy premiums paid by the Company are calculated
based on sales and inventory positions. As such, the increase in sales
activity and increased inventory on hand caused insurance expense to
increase $96.
o The above increases were offset by a $215 decrease in professional
fees as a result of legal expenses incurred in the prior period to
defend a class action law suit relating to alleged damages from
exposure to radio frequency radiation. Such legal costs were not
incurred during the six months ended May 31, 2004, as the
aforementioned complaint was dismissed in March 2003 and an appeal is
not expected to be heard until September 2004 (See Note 15 of the
Notes to Consolidated Financial Statements).
Warehousing and technical support expense increased $141 for the six months
ended May 31, 2004 as compared to the similar period in the prior year. The
increase in warehouse and technical support expense was primarily due to an
increase in direct labor and technical support as a result of additional
engineering and customer service costs necessary to support the increase in
sales and technological complexity of wireless products.
Pre-Tax Income
As a result of the decline in gross margins partially offset by increased
sales and improved operating expense efficiency, pre-tax income for the six
months ended May 31, 2004 was $3,610, compared to $4,735 for 2003.
Management believes that the wireless industry is extremely competitive and
that this competition could affect gross margins and the carrying value of
inventories in the future as new competitors enter the marketplace. The Company
competes against suppliers with significantly greater financial resources and
43
who are able to offer more extensive advertising and greater promotions than the
Company does. This pressure from increased competition is further enhanced by
the consolidation of many of Wireless' customers into a smaller group, dominated
by only a few, large customers. Also, timely delivery and carrier acceptance of
new product could affect our quarterly performance. Our suppliers have to
continually add new products in order for Wireless to improve its margins and
gain market share. These new products require extensive testing and software
development which could delay entry into the market and affect our sales in the
future. In addition, given the anticipated emergence of new technologies in the
wireless industry, the Company will need to sell existing inventory quantities
of current technologies to avoid further write-downs to market.
Electronics Results
Three months ended May 31, 2003 compared to three months ended May 31, 2004
The following table sets forth for the periods indicated certain statements
of earnings data for the Electronics Group expressed as a percentage of net
sales:
Three Months Ended
-----------------------------------------------------------------
May 31, 2003 May 31, 2004
------------------------------ --------------------------------
Net sales:
Mobile electronics $ 74,108 66.2% $ 84,438 57.1%
Consumer electronics 27,762 24.8 18,978 12.8
Sound 9,928 8.9 44,602 30.1
Other 105 0.1 -- --
--------- ------ --------- ------
Total net sales 111,903 100.0 148,018 100.0
Gross profit 16,175 14.5 21,526 14.5
Operating expenses
Selling 4,596 4.1 6,518 4.4
General and administrative 6,054 5.4 7,242 4.9
Warehousing and technical support 656 0.6 1,440 1.0
--------- ------ --------- ------
Total operating expenses 11,306 10.1 15,200 10.3
--------- ------ --------- ------
Operating income 4,869 4.4 6,326 4.2
Other income (expense) 393 0.3 (237) (0.1)
--------- ------ --------- ------
Pre-tax income $ 5,262 4.7% $ 6,089 4.1%
========= ====== ========= ======
Net Sales
Net sales increased $36,115, or 32.3%, to $148,018 for the three months
ended May 31, 2004, from net sales of $111,903 in 2003. Sales of Audiovox
Germany accounted for $12,728, or 35.2%, of this increase as a result of the
Recoton acquisition in July 2003.
Sales for Mobile Electronics increased $10,330 (13.9%) for the three months
ended May 31, 2004 from 2003, primarily from sales of mobile video products.
Sound sales increased $34,674 (349.3%) as a result of the Jensen(R), Magnate(R),
Mac Audio(R), Heco(R), Acoustic Research(R) and Advent(R), trademarks which
usage right was acquired during the Recoton acquisition. In addition, sound
sales were positively impacted by increased sales of $10,388 in the satellite
44
radio product line and $12,728 of Audiovox Germany sales. The increase in Sound
sales has caused a shift in the sales allocation between Mobile and Consumer
Electronics. Consumer Electronics sales decreased $8,784 (31.6%) for the three
months ended May 31, 2004 from 2003. The decline in Consumer Electronics was due
to a decrease in sales of consumer home products, DVD's and FRS radios,
partially offset by an increase in flat panel TV's. Increased competition, most
notably in the DVD category, caused Consumer Electronics sales to decline. The
Company does not expect the decrease in Consumer Electronics sales to be a
future trend.
Net sales of the Company's Malaysian subsidiary decreased from last year by
approximately $542 primarily from a shift in the Malaysia business environment.
Specifically, the OEM market in Malaysia has declined as more automakers are
incorporating electronic products into vehicles at the factory rather than being
sold in the aftermarket. In addition, importing of foreign products has become
more prevalent, therefore reducing domestic distribution within Malaysia. This
decrease was offset by a $382 increase in the Company's Venezuelan subsidiary
due to economic growth in Venezuela as a result of improved political stability.
Sales incentives expense increased $2,290, net of reversals of $646, to
$4,420, due to increased sales, as the majority of programs are based on sales
volume. The increase in sales incentive expense was partially offset by
increased reversals. Specifically, reversals for unearned sales incentives for
the three months ended May 31, 2004 increased $208 as compared to 2003 due to
customers not purchasing the minimum quantities of product required during the
program time period as a result of lower than expected sales. In addition,
reversals for unclaimed sales incentives increased $198 as compared to the prior
year quarter. 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. These sales incentive programs are expected to continue and will
either increase or decrease based upon competition and customer demands.
Gross Profit
Gross profit margins remained steady at 14.5% for the three months ended
May 31, 2004 and 2003. In addition, there was a $2,290 increase in sales
incentive expense, net of reversals of $646, primarily due to increased sales.
Operating Expenses
Operating expenses increased $3,894 for the three months ended May 31, 2004
from 2003, a 34.4% increase compared to 2003. The domestic group (AEC , Code and
American Radio Corp.) accounted for $623 or 16.0% of the 2004 increase. The
international group (Audiovox Germany, Malaysia and Venezuela) accounted for
$3,271 or 84.0% of the 2004 increase which was primarily due to the operations
of Audiovox Germany, which commenced as a result of the Recoton acquisition. As
a percentage of net sales, operating expenses increased to 10.3% for the three
months ended May 31, 2004 compared to 10.1% in 2003.
45
Selling expenses increased $1,922 during the second quarter of 2004 of
which $538 (28.0%) and $1,384 (72.0%) was attributable to the domestic group and
international group, respectively.
o The increase for the domestic group was primarily due to an increase
in salesmen salaries, payroll taxes and benefits of $314 as a result
of higher employee wages and the hiring of additional employees to
support the growing business. In addition, advertising expense
increased $188 as a result of an increased product line and promotions
during fiscal 2004 as compared to the prior year due to the increase
in sales.
o The increase for the international group was due to approximately
$1,401 of Audiovox Germany expenses offset by a $17 decrease in
Malaysia and Venezuela. Due to the operations of Recoton, which was
acquired during the third quarter of fiscal 2003, Audiovox Germany
expenses were primarily comprised of $631 in commissions, $103 of
salesmen salaries and $354 of advertising. Advertising costs consisted
primarily of product brochures and informative advertising materials
regarding the Company's product line.
General and administrative expenses increased $1,188 of which $42 (3.5%)
and $1,146 (96.5%) was attributable to the domestic group and international
group, respectively.
o The increase for the domestic group was primarily attributable to
corporate allocations, insurance expense, occupancy costs and
salaries/payroll taxes which increased $295, $132, $157 and $139,
respectively, as compared to the prior year. These increases were due
to the hiring of additional employees, increased wages and MIS costs
as a result of the additional resources necessary to support the
increased product lines and sales activity. In addition, higher
inventory levels as a result of increased sales activity caused
insurance expense and occupancy costs to increase. The above increases
were partially offset by a $707 decrease in bad debt expense due to
the recovery of a previously reserved bad debt. The Company does not
consider this decrease in bad debt expense to be a trend in the
overall accounts receivable.
o The increase for the international group was due to $1,118 of Audiovox
Germany expenses and a $28 increase in Malaysia and Venezuela
expenses. As a result of the Recoton acquisition, Audiovox Germany
expenses were primarily comprised of $711 in salaries and related
payroll taxes, $211 of office expenses, and $209 of depreciation. The
increase in Malaysia and Venezuela expenses was primarily due to an
increase in Venezuela professional fees due to legal costs incurred in
the winding up of operations in Audiovox Brazil and other legal
matters in connection with Audiovox Venezuela.
Warehousing and technical support increased $784, or 119.5%. This increase
was primarily due to a $731 increase in direct labor and payroll taxes due to
the hiring of additional employees and this increase includes $542 of Audiovox
Germany expenses. In addition, the increase in warehouse and technical support
is due to the hiring of additional engineers as the increase in sales volume and
product complexity has resulted in the Company providing added customer service.
46
Pre-Tax Income
As a result of increased sales due to new product introductions and the
Recoton acquisition, offset by decreased operating expense efficiency, pre-tax
income for the three months ended May 31, 2004 was $6,089 compared to $5,262 for
2003.
The Company believes that the Electronics Group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales and general economic conditions. Also, all of its products are
subject to price fluctuations which could affect the carrying value of
inventories and gross margins in the future.
Six months ended May 31, 2003 compared to six months ended May 31, 2004
The following table sets forth for the periods indicated certain statements
of earnings data for the Electronics Group expressed as a percentage of net
sales:
Six Months Ended
-----------------------------------------------------------------
May 31, 2003 May 31, 2004
------------------------------ --------------------------------
Net sales:
Mobile electronics $ 125,198 65.2% $ 133,987 47.1%
Consumer electronics 44,257 23.0 55,449 19.5
Sound 22,472 11.7 95,131 33.4
Other 232 0.1 -- --
--------- ------ --------- ------
Total net sales 192,159 100.0 284,567 100.0
Gross profit 29,774 15.5 42,846 15.1
Operating expenses
Selling 8,395 4.3 12,705 4.5
General and administrative 11,850 6.2 17,049 6.0
Warehousing and technical support 1,298 0.7 2,345 0.8
--------- ------ --------- ------
Total operating expenses 21,543 11.2 32,099 11.3
--------- ------ --------- ------
Operating income 8,231 4.3 10,747 3.8
Other income (expense) (479) (0.2) 496 0.2
--------- ------ --------- ------
Pre-tax income $ 7,752 4.1% $ 11,243 4.0%
========= ====== ========= ======
Net Sales
Net sales increased $92,408, or 48.1%, to $284,567 for the six months ended
May 31, 2004, from net sales of $192,159 in 2003. Sales of Audiovox Germany
accounted for $28,461, or 30.8%, of this increase as a result of the Recoton
acquisition in July 2003.
Sound sales increased $72,659 (323.3%) as a result of the Jensen(R),
Magnate(R), Mac Audio(R), Heco(R), Acoustic Research(R) and Advent(R),
trademarks which usage right was acquired during the Recoton acquisition. In
addition, sound sales were positively impacted by increased sales of $21,075 in
the satellite radio product line and $28,461 of Audiovox Germany sales. Sales
for Consumer electronics increased $11,192 (25.3%) for the six months ended May
47
31, 2004 from 2003, primarily from sales of DVD players and flat panel TV's.
These products were introduced during fiscal 2003 and strong customer demand has
caused sales activity to increase during fiscal 2004. Mobile electronics sales
increased $8,789 (7.0%) for the six months ended May 31, 2004 from 2003 due to
strong sales in mobile video. The increase in Sound sales has caused a shift in
the sales allocation between Mobile and Consumer Electronics.
Net sales of the Company's Malaysian subsidiary decreased from last year by
approximately $1,493 primarily from a shift in the Malaysia business
environment. Specifically, the OEM market in Malaysia has declined as more
automakers are incorporating electronic products into vehicles at the factory
rather than being sold in the aftermarket. In addition, importing of foreign
products has become more prevalent, therefore reducing domestic distribution
within Malaysia. This decrease was offset by a $1,063 increase in the Company's
Venezuela subsidiary due to economic growth in Venezuela as a result of improved
political stability.
Sales incentives expense increased $1,599, net of reversals of $3,070, to
$4,963, due to increased sales, as the majority of the Electronics Group sales
incentives are based on sales volume. The increase in sales incentive expense
was partially offset by increased reversals. Specifically, reversals for
unearned sales incentives for the six months ended May 31, 2004 increased $1,578
as compared to 2003 due to customers not purchasing the minimum quantities of
product required during the program time period as a result of lower than
expected post holiday season sales. In addition, reversals for unclaimed sales
incentives for 2004 increased $521 to $1,252 as compared to 2003. 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. The above reversals were partially offset by an
increase in sales as many sales incentive programs are based on a percentage of
sales. These sales incentive programs are expected to continue and will either
increase or decrease based upon competition and customer demands.
Gross Profit
Gross profit margins decreased to 15.1% for the six months ended May 31,
2004 compared to 15.5% in 2003. This decrease was due to increased price
compression of consumer electronic products sold through consumer channels,
which carry a lower gross margin as opposed to other product lines.
Specifically, gross margins were adversely impacted by the sale of older DVD
players and flat panel TV's as the selling price for these older items has
declined as a result of new product introductions within these categories. In
addition, there was a $1,599 increase in sales incentive expense, net of
reversals of $3,070, primarily due to increased sales. This decrease was offset
by margins achieved in Audiovox Germany from Jensen(R), Magnate(R), Mac
Audio(R), Heco(R), Acoustic Research(R) and Advent(R) products as well as an
increase in Code-Alarm margins due to a decline in production and warranty
costs.
48
Operating Expenses
Operating expenses increased $10,556 for the six months ended May 31, 2004
from 2003, a 49.0% increase compared to 2003. The domestic group accounted for
$3,248 or 30.8% of the 2004 increase. The international group (Audiovox Germany,
Malaysia and Venezuela) accounted for $7,308 or 69.2% of the 2004 increase which
was primarily due to the operations of Audiovox Germany, which commenced as a
result of the Recoton acquisition. As a percentage of net sales, operating
expenses increased to 11.3% for the six months ended May 31, 2004 compared to
11.2% in 2003.
Selling expenses increased $4,310 during the second quarter of 2004 of
which $1,649 (38.3%) and $2,661 (61.7%) was attributable to the domestic group
and international group, respectively.
o The increase for the domestic group was primarily due to increases of
$252 in commissions due to an increase in commissionable sales and
salesmen salaries, payroll taxes and benefits of $670 as a result of
higher employee wages and the hiring of additional employees. In
addition, advertising expense and trade show expense increased $385
and $224, respectively, as a result of an increased product line and
increased promotions during the annual consumer electronics show as
compared to the prior year.
o The increase for the international group was due to approximately
$2,703 of Audiovox Germany expenses offset by a $42 decrease in
Malaysia and Venezuela. Due to the operations of Recoton, which was
acquired during the third quarter of fiscal 2003, Audiovox Germany
expenses were primarily comprised of $1,197 in commissions, $217 of
salesmen salaries and $906 of advertising. Advertising costs consisted
primarily of product brochures and informative advertising materials
regarding the Company's product line.
General and administrative expenses increased $5,199 of which $1,315
(25.3%) and $3,884 (74.7%) was attributable to the domestic group and
international group, respectively.
o The increase for the domestic group was primarily attributable to an
increase of $291 in professional fees due to the increasing complexity
of patent validity and rights as a result of product complexity. 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. In addition,
corporate allocations, insurance expense, office expenses, occupancy
costs and salaries/payroll taxes increased $594, $220, $97, $261 and
$324, respectively, as compared to the prior year. These increases
were due to the hiring of additional employees, increased wages and
MIS costs as a result of the additional resources necessary to support
the increased product lines and sales activity. In addition, higher
inventory levels as a result of increased sales activity caused
insurance expense and occupancy costs to increase. The above increases
were partially offset by a $693 decrease in bad debt expense due to
the recovery of a previously reserved bad debt. The Company does not
consider this decrease in bad debt expense to be a trend in the
overall accounts receivable.
49
o The increase for the international group was due to $3,948 of Audiovox
Germany expenses offset by a $64 decline in Malaysia and Venezuela
expenses. As a result of the Recoton acquisition, Audiovox Germany
expenses were primarily comprised of $2,024 in salaries and related
payroll taxes, $226 of professional fees, $407 of office expenses,
$356 of occupancy costs and $438 of depreciation. The decline in
Malaysia and Venezuela expenses was primarily due to a decrease in
Venezuela's employee benefits because of a 2003 payment made to
certain Venezuela employees, which did not recur in fiscal 2004.
Warehousing and technical support increased $1,047, or 80.7%. This increase
was primarily due to a $958 increase in direct labor and payroll taxes due to
the hiring of additional employees and includes $615 of Audiovox Germany
expenses. In addition, the increase in warehouse and technical support is due to
the hiring of additional engineers as the increase in sales volume and product
complexity has resulted in the Company providing added customer service.
Pre-Tax Income
As a result of increased sales due to new product introductions and the
Recoton acquisition and increased other income due to royalties received for the
Jensen trademarks offset by a decline in gross margins, pre-tax income for the
six months ended May 31, 2004 was $11,243 compared to $7,752 for 2003. During
the six months ended May 31, 2004, the corporate allocation to the Electronics
Segment was reduced by $618 in order to offset costs incurred in the Company's
Venezuelan subsidiary that were considered to be a consolidated cost of the
Company.
The Company believes that the Electronics Group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales and general economic conditions. Also, all of its products are
subject to price fluctuations which could affect the carrying value of
inventories and gross margins in the future.
Liquidity and Capital Resources
Cash Flows, Commitments and Obligations
The Company has historically financed its operations primarily through a
combination of available borrowings under bank lines of credit and debt and
equity offerings. The amount of financing is dependent primarily on the
collection of accounts receivable and purchase of inventory. As of May 31, 2004,
the Company had working capital of $310,096 which includes cash of $5,152 as
compared with working capital of $304,354 and cash of $4,702 at November 30,
2003.
Operating activities used cash of $27,341 for the six months ended May 31,
2004 compared to cash provided of $58,144 in 2003. The decrease in cash provided
by operating activities as compared to the prior year is primarily due to the
increase in inventory. Net income provided $5,547 for operating activities for
the six months ended May 31, 2004 compared to $3,283 in 2003.
50
The following significant fluctuations in the balance sheet impacted cash
flow from operations:
o The overall decrease in cash flow from operations for the six months
ended May 31, 2004 as compared to 2003 was primarily due to an
increase in purchases of wireless inventory as a result of the
increase in sales activity for the Wireless Group. The increase in
cash used for inventory purchases was partially offset by increased
inventory turnover which approximated 6.3 during for the six months
ended May 31, 2004 compared to 5.1 in the comparable period in the
prior year. The increased turnover is a result of increased sales and
improved management of Wireless inventory which consists of more
products at the beginning of their life cycle during the second
quarter of fiscal 2004 as compared to the second quarter of fiscal
2003, which consisted of products near the end of their life cycle.
Although this is a favorable condition, the Company cannot guarantee
this to be a trend in the future.
o In addition, cash flow from operating activities for the six months
ended May 31, 2004, was impacted by a decrease in accounts payable,
primarily from payments made to inventory vendors. Payments for
accounts payable during the six months ended May 31, 2004 were not as
significant as compared to the comparable period based on the timing
of payments made. The timing of payments made can fluctuate and are
often impacted by the timing of inventory purchases and amount of
inventory on hand.
o Cash flows from operating activities for the six months ended May 31,
2004 were favorably impacted by a decrease in accounts receivable
primarily from collections. Accounts receivable turnover approximated
8.3 during for the six months ended May 31, 2004 compared to 6.5 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.
Investing activities provided $1,725 during the six months ended May 31,
2004, primarily from the distribution from an equity investee, proceeds from the
reduction of purchase price of acquired business, partially offset by the
purchases of property, plant and equipment.
Financing activities provided $25,990 during the six months ended May 31,
2004, primarily from net borrowings of bank obligations, partially offset by
payments of debt.
The Company's principal source of liquidity is its revolving credit
agreement, which expires July 27, 2004. The Company is currently negotiating
with the bank to extend this agreement, of which no assurance can be given. At
November 30, 2003 and May 31, 2004, the credit agreement provided for $150,000
of available credit, including $10,000 for foreign currency borrowings. Under
the credit agreement, the Company may obtain credit through direct borrowings
and letters of credit. The obligations of the Company under the credit agreement
are guaranteed by certain of the Company's subsidiaries and is secured by
accounts receivable, inventory and the Company's shares of ACC common stock. The
Company's ability to borrow under its credit facility is a maximum aggregate
amount of $150,000, subject to certain conditions, based upon a formula taking
into account the amount and quality of its accounts receivable and inventory.
51
The credit agreement also allows for commitments up to $50,000 in forward
exchange contracts.
The credit agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net worth.
Additionally, the agreement includes restrictions and limitations on payments of
dividends, stock repurchases and capital expenditures.
The Company was in compliance with all of its bank covenants at November
30, 2003 and May 31, 2004. There can be no assurance that the Company will not
violate covenants in the future, therefore, resulting in amounts outstanding to
be payable upon demand. While the Company has historically been able to obtain
waivers for violations, there can be no assurance that future negotiations with
its lenders would be successful. This credit agreement has no cross covenants
with other credit facilities.
The Company also has revolving credit facilities in Malaysia and Germany to
finance additional working capital needs. The Malaysian credit facility is
partially secured by the Company under two standby letters of credit and are
payable upon demand or upon expiration of the standby letters of credit. The
obligations of the Company under the Malaysian credit facilities are secured by
the property and building in Malaysia owned by Audiovox Communications Sdn. Bhd.
The German credit facility consists of accounts receivable factoring up to
16,000 Euros and a working capital facility, secured by accounts receivable and
inventory, up to 5,000 Euros. The German and Malaysia facilities are renewable
on an annual basis.
At November 30, 2003, the Company had guaranteed the borrowings of one of
its 50%- owned equity investees (G.L.M.) at a maximum of $300. The Company
guaranteed the debt of G.L.M. beginning in December 1996, and this guarantee was
not modified. During the three months ended May 31, 2004, the Company received a
request for payment in connection with this guarantee. As a result of the
payment request, the Company paid $291 on behalf of G.L.M. during the three
months ended May 31, 2004.
The Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At May 31,
2004, such obligations and commitments are as follows:
Payments Due By Period
---------------------------------------------------------------------------
Contractual Cash Less than 1-3 4-5 After
Obligations Total 1 Year Years Years 5 Years
- ------------------------ ------- ------- ------- ------- -------
Capital lease obligation $13,376 $ 553 $ 1,125 $ 1,157 $10,541
Operating leases 12,263 3,609 5,528 3,070 56
------- ------- ------- ------- -------
Total contractual cash
obligations $25,639 $ 4,162 $ 6,653 $ 4,227 $10,597
======= ======= ======= ======= =======
52
Amount of Commitment
Expiration per period
-------------------------------------------------------------
Total
Other Commercial Amounts Less than After
Commitments Committed 1 Year 1-3 Years 4-5 Years 5 years
----------- -------- -------- ---------- ---------- -----
Lines of credit (1) $ 69,643 $ 69,643 -- -- --
Standby letters of
credit (1) 2,271 2,271 -- -- --
Commercial letters of
credit (1) 14,627 14,627 -- -- --
Debt (1) 18,466 2,747 $ 12,401 $ 3,318 --
-------- -------- -------- -------- -----
Total commercial $105,007 $ 89,288 $ 12,401 $ 3,318 --
======== ======== ======== ======== =====
commitments
(1) Refer to footnote 13 of the notes to the consolidated financial statements.
The Company regularly reviews its cash funding requirements and attempts to
meet those requirements through a combination of cash on hand, cash provided by
operations, available borrowings under bank lines of credit and possible future
public or private debt and/or equity offerings. At times, the Company evaluates
possible acquisitions of, or investments in, businesses that are complementary
to those of the Company, which transaction may requires the use of cash. The
Company believes that its cash, other liquid assets, operating cash flows,
credit arrangements, access to equity capital markets, taken together, provide
adequate resources to fund ongoing operating expenditures. In the event that
they do not, the Company may require additional funds in the future to support
its working capital requirements or for other purposes and may seek to raise
such additional funds through the sale of public or private equity and/or debt
financings as well as from other sources. No assurance can be given that
additional financing will be available in the future or that if available, such
financing will be obtainable on terms favorable to the Company when required.
Treasury Stock
The Company's Board of Directors approved the repurchase of 1,563,000
shares of the Company's Class A common stock in the open market under a share
repurchase program (the Program). No shares were purchased under the Program
during fiscal 2003 or fiscal 2004. As of November 30, 2003 and May 31, 2004,
1,072,737 and 1,070,957 shares were repurchased under the Program at an average
price of $7.93 per share for an aggregate amount of $8,511 and $8,497,
respectively.
Off-Balance Sheet Arrangements
The Company does not maintain any off-balance sheet arrangements,
transactions, obligations or other relationships with unconsolidated entities
53
that would be expected to have a material current or future effect upon our
financial condition or results of operations.
Related Party Transactions
The Company has entered into several related party transactions which are
described below.
Leasing Transactions
During 1998, the Company entered into a 30-year capital lease for a
building with its principal stockholder and chief executive officer, which is
the headquarters of the Wireless operation. Payments on the lease were based
upon the construction costs of the building and the then-current interest rates.
The effective interest rate on the capital lease obligation is 8%.
During 1998, the Company entered into a sale/leaseback transaction with its
principal stockholder and chief executive officer for $2,100 of equipment, which
has been classified as an operating lease. The lease has monthly payments of $34
and expires on March 31, 2005. No gain or loss was recorded on the transaction
as the book value of the equipment equaled the fair market value.
The Company also leases certain facilities from its principal stockholder.
Rentals for such leases are considered by management of the Company to
approximate prevailing market rates. Total lease payments required under the
leases for the five-year period ending May 31, 2009 and thereafter are $4,426.
Transactions with Toshiba Corporation
Toshiba Corporation (Toshiba), a minority shareholder of ACC, is a major
supplier of ACC products. On June 8, 2004, Audiovox purchased 5% of ACC stock
from Toshiba (see Note 17 of the Notes to Consolidated Financial Statements).
Inventory on hand at November 30, 2003 and May 31, 2004 purchased from Toshiba
approximated $22,405 and $41,439, respectively. At November 30, 2003 and May 31,
2004, the Company recorded receivables from Toshiba aggregating approximately
$709 and $58, respectively, primarily for software upgrades.
At November 30, 2003 and May 31, 2004, the Company had outstanding payables
in the amount of $18,841 and $86, respectively, for inventory purchases from
Toshiba. The payment terms are such that the payable is non-interest bearing and
is payable in accordance with the terms established in the distribution
agreement between the parties, which is 30 days.
On occasion, the Company negotiates to receive price protection in the
event the selling price to its customers is less than the purchase price from
Toshiba. The Company will record such price protection, if necessary, at the
time of the sale of the units.
Recent Accounting Pronouncements
The Financial Accounting Standard Board ("FASB") issued an exposure draft
entitled "Share- Based Payment, an Amendment of FASB Statements Nos. 123 and
54
95." This exposure draft would require stock-based compensation to employees to
be recognized as a cost in the financial statements and that such cost be
measured according to the fair value of the stock options. In the absence of an
observable market price for the stock awards, the fair value of the stock
options would be based upon a valuation methodology that takes into
consideration various factors, including the exercise price of the option, the
expected term of the option, the current price of the underlying shares, the
expected volatility of the underlying share price, the expected dividends on the
underlying shares and the risk- free interest rate. The proposed requirements in
the exposure draft would be effective for the first fiscal year beginning after
December 15, 2004. The FASB intends to issue a final Statement in late 2004. The
Company will continue to monitor communications on this subject from the FASB in
order to determine the impact on the Company's consolidated financial
statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51",
which addresses consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46 (Revised
Interpretations) resulting in multiple effective dates based on the nature as
well as the creation date of the VIE. The adoption of FIN 46 did not have an
impact on the Company's consolidated financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
"Revenue Recognition" (SAB No. 104), which codifies, revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition", in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on our consolidated results of operations,
consolidated financial position or consolidated cash flows.
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 wireless, 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
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, 2003. These factors, among others, may cause actual results to
differ materially from the results suggested in the forward-looking statements.
Forward-looking statements include statements relating to, among other things:
o growth trends in the wireless, mobile and consumer electronic
businesses
o technological and market developments in the wireless, automotive and
consumer electronics businesses
o liquidity
55
o availability of key employees
o expansion into international markets
o the availability of new consumer electronic products
o the availability of new wireless products
These forward-looking statements are subject to numerous risks,
uncertainties and assumptions about the Company including, among other things:
o the ability to keep pace with technological advances
o impact of future selling prices on Company profitability and inventory
carrying value
o significant competition in the wireless, automotive and consumer
electronics businesses
o quality and consumer acceptance of newly introduced products
o the relationships with key suppliers
o the relationships with key customers
o possible increases in warranty expense
o changes in the Company's business operations
o the loss of key employees
o foreign currency risks
o political instability
o changes in U.S. federal, state and local and foreign laws
o changes in regulations and tariffs
o seasonality and cyclicality
o inventory obsolescence and availability
o consolidations in the wireless and retail industries, causing a
decrease in the number of carriers and retail stores that carry our
products
o changes in global or local economic conditions
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, 2003 and May 31, 2004, which are
recorded at fair value of $9,512 and $8,045, respectively, include an unrealized
gain (loss) of $1,831 and ($544), 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 $951 and $805 as of November 30, 2003 and May 31, 2004, respectively. Actual
results may differ.
56
Interest Rate Risk
The Company's bank loans expose earnings to changes in short-term interest
rates since interest rates on the underlying obligations are either variable or
fixed for such a short period of time as to effectively become variable. The
fair values of the Company's bank loans are not significantly affected by
changes in market interest rates.
Foreign Exchange Risk
In order to reduce the risk of foreign currency exchange rate fluctuations,
the Company hedges transactions denominated in a currency other than the
functional currencies applicable to each of its various entities. The
instruments used for hedging are forward contracts with banks. The 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, 2003 or May 31, 2004. Therefore, the potential loss
in fair value for a net currency position resulting from a 10% adverse change in
quoted foreign currency exchange rates as of November 30, 2003 and May 31, 2004
is not applicable.
The Company is subject to risk from changes in foreign exchange rates for
its subsidiaries and equity investments that use a foreign currency as their
functional currency and are translated into U.S. dollars. These changes result
in cumulative translation adjustments which are included in accumulated other
comprehensive income. On November 30, 2003 and May 31, 2004, the Company had
translation exposure to various foreign currencies with the most significant
being the Euro, Malaysian ringgit, Thailand baht and Canadian dollar. The
potential loss resulting from a hypothetical 10% adverse change in quoted
foreign currency exchange rates, as of November 30, 2003 and May 31, 2004,
amounts to $1,195 and $951, respectively. Actual results may differ.
ITEM 4 CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q,
the Company's Chief Executive Officer and Principal Financial Officer has each
evaluated the effectiveness of the Company's "Disclosure Controls and
Procedures" and has concluded that they were effective. As such term is used
above, the Company's Controls and Procedures are controls and other procedures
of the Company that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Security Exchange Commission's rules
and forms. Disclosure Controls and Procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by the Company in such reports is accumulated and communicated to the
Company's management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
57
date that the Company's Chief Executive Officer and Principal Financial Officer
conducted their evaluations of the Disclosure Controls and Procedures, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is currently, and has in the past been, a party to routine
litigation incidental to its business. From time to time, the Company receives
notification of alleged violations of registered patent holders' rights. The
Company has either been indemnified by its manufacturers in these matters,
obtained the benefit of a patent license or has decided to vigorously defend
such claims.
The Company and ACC, along with other manufacturers of wireless phones and
cellular service providers, were named as defendants in two class action
lawsuits alleging non-compliance with FCC ordered emergency 911 call processing
capabilities. These lawsuits were consolidated and transferred to the United
States District Court for the Northern District of Illinois, which in turn
referred the cases to the Federal Communications Commission ("FCC") to determine
if the manufacturers and service providers are in compliance with the FCC's
order on emergency 911 call processing capabilities. The Company and ACC intend
to vigorously defend this matter. However, no assurances regarding the outcome
of this matter can be given at this point in the litigation.
During 2001, the Company, along with other suppliers, manufacturers and
distributors of hand-held wireless telephones, was named as a defendant in five
class action lawsuits alleging damages relating to exposure to radio frequency
radiation from hand-held wireless telephones. These class actions have been
consolidated and transferred to a Multi-District Litigation Panel before the
United States District Court of the District of Maryland. On March 5, 2003,
Judge Catherine C. Blake of the United States District Court for the District of
Maryland granted the defendants' consolidated motion to dismiss these
complaints. Plaintiffs have appealed to the United States Circuit Court of
Appeals, Fourth Circuit. The appeal pending before the United States Circuit
Court of Appeals, Fourth Circuit in the consolidated class action lawsuits
(Pinney, Farina, Gilliam, Gimpelson and Naquin) against ACC and other suppliers,
manufacturers and distributors as well as wireless carriers of hand-held
wireless telephones alleging damages relating to risk of exposure to radio
frequency radiation from the wireless telephones has not yet been heard. It is
anticipated that the appeal will be heard in September 2004.
During the third quarter of fiscal 2003, a certain Venezuelan employee, who
is also a minority shareholder in Audiovox Venezuela, submitted a claim to the
Venezuela Labor Court for severance compensation of approximately $560. The
Court approved the claim and it was paid and expensed by Audiovox Venezuela in
the third quarter of fiscal 2003. The Company is challenging the payment of this
claim and will seek reimbursement from the Venezuelan shareholder or the
Company's insurance carrier.
During the second quarter of fiscal 2004, the Company, AEC and one of its
distributors of car security products, were named as defendants in a lawsuit
brought by Magnadyne Corporation in the United States District Court, Central
District of California alleging patent infringement and seeking damages and
58
injunctive relief. The Company has answered the amended complaint, asserted
various affirmative defenses and interposed counterclaims alleging
non-infringement, invalidity and non- enforceability. AEC is due to respond to
the amended complaint by July 20, 2004 and intends to answer, assert affirmative
defenses and interpose counterclaims as well. To date, there has been no
discovery. The Company and AEC 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 does not expect the outcome of any pending litigation,
separately and in the aggregate, to have a material adverse effect on its
business, consolidated financial position or results of operations.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934 (furnished herewith)
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934 (furnished herewith)
32.1 Certification Pursuant to Rule
13a-14(a) And Rule 15d- 14(a)
Section 1350, Chapter 63 of Title 18
of The United States Code, As
Adopted Pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002
(furnished herewith)
32.2 Certification Pursuant to Rule
13a-14(a) And Rule 15d- 14(a)
Section 1350, Chapter 63 of Title 18
of The United States Code, As
Adopted Pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002
(furnished herewith)
(b) Reports on Form 8-K
During the second quarter ended May 31, 2004, the Company filed two reports
on Form 8-K:
The first report filed on Form 8-K, dated April 14, 2004 and filed April
16, 2004, stated that the Company had issued a press release reporting on the
Company's results for the fiscal first quarter ended February 29, 2004. A copy
of the press release was attached to the Form 8-K as Exhibit 99.1.
The second report filed on Form 8-K, dated April 16, 2004 and filed April
22, 2004, reported that the Company and its Lenders had executed a Tenth
Amendment to the Fourth Amended and Restated Credit Agreement, which, among
other things, amends and restates the definition of "Borrowing Base" to allow
the Company to borrow against its inventory at any time during the year. A copy
of the Tenth Amendment was attached to the Form 8-K as Exhibit 99.1.
59
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUDIOVOX CORPORATION
By:/s/John J. Shalam
---------------------------------------
John J. Shalam
President and Chief
Executive Officer
Dated: July 15, 2004
By:/s/Charles M. Stoehr
---------------------------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
60
CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
I, John J. Shalam, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Audiovox
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in the report;
4. The registrant's other certifying 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) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and to the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: July 15, 2004 By: /s/ John J. Shalam
---------------------------------------
John J. Shalam
Chief Executive Officer
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
I, Charles M. Stoehr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Audiovox
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in the report;
4. The registrant's other certifying 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) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and to the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: July 15, 2004 By: /s/ Charles M. Stoehr
---------------------------------------
Charles M. Stoehr
Chief Financial Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a)
SECTION 1350, CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarter ended
May 31, 2004, (the "Report") of Audiovox Corporation (the "Company"), as filed
with the Securities and Exchange Commission on the date hereof, I, John J.
Shalam, the Chief Executive Officer of the Company certify, to the best of my
knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/John J. Shalam
John J. Shalam
President and Chief Executive Officer
July 15, 2004
Exhibit 32.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a)
SECTION 1350, CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarter ended
May 31, 2004, (the "Report") of Audiovox Corporation (the "Company"), as filed
with the Securities and Exchange Commission on the date hereof, I, Charles M.
Stoehr, the Chief Financial Officer of the Company certify, to the best of my
knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/Charles M. Stoehr
Charles M. Stoehr
Chief Financial Officer
July 15, 2004
Exhibit 32.2