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 August 31, 2003
Commission file number 0-28839
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 231-7750
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes 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 October 9, 2003
Class A Common Stock 20,733,874 Shares
Class B Common Stock 2,260,954 Shares
2
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS:
Consolidated Balance Sheets at November 30,
2002 and August 31, 2003 (unaudited) 4
Consolidated Statements of Income for the
Three and Nine Months Ended August 31, 2002 (unaudited),
as restated, and August 31, 2003 (unaudited) 5
Consolidated Statements of Cash Flows
for the Nine Months Ended August 31, 2002
(unaudited), as restated, and August 31, 2003 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 32
ITEM 3 Legal Proceedings 60
ITEM 4 Controls and Procedures 60
PART II - OTHER INFORMATION 62
ITEM 4. Submission of Matters to a Vote of Security Holders 62
ITEM 6. Exhibits and Reports on Form 8-K 62
SIGNATURES 64
3
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
November 30, August 31,
2002 2003
--------- ---------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,758 $ 30,711
Accounts receivable, net 186,564 155,590
Inventory, net 290,064 187,698
Receivable from vendor 14,174 4,864
Prepaid expenses and other current assets 7,626 11,556
Deferred income taxes, net 7,653 9,869
--------- ---------
Total current assets 508,839 400,288
Investment securities 5,405 6,544
Equity investments 11,097 12,349
Property, plant and equipment, net 18,381 20,380
Excess cost over fair value of assets acquired and other intangible assets, net 6,826 15,552
Other assets 687 2,690
--------- ---------
$ 551,235 $ 457,803
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 121,127 $ 50,807
Accrued expenses and other current liabilities 34,983 37,371
Accrued sales incentives 12,151 11,930
Income taxes payable 7,643 9,907
Bank obligations 40,248 7,278
--------- ---------
Total current liabilities 216,152 117,293
Long-term debt 8,140 8,250
Capital lease obligation 6,141 6,096
Deferred income taxes payable, net 2,704 2,038
Deferred compensation 3,969 4,764
--------- ---------
Total liabilities 237,106 138,441
--------- ---------
Minority interest 4,616 4,549
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 2,500
Common stock:
Class A; 60,000,000 authorized; 20,632,182 and 20,680,882 issued at
November 30, 2002 and August 31, 2003, respectively; 19,559,445
outstanding at
November 30, 2002 and 19,608,145 outstanding at August 31, 2003, respectively 207 207
Class B convertible; 10,000,000 authorized; 2,260,954 issued and outstanding 22 22
Paid-in capital 250,917 251,661
Retained earnings 69,396 73,325
Accumulated other comprehensive loss (5,018) (4,391)
Treasury stock, at cost, 1,072,737 Class A common stock at November 30, 2002 and
August 31, 2003, respectively (8,511) (8,511)
--------- ---------
Total stockholders' equity 309,513 314,813
--------- ---------
Total liabilities and stockholders' equity $ 551,235 $ 457,803
========= =========
See accompanying notes to consolidated financial statements.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Three and Nine Months Ended August 31, 2002 and 2003
(In thousands, except share and per share data)
(unaudited)
Three Months Ended Nine Months Ended
August 31, August 31, August 31, August 31,
2002 2003 2002 2003
------------ ------------ ------------ ------------
As Restated As Restated
See Note 2 See Note 2
Net sales $ 301,992 $ 265,822 $ 783,528 $ 863,650
Cost of sales 274,524 237,991 723,684 784,739
------------ ------------ ------------ ------------
Gross profit 27,468 27,831 59,844 78,911
------------ ------------ ------------ ------------
Operating expenses:
Selling 7,497 8,568 21,869 24,145
General and administrative 12,686 15,576 39,692 40,771
Warehousing and technical support 1,100 1,237 2,757 4,030
------------ ------------ ------------ ------------
Total operating expenses 21,283 25,381 64,318 68,946
------------ ------------ ------------ ------------
Operating income (loss) 6,185 2,450 (4,474) 9,965
------------ ------------ ------------ ------------
Other income (expense), net:
Interest and bank charges (752) (1,049) (2,754) (3,167)
Equity in income of equity investments 750 1,019 1,611 2,133
Gain on issuance of subsidiary shares, net -- -- 14,269 --
Other, net (1,198) 22 (3,441) (505)
------------ ------------ ------------ ------------
Total other income (expense), net (1,200) (8) 9,685 (1,539)
------------ ------------ ------------ ------------
Income before provision for income taxes, minority interest and
cumulative effect of a change in accounting for negative
goodwill 4,985 2,442 5,211 8,426
Provision for income taxes 2,416 2,606 5,236 4,564
Minority interest 49 811 819 68
------------ ------------ ------------ ------------
Income before cumulative effect of a change in accounting for
negative goodwill 2,618 647 794 3,930
Cumulative effect of a change in accounting for negative
goodwill -- -- 240 --
------------ ------------ ------------ ------------
Net income $ 2,618 $ 647 $ 1,034 $ 3,930
============ ============ ============ ============
Net income per common share (basic):
Income before cumulative effect of a change in accounting
for negative goodwill $ 0.12 $ 0.03 $ 0.04 $ 0.18
Cumulative effect of a change in accounting for negative
goodwill -- -- 0.01 --
------------ ------------ ------------ ------------
Net income per common share $ 0.12 $ 0.03 $ 0.05 $ 0.18
============ ============ ============ ============
Net income per common share (diluted):
Income before cumulative effect of a change in accounting
for negative goodwill $ 0.12 $ 0.03 $ 0.04 $ 0.18
Cumulative effect of a change in accounting for negative
goodwill -- -- 0.01 --
------------ ------------ ------------ ------------
Net income per common share $ 0.12 $ 0.03 $ 0.05 $ 0.18
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic 21,947,573 21,840,621 21,960,652 21,836,241
============ ============ ============ ============
Diluted 21,982,803 22,101,749 21,997,892 22,000,232
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended August 31, 2002 and 2003
(In thousands)
(unaudited)
August 31,
2002 2003
--------- ---------
As Restated
Cash flows from operating activities:
Net income $ 1,034 $ 3,930
Adjustments to reconcile net income to net cash flows provided by operating activities
Depreciation and amortization 3,484 3,222
Provision for (recovery of) bad debt expense 2,006 (375)
Equity in income of equity investments (1,611) (2,133)
Minority interest (819) (68)
Non-cash stock compensation -- 297
Gain on issuance of subsidiary shares, net (14,269) --
Deferred income tax expense, net 3,707 (3,080)
(Gain) loss on disposal of property, plant and equipment, net (12) 180
Cumulative effect of a change in accounting for negative goodwill (240) --
Changes in operating assets and liabilities:
Accounts receivable 48,257 43,785
Receivable from vendor (6,611) 9,313
Inventory (27,273) 125,336
Accounts payable, accrued expenses and other current liabilities 73,706 (73,926)
Income taxes payable 2,886 2,057
Investment securities-trading 109 (796)
Prepaid expenses and other, net (5,656) (3,994)
--------- ---------
Net cash provided by operating activities 78,698 103,748
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,075) (4,204)
Proceeds from the sale of property, plant and equipment 364 129
Proceeds of distribution from an equity investee 572 810
Sale of assets to equity investee -- 3,600
Net proceeds from issuance of subsidiary shares 22,358 --
Purchase of acquired business, net of acquired cash (7,107) (39,609)
--------- ---------
Net cash provided by (used in) investing activities 14,112 (39,274)
--------- ---------
Cash flows from financing activities:
Borrowings of bank obligations 210,450 164,331
Repayments on bank obligations (299,001) (201,158)
Proceeds from issuance of convertible subordinated debentures 8,107 --
Principal payments on capital lease obligation (40) (45)
Repurchase of Class A common stock held in treasury (712) --
Net proceeds from employee stock options and warrants -- 385
--------- ---------
Net cash used in financing activities (81,196) (36,487)
--------- ---------
Effect of exchange rate changes on cash (163) (34)
--------- ---------
Net increase in cash 11,451 27,953
Cash at beginning of period 3,025 2,758
--------- ---------
Cash at end of period $ 14,476 $ 30,711
========= =========
See accompanying notes to consolidated financial statements.
6
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended August 31, 2002 and 2003
(Dollars in thousands, except share and per share data)
(1) Basis of Presentation
The accompanying consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United
States of America and include all adjustments, which include only normal
recurring adjustments, which, in the opinion of management, are necessary
to present fairly the consolidated financial position of Audiovox
Corporation and subsidiaries (the Company) as of November 30, 2002 and
August 31, 2003, the consolidated statements of income for the three and
nine month periods ended August 31, 2002 (as restated) and 2003, and the
consolidated statements of cash flows for the nine month periods ended
August 31, 2002 (as restated) and 2003. The interim figures are not
necessarily indicative of the results for the year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, including the allowance for doubtful
accounts, allowance for cellular deactivations, inventory valuation,
recoverability of deferred taxes and other assets, valuation of long-lived
assets and accrued sales incentives, warranty reserves and disclosure of
the contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
A summary of the Company's significant accounting policies is identified in
Note 1 of the Notes to Consolidated Financial Statements included in the
Company's 2002 Annual Report filed on Form 10-K. There have been no changes
to the Company's significant accounting policies subsequent to November 30,
2002. Certain reclassifications have been made to the 2002 consolidated
financial statements in order to conform to the 2003 presentation.
(2) Restatement of Prior Period Consolidated Financial Statements
As discussed in Note 2 of the Notes to Consolidated Financial Statements
included in the Company's 2002 Annual Report filed on Form 10-K, the
Company has restated its consolidated financial statements for fiscal 2000,
2001 and for the first three quarters of fiscal 2002. Those restatement
adjustments were the result of the misapplication of generally accepted
accounting principles. In addition, the Company reclassified certain
expenses from operating expenses to cost of sales for the three and nine
months ended August 31, 2002.
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The net effect of the restatement adjustments on net income for the three
and nine months ended August 31, 2002 is as follows:
August 31, 2002
-----------------------------
Three Months Nine Months
Increase (decrease) in income before cumulative effect
of a change in accounting for negative goodwill $ 751 $(1,339)
Increase (decrease) in net income 751 (1,339)
Increase (decrease) in net income per common share -
diluted $ 0.04 $ (0.06)
The following table provides additional information regarding the effects
of restatement adjustments on the Company's net income (loss) for the three
and nine months ended August 31, 2002:
(In Thousands)
Increase
(Decrease)
August 31, 2002
-----------------------------
Three Months Nine Months
Restatement adjustments:
Timing of revenue $ 405 $ (103)
Litigation 757 427
Foreign currency translation (157) (1,491)
Inventory pricing 35 420
Sales incentives 154 847
Gain on the issuance of subsidiary shares -- (1,556)
Operating expense reclassification to cost of
sales (1) -- --
------- -------
Total adjustment to increase (decrease) pre-
tax income 1,194 (1,456)
(Provision for) recovery of income taxes 398 (203)
Minority interest (2) (45) (86)
------- -------
Total increase (decrease) on net income $ 751 $(1,339)
======= =======
(1) This adjustment represents a reclassification of warehousing and technical
support and general and administrative costs (which are components of
operating expenses) to cost of sales. This reclassification did not have
any effect on previously reported net income for the three and nine months
of fiscal 2002.
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) The adjustment reflects the impact of the restatement adjustments on
minority interest.
The following discussion addresses each of the restatement adjustments for
the corrections of accounting errors and the reclassification adjustment.
(a) Timing of revenue. During the three and nine months ended August 31,
2002, the Company understated net sales by $10,472 and overstated net
sales by $1,886, respectively, as the timing of revenue recognition
was not in accordance with the established shipping terms with certain
customers. SAB 101 specifically states that delivery generally is not
considered to have occurred unless the customer has taken title (which
is in this situation when the product was delivered to the customer's
site). Accordingly, the Company should have deferred revenue
recognition until delivery was made to the customer's site. In
addition, during the three and nine months ended August 31, 2002,
gross profit was understated by $535 and overstated by $126,
respectively, and operating expenses were understated by $130 and
overstated by $23, respectively.
(b) Litigation. During the three and nine months ended August 31, 2002,
the Company overestimated its provisions for certain litigation
matters, thereby overstating cost of sales by $457 and $978,
respectively. Also, the Company understated operating expenses by $0
and $497 for the three and nine months ended August 31, 2002,
respectively as a result of not recording a settlement offer in the
period the Company offered it.
During the three and nine months ended August 31, 2002, the Company
overstated operating expenses by $300 and understated operating
expenses by $54, respectively as a result of inappropriately deferring
costs related to an insurance claim. The Company's insurance company
refused to defend the Company against a legal claim made against the
Company. The Company took legal action against the insurance company
and was unsuccessful. The Company was improperly capitalizing costs
that were not probable of recovery.
(c) Foreign currency translation. During the three and nine months ended
August 31, 2002, the Company did not properly account for a change in
accounting for its Venezuelan subsidiary as operating in a non-highly
inflationary economy. In prior periods, Venezuela was deemed to be a
highly-inflationary economy in accordance with certain technical
accounting pronouncements. Effective January 1, 2002, it was deemed
that Venezuela should cease to be considered a highly-inflationary
economy, however, the Company did not account for this change. The
Company incorrectly
9
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
recorded the foreign currency translation adjustment in other income
rather than as other comprehensive income. As a result, the Company
understated other expenses, net, by $247 and $1,674 for the three and
nine months ended August 31, 2002, respectively. Also, the Company
overstated operating expenses by $90 and $183 for the three and nine
months ended August 31, 2002, respectively.
(d) Inventory pricing. For the three and nine months ended August 31,
2002, the Company overstated cost of sales related to an inventory
pricing error that occurred at its Venezuelan subsidiary. The Company
was not properly pricing its inventory at the lower of cost or market
in accordance with generally accepted accounting principles. As a
result, the Company overstated cost of sales by $35 and $420 for the
three and nine months ended August 31, 2002, respectively.
(e) Sales incentives. During the three and nine months ended August 31,
2002, the Electronics segment underestimated accruals for additional
sales incentives (other trade allowances) that were not yet offered to
its customers. As a result, for the three and nine months ended August
31, 2002, the Company understated net sales by $288 and $292,
respectively.
Furthermore, during the three and nine months ended August 31, 2002,
the Electronics segment was also not reversing earned and unclaimed
sales incentives (i.e., cooperative advertising, market development
and volume incentive rebate funds) upon the expiration of the
established claim period. As a result, for the three and nine months
ended August 31, 2002, the Company understated (overstated) net sales
by $(134) and $555, respectively.
(f) Income taxes. Income taxes were adjusted for the restatement
adjustments discussed above for each period presented.
The Company also applied income taxes to minority interest amounts
during the three and nine months ended August 31, 2002. As a result of
these adjustments, the Company understated (overstated) the provision
for income taxes by $398 and $(203) for the three and nine months
ended August 31, 2002, respectively.
(g) Operating expense reclassification. The Company reclassified certain
costs as operating expenses, which were included as a component of
warehousing and technical support and general and administrative
costs, which should have been classified as a component of cost of
sales. The effect of this reclassification for the three and nine
months ended August 31, 2002 was to understate cost of sales and
overstate operating expenses by $5,292 and $15,488, respectively. This
10
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
reclassification did not have any effect on previously reported net
income or loss for any period presented herein. This reclassification
reduced gross margin by 1.8 and 1.9 percentage points for the three
and nine months ended August 31, 2002, respectively.
(h) Gain on the issuance of subsidiary shares. During the second quarter
of fiscal 2002, the Company overstated the gain on issuance of
subsidiary shares by $1,735 due to expenses related to this issuance
being charged to additional paid in capital. This adjustment also
reflects the impact of the other restatement adjustments on the
calculation of the gain on the issuance of subsidiary shares of $179
that was originally recorded by the Company in the quarter ended May
31, 2002. As a result, the Company decreased the gain on issuance of
subsidiary shares and increased the additional paid in capital by
$1,556.
11
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following represents the effect of the restatement and reclassification
adjustments in the consolidated statements of income for the three months
ended August 31, 2002:
Fiscal 2002
For the Quarter Ended August 31,
-------------------------------------------------------------------------
Restatement Reclassification
As Reported Adjustments Adjustments As Restated
Net sales $ 291,367 $ 10,625 (1)(7) - $ 301,992
Cost of sales 259,791 9,441 (1)(5)(6) $ 5,292 (2) 274,524
----------- ---------- ------------ ----------
Gross profit 31,576 1,184 (5,292) 27,468
----------- ---------- ------------ ----------
Operating expenses:
Selling 7,486 11 (1) - 7,497
General and administrative 13,208 (372)(1)(4)(5) (150)(2) 12,686
Warehousing and technical support 6,138 104 (1)(4) (5,142)(2) 1,100
----------- ---------- ------------ ----------
Total operating expenses 26,832 (257) (5,292) 21,283
----------- ---------- ------------ ----------
Operating income 4,744 1,441 - 6,185
Total other expense, net (953) (247)(4) - (1,200)
----------- ---------- ------------ -----------
Income before provision for income taxes and
minority interest 3,791 1,194 - 4,985
Provision for income taxes 2,018 398 (3) - 2,416
Minority interest 94 (45)(8) - 49
----------- ---------- ------------ -----------
Net income $ 1,867 $ 751 - $ 2,618
=========== ========== ============ ===========
Net income per common share (basic) $ 0.09 $ 0.03 - $ 0.12
=========== ========== ============ ===========
Net income per common share (diluted) $ 0.08 $ 0.04 - $ 0.12
=========== ========== ============ ===========
Weighted average number of common shares
outstanding (basic) 21,947,573 21,947,573
=========== ===========
Weighted average number of common shares
outstanding (diluted) 21,982,803 21,982,803
=========== ===========
(1) Amounts reflect adjustments for (a) timing of revenue.
(2) Amounts reflect adjustments for (g) operating expense reclassification.
(3) Amounts reflect adjustments for (f) income taxes.
(4) Amounts reflect adjustments for (c) foreign currency translation.
(5) Amounts reflect adjustments for (b)litigation.
(6) Amounts reflect adjustments for (d) inventory pricing.
(7) Amounts reflectadjustments for (e) sales incentives.
(8) Amount reflects impact of the restatement adjustments on minority interest.
12
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following represents the effect of the restatement and reclassification
adjustments in the consolidated statements of income for the nine months ended
August 31, 2002:
Fiscal 2002
For the Nine Months Ended August 31,
--------------------------------------------------------------------------
Restatement Reclassification
As Reported (a) Adjustments Adjustments As Restated
----------- ----------- ----------- -----------
Net sales $ 784,567 $ (1,039) (1)(9) - $ 783,528
Cost of sales 711,350 (3,154) (1)(5)(6) $ 15,488 (2) 723,684
----------- --------- --------- -----------
Gross profit 73,217 2,115 (15,488) 59,844
----------- --------- --------- -----------
Operating expenses:
Selling 21,870 (1)(1) - 21,869
General and administrative 39,716 415 (1)(4)(5) (438)(2) 39,692
Warehousing and technical support 17,873 (66)(1)(4) (15,050)(2) 2,757
----------- --------- --------- -----------
Total operating expenses 79,459 347 (15,488) 64,318
----------- --------- --------- -----------
Operating income (loss) (6,242) 1,768 - (4,474)
Total other income (expense), net 12,909 (3,224) (4)(8) - 9,685
----------- --------- --------- -----------
Income (loss) before provision for (recovery
of) income taxes, minority interest
and before cumulative effect of a change
in accounting for negative goodwill 6,667 (1,456) - 5,211
Provision for (recovery of) income taxes 5,439 (203) (3) - 5,236
Minority interest 905 (86) (9) - 819
----------- --------- --------- -----------
Income (loss) before cumulative effect of a
change in accounting for negative
goodwill 2,133 (1,339) 794
Cumulative effect of a change in
accounting for negative goodwill 240 - - 240
----------- --------- --------- -----------
Net income (loss) $ 2,373 $ (1,339) - $ 1,034
=========== ========= ========= ===========
Netincome (loss) per common share (basic)
before cumulative effect of a change
in accounting for negative
goodwill $ 0.10 $ (0.06) - $ 0.04
Cumulative effect of a change in
accounting for negative goodwill 0.01 - - $ 0.01
---------- -------- --------- -----------
Net income (loss) per common share
(basic) $ 0.11 $ (0.06) - $ 0.05
=========== ========== ========= ===========
13
Fiscal 2002
For the Nine Months Ended August 31,
--------------------------------------------------------------------------
Restatement Reclassification
As Reported (a) Adjustments Adjustments As Restated
----------- ----------- ----------- -----------
Netincome (loss) per common share (diluted)
before cumulative effect of a
change in accounting for negative
goodwill $ 0.10 $ (0.06) - $ 0.04
Cumulative effect of a change in
accounting for negative goodwill 0.01 - - $ 0.01
---------- -------- --------- -----------
Net income (loss) per common share
(diluted) $ 0.11 $ (0.06) - $ 0.05
=========== ========== ========= ===========
Weighted average number of common
shares outstanding (basic) 21,960,652 21,960,652
=========== ===========
Weighted average number of
common shares outstanding
(diluted) 22,000,232 22,000,232
=========== ===========
(a) Includes reclassification of sales incentives (previously reported in
operating expenses) pursuant to EITF 01-9, "Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's
Products)".
(1) Amounts reflect adjustments for (a) timing of revenue.
(2) Amounts reflect adjustments for (g) operating expense reclassification.
(3) Amounts reflect adjustments for (f) income taxes.
(4) Amounts reflect adjustments for (c) foreign currency translation.
(5) Amounts reflect adjustments for (b)litigation.
(6) Amounts reflect adjustments for (d) inventory pricing.
(7) Amounts reflect adjustments for (e) sales incentives.
(8) Amounts reflect adjustments for (h) gain on the issuance of subsidiary
shares.
(9) Amounts reflect impact of restatement adjustments on minority interest.
As a result of the restatement for the quarter ended August 31, 2002, cash
provided by operating activities was decreased $779 and cash provided by
investing activities was increased $779. There has not been any change to
cash used in financing activities.
(3) Accrued Sales Incentives
During the prior year, the Company adopted the provisions of EITF 01-9
"Accounting for Consideration Given by a Vendor to a Customer". As a
result, the Company has reclassified co-operative advertising, market
development funds and volume incentive rebate costs (collectively sales
incentives), which were previously included in selling expenses, to net
sales as the Company does not receive an identifiable benefit in connection
with these costs. As a result of this reclassification, net sales and
selling expenses, after restatement, were reduced by $24,899 for the nine
months ended August 31, 2002. The Company adopted
14
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
EITF 01-9 during the second quarter of 2002. As such, no reclassification
was necessary for the three months ended August 31, 2002. There was no
further impact on the Company's consolidated financial statements as a
result of the adoption of EITF 01-9 as the Company's historical accounting
policy with respect to the recognition and measurement of sales incentives
is consistent with EITF 01-9.
A summary of the activity with respect to sales incentives for the quarters
ended August 31, 2002 and 2003, respectively, on a segment and consolidated
basis is provided below:
For the three months ended August 31, 2002
Wireless Electronics Total
Opening balance $ 12,530 $ 3,752 $ 16,282
Accruals 10,228 1,870 12,098
Payments (12,998) (1,122) (14,120)
Reversals for unearned sales incentives - (434) (434)
Reversals for unclaimed sales incentives (726) - (726)
---------- -------- ---------
Ending balance $ 9,034 $ 4,066 $ 13,100
========== ======== =========
For the nine months ended August 31, 2002
Wireless Electronics Total
Opening Balance $ 5,209 $ 3,265 $ 8,474
Accruals 23,434 4,862 28,296
Payments (17,317) (2,956) (20,273)
Reversals for unearned sales incentives (105) (434) (539)
Reversals for unclaimed sales incentives (2,187) (671) (2,858)
---------- -------- --------
Ending balance $ 9,034 $ 4,066 $ 13,100
========== ======== =========
For the three months ended August 31, 2003
Wireless Electronics Total
Opening balance $ 3,317 $ 4,928 $ 8,245
Accruals** 2,253 8,181 10,434
Payments (2,809) (2,763) (5,572)
Reversals for unearned sales incentives (206) (168) (374)
Reversals for unclaimed sales incentives (263) (540) (803)
---------- ---------- ---------
Ending balance $ 2,292 $ 9,638 $ 11,930
========== ========== =========
15
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
For the nine months ended August 31, 2003
Wireless Electronics Total
Opening balance $ 7,525 $ 4,626 $ 12,151
Accruals** 13,588 12,516 26,104
Payments (18,034) (5,825) (23,859)
Reversals for unearned sales incentives (257) (408) (665)
Reversals for unclaimed sales incentives (530) (1,271) (1,801)
---------- ---------- ---------
Ending balance $ 2,292 $ 9,638 $ 11,930
========== ========== =========
** Included in Electronics accruals is $4,111 of accrued sales incentives
acquired from Recoton (Note 11).
(4) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
Nine Months Ended
--------------------------
August 31, August 31,
2002 2003
------ -------
Cash paid during the period:
Interest (excluding bank charges) $ 951 $1,420
Income taxes 878 3,171
During the nine months ended August 31, 2002 and August 31, 2003, the Company
recorded a net unrealized holding gain (loss) relating to available-for-sale
marketable securities, net of deferred taxes, of $(327) and $135, respectively,
as a component of accumulated other comprehensive loss.
16
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Net Income Per Common Share
A reconciliation between the numerators and denominators of the basic and
diluted income per common share is as follows:
Three Months Ended Nine Months Ended
August 31, August 31,
2002 2003 2002 2003
-------------- -------------- -------------- --------------
(As Restated) (As Restated)
Net income (numerator for basic
income per share) $ 2,618 $ 647 $ 1,034 $ 3,930
============== ============== ============== ==============
Weighted average common shares
(denominator for basic income per
share) 21,947,573 21,840,621 21,960,652 21,836,241
Effect of dilutive securities:
Employee stock options and stock
warrants 35,230 261,128 37,240 163,991
-------------- -------------- -------------- --------------
Weighted average common and
potential common shares
outstanding (denominator for
diluted income per share) 21,982,803 22,101,749 21,997,892 22,000,232
============== ============== ============== ==============
Net income per common share (basic):
Income before cumulative effect of
a change in accounting for
negative goodwill $ 0.12 $ 0.03 $ 0.04 $ 0.18
Cumulative effect of a change in
accounting for negative goodwill -- -- 0.01 --
-------------- -------------- -------------- --------------
Net income per common share $ 0.12 $ 0.03 $ 0.05 $ 0.18
============== ============== ============== ==============
Net income per common share (diluted):
Income before cumulative effect of
a change in accounting for
negative goodwill $ 0.12 $ 0.03 $ 0.04 $ 0.18
Cumulative effect of a change in
accounting for negative goodwill -- -- 0.01 --
-------------- -------------- -------------- --------------
Net income per common share $ 0.12 $ 0.03 $ 0.05 $ 0.18
============== ============== ============== ==============
Stock options and warrants totaling 2,457,200 and 2,551,367 for the three
and nine months ended August 31, 2002, respectively, and 1,588,200 and
1,864,188 for the three and nine
17
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
months ended August 31, 2003, respectively, were not included in the net
income per common share calculation because their effect would have been
anti-dilutive.
(6) Comprehensive Income (Loss)
The accumulated other comprehensive loss of $5,018 and $4,391 at November
30, 2002 and August 31, 2003, respectively, on the accompanying
consolidated balance sheets is the net accumulated unrealized loss on the
Company's available-for-sale investment securities of $599 and $379 at
November 30, 2002 and August 31, 2003, respectively, and the accumulated
foreign currency translation adjustment of $4,419 and $4,012 at November
30, 2002 and August 31, 2003, respectively.
The Company's total comprehensive income (loss) was as follows:
Three Months Ended Nine Months Ended
August 31, August 31,
2002 2003 2002 2003
------ ------ ------ -----
(As Restated) (As Restated)
Net income $ 2,618 $ 647 $ 1,034 $ 3,930
Other comprehensive income (loss):
Foreign currency translation
adjustments 353 (1,112) 752 406
Unrealized gain (loss) on securities:
Unrealized holding gain (loss)
arising during period, net of
tax (113) 127 (527) 220
------- ------- ------- -------
Other comprehensive loss, net of tax 240 (985) 225 626
------- ------- ------- -------
Total comprehensive income (loss) $ 2,858 $ (338) $ 1,259 $ 4,556
======= ======= ======= =======
The change in the net unrealized gain (loss) arising during the periods
presented above are net of tax provision (benefit) of $(70) and $78 for the
three months ended August 31, 2002 and August 31, 2003, respectively, and
$(327) and $135 for the nine months ended August 31, 2002 and 2003,
respectively.
Included in foreign currency translation adjustments for the three and nine
months ended August 31, 2002 are translation adjustments of $285 and $107,
respectively, related to the translation Company's operations in Venezuela.
Included in foreign currency translation adjustments for the three and nine
months ended August 31, 2003 are translation adjustments of $(20) and
$(33), respectively, related to the translation of the Company's operations
in Venezuela. On January 22, 2003, and as a result of the National Civil
Strike, the Venezuelan government suspended trading of the Venezuelan
Bolivar and set the currency at a stated
18
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
government rate. Accordingly, until further guidance is issued, the
Company's 80%-owned Venezuelan subsidiary will translate its financial
statements utilizing the stated government rate.
Included in foreign currency translation adjustments for the three and nine
months ended August 31, 2003 are translation adjustments of $1,138 related
to the Company's operations in Germany (Note 11).
(7) Segment Information
The Company has two reportable segments which are organized by products:
Wireless and Electronics. The Wireless segment markets wireless handsets
and accessories through domestic and international wireless carriers and
their agents, independent distributors and retailers. The Electronics
segment sells autosound, mobile electronics and consumer electronics,
primarily to mass merchants, specialty retailers, new car dealers, original
equipment manufacturers (OEM), independent installers of automotive
accessories and the U.S. military.
The Company 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.
Intersegment sales are reflected at cost and have been eliminated in
consolidation. A royalty fee on the intersegment sales, which is eliminated
in consolidation, is recorded by the segments and included in other income
(expense). Certain items are maintained at the Company's corporate
headquarters (Corporate) and are not allocated to the segments. They
primarily include costs associated with accounting and certain executive
officer salaries and bonuses and certain items including investment
securities, equity investments, deferred income taxes, certain portions of
excess cost over fair value of assets acquired, jointly-used fixed assets
and debt. The jointly-used fixed assets are the Company's management
information systems, which are used by the Wireless and Electronics
segments and Corporate. A portion of the management information systems
costs, including depreciation and amortization expense, are allocated to
the segments based upon estimates made by management. During the three and
nine months ended August 31, 2002 and August 31, 2003, certain advertising
costs were not allocated to the segments. These costs pertained to an
advertising campaign that was intended to promote overall Company
awareness, rather than individual segment products. Segment identifiable
assets are those which are directly used in or identified to segment
operations.
19
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Consolidated
Wireless Electronics Corporate Totals
Three Months Ended
August 31, 2002 - As Restated
Net sales $ 197,310 $ 104,682 -- $ 301,992
Intersegment sales (purchases) (302) 302 -- --
Pre-tax income (loss) 114 7,891 $ (3,020) 4,985
Three Months Ended
August 31, 2003
Net sales $ 130,583 $ 135,239 -- $ 265,822
Intersegment sales (purchases) 118 (118) -- --
Pre-tax income (loss) (2,609) 8,858 $ (3,807) 2,442
Nine Months Ended
August 31, 2002 - As Restated
Net sales $ 516,601 $ 266,927 -- $ 783,528
Intersegment sales (purchases) (286) 286 -- --
Pre-tax income (loss) (15,524) 14,567 $ 6,168 5,211
Total assets 291,584 182,102 67,721 541,407
Goodwill, net -- 622 4,602 5,224
Nine Months Ended
August 31, 2003
Net sales $ 536,253 $ 327,397 -- $ 863,650
Intersegment sales (purchases) -- -- -- --
Pre-tax income (loss) 2,126 16,610 $ (10,310) 8,426
Total assets 129,742 259,803 68,258 457,803
Goodwill, net -- 2,907 4,602 7,509
(8) Income Taxes
Quarterly tax provisions are generally based upon an estimated annual
effective tax rate per taxable entity, including evaluations of possible
future events and transactions, and are subject to subsequent refinement or
revision. When the Company is unable to estimate a part of its annual
income or loss, or the related tax expense or benefit, the tax expense or
benefit applicable to that item is reported in the interim period in which
the income or loss occurs. For the three months ended August 31, 2003, the
Wireless Group increased its gross deferred tax assets by incurring
additional losses. This resulted in an increase to the valuation allowance
and an increase in the Company's effective tax rate for the period. During
the nine months ended August 31, 2003, the Wireless Group utilized certain
of its gross deferred tax assets (including net operating losses and other
deferred assets), therefore, the valuation
20
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
allowance related to those utilized deferred tax assets has been removed,
which resulted in a decrease in the Company's effective tax rate for the
period.
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to the reported provision for (recovery of) income taxes is
as follows:
Three Months Ended Nine Months Ended
August 31, August 31,
--------------------------------------------- ----------------------------------------------
2002 2003 2002 2003
------ ------ ------ -----
(As Restated) (As Restated)
Tax provision at Federal
statutory rate $ 1,745 35.0% $ 855 35.0% $ 1,824 35.0% $ 2,950 35.0%
State income taxes, net of
Federal benefit 79 1.6 554 22.7 642 12.3 980 11.6
Increase (decrease) in
beginning-of-the-year
balance of the valuation
allowance for deferred
tax assets 100 2.0 973 39.8 498 9.6 (32) (0.4)
Foreign tax rate
differential 713 14.3 278 11.4 1,203 23.1 683 8.1
Non-deductible items 53 1.1 236 9.7 1,279 24.5 317 3.8
Other, net (274) (5.5) (290) (11.9) (210) (4.0) (334) (3.9)
------- ------- ------- ------ ------- ----- ------- ----
$ 2,416 48.5% $ 2,606 106.7% $ 5,236 100.5% $ 4,564 54.2%
======= ======= ======= ====== ======= ===== ======= =====
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.
Effective May 29, 2002, the Company's ownership in the Wireless Group was
decreased to 75%. As such, the Company now files two consolidated U.S.
Federal Tax Returns, one for the Wireless Group and one for the Electronics
Group.
The effective tax (recovery) rate for the three and nine months ended
August 31, 2003, was 106.7% and 54.2%, respectively, compared to last
year's 48.5% and 100.5% for the comparable periods. During the three and
nine months ended August 31, 2002, the Company experienced a high effective
tax rate due to the impact of certain non-deductible items including a
bonus payment and the mix of foreign and domestic earnings. During the
three months ended August 31, 2003, the unprofitability of Wireless
resulted in an increased effective rate since Wireless' losses did not
provide any benefit. During the nine months
21
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
ended August 31, 2003, Wireless was slightly profitable, resulting in a
decrease to the Company's effective tax rate since Wireless' losses offset
such income.
The net change in the total valuation allowance for the three and nine
months ended August 31, 2003, was an increase of $973 and a decrease of
$32, 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 Group. Based on the Electronics Group's ability to carry back
future reversals of deductible temporary differences to taxes paid in
current and prior years and the Electronics Group's historical taxable
income record, adjusted for unusual items, management believes it is more
likely than not that the Electronics Group will realize the benefit of the
net deferred tax assets existing at August 31, 2003.
(9) Product Warranties
The Company generally warrants its products against certain manufacturing
and other defects. The Company provides warranties for all of its products
ranging from 90 days to the lifetime of the product. Warranty expenses are
accrued at the time of sale based on the Company's estimated cost to repair
expected returns for products. This liability is based primarily on
historical experiences of actual warranty claims as well as current
information on repair costs. Warranty expense for the three months ended
August 31, 2002 and 2003 were $2,857 and $3,497, and $6,886 and $8,381 for
the nine months ended August 31, 2002 and 2003, respectively.
The following table provides the changes in the Company's product
warranties and product repair costs for 2003:
Three Months Nine Months
Ended Ended
August 31, 2003
----------------------
Opening balance $ 16,890 $ 15,410
Liabilities accrued for warranties
issued during the period 3,497 8,381
Warranty claims paid during the
period (1,802) (5,206)
-------- --------
Ending balance at August 31, 2003 $ 18,585 $ 18,585
======== ========
22
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Financing and Factoring Arrangements
Financing Arrangements
The Company maintains a revolving credit agreement with various financial
institutions which expires July 27, 2004. As of November 30, 2002, the
credit agreement provided for $250,000 of available credit (which was
subsequently amended on March 13, 2003 to provide $200,000 of available
credit). On June 26, 2003, the credit agreement was amended to provide for
$150,000 of available credit.
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 June
26, 2003 amendment also amended certain limitations on indebtedness, liens,
guarantee obligations, sales of assets and investments, loans and advances.
At November 30, 2002, the Company was not in compliance with certain of its
pre-tax income covenants. Furthermore, as of November 30, 2002, the Company
was also not in compliance with the requirement to deliver audited
financial statements 90 days after the Company's fiscal year-end, and as of
February 28, 2003, the requirement to deliver unaudited quarterly financial
statements 45 days after the Company's quarter end and had not received a
waiver. Accordingly, the Company recorded its outstanding domestic bank
obligations of $36,883 in current liabilities at November 30, 2002.
Subsequent to November 30, 2002, the Company repaid its obligation of
$36,883 in full resulting in domestic bank obligations outstanding at May
31, 2003 of $0. The Company subsequently obtained a waiver for the November
30, 2002 and February 28, 2003 violations. The Company was in compliance
with all its bank covenants at August 31, 2003. While the Company has
historically been able to obtain waivers for such violations, there can be
no assurance that future negotiations with its lenders would be successful
or that the Company will not violate covenants in the future, therefore,
resulting in amounts outstanding to be payable upon demand. This credit
agreement has no cross covenants with other credit facilities.
Factoring Arrangements
The Company has available a 16,000 Euro factoring arrangement with a German
financial institution for its recently acquired German operations. Selected
accounts receivable are purchased from the Company on a non-recourse basis
at 80% of face value and payment of
23
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
the remaining 20% upon receipt from the customer of the balance of the
receivable purchased. The Company pays 0.4% of its gross sales as a fee for
this arrangement. The rate of interest is Euribor plus 2.5%.
(11) Business Acquisitions
Code Systems
On March 15, 2002, Code Systems, Inc. (Code), a wholly-owned subsidiary of
Audiovox Electronics Corp., purchased certain assets of Code-Alarm, Inc.,
an automotive security product company. The Company accounted for the
transaction in accordance with the purchase method of accounting. As a
result of the transaction, goodwill of $2,537 was recorded. The purchase
price allocation for Code Systems is final.
Recoton Audio Group
On July 8, 2003, the Company, through a newly-formed, wholly-owned
subsidiary, acquired (i) certain accounts receivable, inventory and
trademarks from the U.S. audio operations of Recoton Corporation (the "U.S.
audio business") and (ii) the outstanding capital stock of Recoton German
Holdings GmbH (the "international audio business"), the parent holding
company of Recoton Corporations Italian, German and Japanese subsidiaries,
for approximately $42.3 million in cash, including estimated transaction
costs of $1.9 million. The primary reason for this transaction was to
expand the product offerings of Audiovox Electronics Corp. and to obtain
certain long-standing trademarks such as Jensen, Acoustic Research and
others.The Company also acquired an obligation with a German financial
institution as a result of the purchase of the common stock of Recoton
German Holdings GmbH. This obligation is secured by the acquired company's
accounts receivable and inventory.
The results of operations of this acquisition have been included in the
consolidated financial statements from the date of acquisition.
The acquisition is being accounted for using the purchase method of
accounting in accordance with SFAS No. 141, Business Combinations ("SFAS
No. 141"). SFAS No. 141 requires that the total cost of the acquisition be
allocated to the tangible and intangible assets acquired and liabilities
assumed based upon their respective fair values at the date of acquisition.
24
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following summarizes the preliminary allocation of the purchase price
to the fair value of the assets acquired and liabilities assumed at the
date of acquisition:
Assets acquired:
Accounts receivable $12,291
Inventory 21,979
Other current assets 4,014
Property, plant and equipment 2,201
Trademarks 10,303
-------
Total assets acquired 50,788
-------
Liabilities assumed:
Accounts payable and other current liabilities 6,721
Long-term debt 3,776
Other non-current liabilities 243
-------
Total liabilities assumed 10,740
-------
Cash paid, net of cash acquired $40,048
=======
The excess of the estimated purchase price over the fair value of assets
and liabilities acquired of $10,303 has been preliminarily allocated to
trademarks, with an indefinite useful life. The actual allocation of
purchase price to assets and liabilities acquired will be dependent upon
the final valuation study.
Subsequent to July 8, 2003, the Company sold accounts receivable, inventory
and trademark ($524, $816 and $2,260, respectively) attributable to the
marine products division of the Group based upon their estimated fair
values. The sale of the marine division assets is required since the
Company is precluded from selling marine products as a result of its joint
venture agreement with Audiovox Specialized Applications, Inc. (ASA), an
equity investee of the Company.
25
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following proforma financial information for the year ended November
30, 2002 represents the combined results of the Company's operations and
acquisition as if the acquisition had occurred at the beginning of the year
of acquisition. The proforma financial information does not necessarily
reflect the results of operations that would have occurred had the Company
constituted a single entity during such periods.
Fiscal 2003
------------ ---------------------------------
Third
Quarter
Third Year-to-
2002 Quarter Date
------------ ----------- -----------
Revenue $ 1,305,212 $ 271,592 $ 904,039
Net loss (14,985) (1,524) (11,269)
Net loss per share-diluted $ (0.69) $ (0.07) $ (0.51)
(12) Intangible Assets
Intangible assets consist of patents, trademarks and the excess cost over
fair value of equity investments (goodwill). The Company will perform its
annual evaluation of intangible assets as of September 30, 2003.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that the purchase method of
accounting be used for all future business combinations and specifies
criteria intangible assets acquired in a business combination must meet to
be recognized and reported apart from goodwill. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives and reviewed for impairment in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets".
The Company early adopted the provisions of SFAS No. 141 and SFAS No. 142
as of December 1, 2001. As a result of adopting the provisions of SFAS No.
141 and 142, the Company did not record amortization expense relating to
its goodwill, which approximated $9,616, during the fiscal year ended
November 30, 2002. The Company was not required under SFAS No. 142 to
assess the useful life and residual value of its goodwill as the Company's
goodwill, at the time of adoption, was equity method goodwill and, as such,
will
26
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
continue to be evaluated for impairment under Accounting Pronouncement
Board No. 18, "The Equity Method of Accounting for Investments in Common
Stock", as amended.
As required by the adoption of SFAS No. 142, the Company reassessed the
useful lives and residual values of all acquired intangible assets to make
any necessary amortization period adjustments. Based upon that assessment,
no adjustments were made to the amortization period of residual values of
other intangible assets. The cost of other intangible assets are amortized
on a straight-line basis over their respective lives.
As of November 30, 2002 and August 31, 2003, the Company had intangible
assets subject to amortization of $711 and related accumulated amortization
of $711, which pertained to trademarks and patents. There was no
amortization expense for intangible assets subject to amortization. As of
November 30, 2002, all intangible assets subject to amortization have been
fully amortized. Accordingly, the estimated aggregate amortization expense
for each of the five succeeding years ending August 31, 2008 amounts to $0.
As of November 30, 2002 and August 31, 2003, the Company has intangible
assets not subject to amortization in the amount of $6,826 and $15,552, the
majority of which pertained to Code Alarm and Recoton.
As of November 30, 2002 and August 31, 2003, the Company had unamortized
goodwill in the amount of $6,826 and $7,509, respectively. In accordance
with SFAS No. 142, the Company wrote-off its unamortized negative goodwill
of $240 as of the date of adoption, which has been reflected in the
consolidated statements of income for the nine months ended August 31, 2002
as a cumulative effect of a change in accounting principle.
The change in carrying amount of goodwill is as follows:
Nine Months
Ended
August 31,
2003
-------------------
Net balance as of November 30, 2002 $6,826
Adjustment for certain acquired balance of Code Systems 683
------
Net Balance as of August 31, 2003 $7,509
======
(13) Guarantee of Debt
During the six months ended May 31, 2003, the Company adopted FIN 45. The
Company has guaranteed the borrowings of one of its 50%-owned equity
investees (GLM Wireless)
27
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
at a maximum of $300. The Company guaranteed the debt of GLM beginning in
December 1996. The Company has not issued or modified this guarantee after
December 31, 2002. In accordance with FIN 45, this guarantee has not been
reflected on the accompanying consolidated financial statements. The
Company does not have any contractual recourse provisions that would enable
the Company to recover any amounts paid under the guarantee. No assets are
held by the Company as collateral that the Company could obtain and
liquidate to recover all or a portion of the amounts paid under the
guarantee.
(14) Employee Stock-Based Compensation
The Company applies the intrinsic value method as outlined in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for stock options and
share units granted under these programs. Under the intrinsic value method,
no compensation expense is recognized if the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of the grant. Accordingly, no compensation cost has been
recognized. Statement of Financial Accounting Standard ("SFAS") No. 123,
"Accounting for Stock-Based Compensation", requires that the Company
provide pro forma information regarding net income and net income per
common share as if compensation cost for the Company's stock option
programs had been determined in accordance with the fair value method
prescribed therein. The Company adopted the disclosure portion of SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure"
requiring quarterly SFAS No. 123 pro forma disclosure. The following table
illustrates the effect on net income and income per common share as if the
Company had measured the compensation cost for the Company's stock option
programs under the fair value method in each period presented.
Three Months Ended Nine Months Ended
August 31, August 31,
----------------------- --------------------
2002 2003 2002 2003
---- ---- ---- ----
(As Restated) (As Restated)
Net income, as reported $ 2,618 $ 647 $ 1,034 $ 3,930
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards,
net of related tax effects (303) -- (908) --
------- ------- ------- -------
Pro forma net income $ 2,315 $ 647 $ 126 $ 3,930
======= ======= ======= =======
Net income per common share:
Basic - as reported $ 0.12 $0.03 $ 0.05 $ 0.18
Basic - pro forma $ 0.11 $0.03 $ 0.01 $ 0.18
Diluted - as reported $ 0.12 $0.03 $ 0.05 $ 0.18
Diluted - pro forma $ 0.11 $0.03 $ 0.01 $ 0.18
28
(15) New Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure". Statement 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally provided by
Statement 123, "Accounting for Stock- Based Compensation". Additionally,
Statement 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosure in both annual and interim financial statements about
the method of accounting for stock-based compensation and the effect of the
method used on reported results. The transitional requirements of Statement
148 will be effective for all financial statements for fiscal years ending
after December 15, 2002. The disclosure requirements shall be effective for
financial reports containing condensed financial statements for interim
periods beginning after December 31, 2002. The Company has adopted the
disclosure portion of this statement for the quarter beginning March 1,
2003, as required. The application of this standard will have no impact on
the Company's consolidated financial position or results of operations.
The FASB also recently indicated that it will require stock-based employee
compensation to be recorded as a charge to earnings beginning in 2004. We
will continue to monitor the progress on the issuance of this standard.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantors,
Including Guarantees of Indebtedness of Others". FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending
after December 15, 2002. The Company adopted FIN 45 during the quarter
ended May 31, 2003. The adoption of FIN 45 did not have a material effect
on the Company's consolidated financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB No.
51". FIN 46 addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. FIN 46 is effective for
all new variable interest entities created or acquired after January 31,
2003. For variable interest entities created or acquired prior to February
1, 2003, the provisions of FIN
29
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
46, as revised, must be applied for the first interim or annual period
ending after December 15, 2003. Accordingly, the Company will adopt this
provision of FIN 46 during the quarter ended February 28, 2004. The
adoption of FIN 46 is being evaluated to determine what impact, if any, the
adoption of the provisions will have on the Company's financial condition
or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting guidance on derivative instruments (including
certain derivative instruments embedded in other contracts) and hedging
activities that fall within the scope of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective
for all contracts entered into or modified after June 30, 2003, with
certain exceptions, and for hedging relationships designated after June 30,
2003. The guidance is to be applied prospectively. The adoption of SFAS No.
149 did not have a material effect on the Company's financial condition or
results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 changes the accounting guidance for certain financial
instruments that, under previous guidance, could be classified as equity or
"mezzanine" equity by now requiring those instruments to be classified as
liabilities (or assets in some circumstances) in the statement of financial
position. Further, SFAS No. 150 requires disclosure regarding the terms of
those instruments and settlement alternatives. SFAS No. 150 is generally
effective for all financial instruments entered into or modified after May
31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 did not
have a material effect on the Company's financial condition or results of
operations.
In August 2003, the EITF reached a final consensus regarding Issue No.
03-5, "Applicability of AICPA Statement of Position 97-2, Software Revenue
Recognition to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software". EITF 03-5 involves whether non-software
deliverables included in an arrangement that contains software that is
more-than-incidental to the products or services as a whole are included
with the scope of SOP 97-2 "Software Revenue Recognition". The Company is
currently evaluating the impact of this new pronouncement.
30
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) Other
Legal Proceedings
The Company had been the subject of an administrative agency investigation
involving alleged reimbursement of a fixed nominal amount of federal
campaign contributions during the years 1995 and 1996. During the third
quarter of 2003, the Company entered into a Conciliation Agreement and paid
a civil penalty in the amount of $620.
Venezuela
During the third quarter, 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. The Company is challenging the payment of this claim
and will seek reimbursement from the Venezuelan shareholder or the
Company's insurance carrier.
(17) Subsequent Event
On September 2, 2003, the Company's subsidiary, Audiovox Europe Holdings
GmbH, borrowed 12 million Euros under a new term loan agreement. The term
loan agreement was entered into on August 29, 2003. 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 installments
and interest accrues at (i) 2.75% over the Euribor rate for the Tranche A
and (ii) 3.5% over the Euribor rate for Tranche B. Any amount repaid may
not be reborrowed. The term loan becomes immediately due and payable if a
change of control occurs without permission of the financial institution.
Audiovox Corporation guarantees 3 million Euros of this term loan. The term
loan is secured by the pledge of the stock of Audiovox Europe Holdings
GmbH. and on all brands and trademarks of the Audiovox Europe Holdings
Group. The term loan requires the maintenance of certain yearly financial
covenants that are calculated according to German Accounting Standards for
Audiovox Europe Holdings. Should any of the financial covenants not be met,
the financial institution may charge a higher interest rate on any
outstanding borrowings.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company markets its products under the Audiovox brand name and others,
such as Jensen , Acoustic Research and Advent, as well as private labels through
a large and diverse distribution network both domestically and internationally.
The Company operates through two marketing groups: Wireless and Electronics.
Wireless consists of Audiovox Communications Corp. (ACC), a 75%-owned subsidiary
of Audiovox, and Quintex, which is a wholly-owned subsidiary of ACC. ACC markets
wireless handsets and accessories primarily on a wholesale basis to wireless
carriers in the United States and carriers overseas. Quintex is a small
operation for the direct sale of handsets, accessories and wireless telephone
service. Quintex also receives residual fees and activation commissions from the
carriers. Residuals are paid by the carriers based upon a percentage of usage of
customers activated by Quintex for a period of time (1-5 years). Quintex also
sells a small volume of electronics products not related to wireless which are
categorized as "other".
The Electronics Group consists of four wholly-owned subsidiaries: Audiovox
Electronics Corporation (AEC), American Radio Corp., Code Systems, Inc. (Code)
and Audiovox Europe Holdings GmbH. (Audiovox Europe) and three majority-owned
subsidiaries: Audiovox Communications (Malaysia) Sdn. Bhd., Audiovox Holdings
(M) Sdn. Bhd. and Audiovox Venezuela, C.A. The Electronics Group markets, both
domestically and internationally, automotive sound and security systems,
electronic car accessories, home and portable sound products, FRS radios,
in-vehicle video systems, flat-screen televisions, DVD players and navigation
systems. Sales are made through an extensive distribution network of mass
merchandisers and others. In addition, the Company sells some of its products
directly to automobile manufacturers on an OEM basis. American Radio Corp. is
also involved on a limited basis in the wireless marketplace. Wireless related
sales are categorized as "other".
The Company allocates interest and certain shared expenses to the marketing
groups based upon both actual and estimated usage. General expenses and other
income items that are not readily allocable are not included in the results of
the two marketing groups.
Restatement of Consolidated Financial Statements
As discussed in Note 2 of the Notes to Consolidated Financial Statements,
the Company has restated its consolidated financial statements for fiscal 2000,
2001 and the first three quarters of fiscal 2002. These restatement adjustments
are the result of the misapplication of generally accepted accounting
principles. In addition, the Company has reclassified certain expenses from
operating expenses to cost of sales for the three and nine months ended August
31, 2002.
32
The net effect of the restatement adjustments on net income for the three
and nine months ended August 31, 2002 is as follows:
August 31, 2002
-----------------------------
Three Months Nine Months
Increase (decrease) in income before cumulative effect
of a change in accounting for negative goodwill $ 751 $(1,339)
Increase (decrease) in net income 751 (1,339)
Increase (decrease) in net income per common share -
diluted $ 0.04 $ (0.06)
The following table provides additional information regarding the effects
The following table provides additional information regarding the effects
of restatement adjustments on the Company's net income (loss) for the three
and nine months ended August 31, 2002:
(In Thousands)
Increase
(Decrease)
August 31, 2002
-----------------------------
Three Months Nine Months
Restatement adjustments:
Timing of revenue $ 405 $ (103)
Litigation 757 427
Foreign currency translation (157) (1,491)
Inventory pricing 35 420
Sales incentives 154 847
Gain on the issuance of subsidiary shares -- (1,556)
Operating expense reclassification to cost of
sales (1) -- --
------- -------
Total adjustment to increase (decrease) pre-
tax income 1,194 (1,456)
(Provision for) recovery of income taxes 398 (203)
Minority interest (2) (45) (86)
------- -------
Total increase (decrease) on net income $ 751 $(1,339)
======= =======
(1) This adjustment represents a reclassification of warehousing and
technical support and general and administrative costs (which are
components of operating expenses) to cost of sales. This
reclassification did not have any effect on previously reported net
income for the three and nine months of fiscal 2002.
(2) The adjustment reflects the impact of the restatement adjustments on
minority interest.
The following discussion addresses each of the restatement adjustments for
the corrections of accounting errors and the reclassification adjustment.
(a) Timing of revenue. During the three and nine months ended August 31, 2002,
the Company
33
understated net sales by $10,472 and overstated net sales by $1,886,
respectively, as the timing of revenue recognition was not in accordance
with the established shipping terms with certain customers. SAB 101
specifically states that delivery generally is not considered to have
occurred unless the customer has taken title (which is in this situation
when the product was delivered to the customer's site). Accordingly, the
Company should have deferred revenue recognition until delivery was made to
the customer's site. In addition, during the three and nine months ended
August 31, 2002, gross profit was understated by $535 and overstated by
$126, respectively, and operating expenses were understated by $130 and
overstated by $23, respectively.
(b) Litigation. During the three and nine months ended August 31, 2002, the
Company overestimated its provisions for certain litigation matters,
thereby overstating cost of sales by $457 and $978, respectively. Also, the
Company understated operating expenses by $0 and $497 for the three and
nine months ended August 31, 2002, respectively as a result of not
recording a settlement offer in the period the Company offered it.
During the three and nine months ended August 31, 2002, the Company
overstated operating expenses by $300 and understated operating expenses by
$54, respectively as a result of inappropriately deferring costs related to
an insurance claim. The Company's insurance company refused to defend the
Company against a legal claim made against the Company. The Company took
legal action against the insurance company and was unsuccessful. The
Company was improperly capitalizing costs that were not probable of
recovery.
(c) Foreign currency translation. During the three and nine months ended August
31, 2002, the Company did not properly account for a change in accounting
for its Venezuelan subsidiary as operating in a non-highly inflationary
economy. In prior periods, Venezuela was deemed to be a highly-inflationary
economy in accordance with certain technical accounting pronouncements.
Effective January 1, 2002, it was deemed that Venezuela should cease to be
considered a highly-inflationary economy, however, the Company did not
account for this change. The Company incorrectly recorded the foreign
currency translation adjustment in other income rather than as other
comprehensive income. As a result, the Company understated other expenses,
net, by $247and $1,674 for the three and nine months ended August 31, 2002,
respectively. Also, the Company overstated operating expenses by $90 and
$183 for the three and nine months ended August 31, 2002, respectively.
(d) Inventory pricing. For the three and nine months ended August 31, 2002, the
Company overstated cost of sales related to an inventory pricing error that
occurred at its Venezuelan subsidiary. The Company was not properly pricing
its inventory at the lower of cost or market in accordance with generally
accepted accounting principles. As a result, the Company overstated cost of
sales by $35 and $420 for the three and nine months ended August 31, 2002,
respectively.
(e) Sales incentives. During the three and nine months ended August 31, 2002,
the Electronics segment underestimated accruals for additional sales
incentives (other trade allowances) that were not yet offered to its
customers. As a result, for the three and nine months ended August 31,
2002, the Company understated net sales by and nine months ended August 31,
34
2002, the Company understated net sales by $288 and $292, respectively.
Furthermore, during the three and nine months ended August 31, 2002, the
Electronics segment was also not reversing earned and unclaimed sales
incentives (i.e., cooperative advertising, market development and volume
incentive rebate funds) upon the expiration of the established claim
period. As a result, for the three and nine months ended August 31, 2002,
the Company understated (overstated) net sales by $(134) and $555,
respectively.
(f) Income taxes. Income taxes were adjusted for the restatement adjustments
discussed above for each period presented.
The Company also applied income taxes to minority interest amounts during
the three and nine months ended August 31, 2002. As a result of these
adjustments, the Company understated (overstated) the provision for income
taxes by $398 and $(203) for the three and nine months ended August 31,
2002, respectively.
(g) Operating expense reclassification. The Company reclassified certain costs
as operating expenses, which were included as a component of warehousing
and technical support and general and administrative costs, which should
have been classified as a component of cost of sales. The effect of this
reclassification for the three and nine months ended August 31, 2002 was to
understate cost of sales and overstate operating expenses by $5,292 and
$15,488, respectively. This reclassification did not have any effect on
previously reported net income or loss for any period presented herein.
This reclassification reduced gross margin by 1.8 and 1.9 percentage points
for the three and nine months ended August 31, 2002, respectively.
(h) Gain on the issuance of subsidiary shares. During the second quarter of
fiscal 2002, the Company overstated the gain on issuance of subsidiary
shares by $1,735 due to expenses related to this issuance being charged to
additional paid in capital. This adjustment also reflects the impact of the
other restatement adjustments on the calculation of the gain on the
issuance of subsidiary shares of $179 that was originally recorded by the
Company in the quarter ended May 31, 2002. As a result, the Company
decreased the gain on issuance of subsidiary shares and increased the
additional paid in capital by $1,556.
35
The following represents the effect of the restatement and reclassification
adjustments in the consolidated statements of income for the three months ended
August 31, 2002:
Fiscal 2002
For the Quarter Ended August 31,
-------------------------------------------------------------------------
Restatement Reclassification
As Reported Adjustments Adjustments As Restated
Net sales $ 291,367 $ 10,625 (1)(7) - $ 301,992
Cost of sales 259,791 9,441 (1)(5)(6) $ 5,292 (2) 274,524
----------- ---------- ------------ ----------
Gross profit 31,576 1,184 (5,292) 27,468
----------- ---------- ------------ ----------
Operating expenses:
Selling 7,486 11 (1) - 7,497
General and administrative 13,208 (372)(1)(4)(5) (150)(2) 12,686
Warehousing and technical support 6,138 104 (1)(4) (5,142)(2) 1,100
----------- ---------- ------------ ----------
Total operating expenses 26,832 (257) (5,292) 21,283
----------- ---------- ------------ ----------
Operating income 4,744 1,441 - 6,185
Total other expense, net (953) (247)(4) - (1,200)
----------- ---------- ------------ -----------
Income before provision for income taxes and
minority interest 3,791 1,194 - 4,985
Provision for income taxes 2,018 398 (3) - 2,416
Minority interest 94 (45)(8) - 49
----------- ---------- ------------ -----------
Net income $ 1,867 $ 751 - $ 2,618
=========== ========== ============ ===========
Net income per common share (basic) $ 0.09 $ 0.03 - $ 0.12
=========== ========== ============ ===========
Net income per common share (diluted) $ 0.08 $ 0.04 - $ 0.12
=========== ========== ============ ===========
Weighted average number of common shares
outstanding (basic) 21,947,573 21,947,573
=========== ===========
Weighted average number of common shares
outstanding (diluted) 21,982,803 21,982,803
=========== ===========
(1) Amounts reflect adjustments for (a) timing of revenue.
(2) Amounts reflect adjustments for (g) operating expense reclassification.
(3) Amounts reflect adjustments for (f) income taxes.
(4) Amounts reflect adjustments for (c) foreign currency translation.
(5) Amounts reflect adjustments for (b)litigation.
(6) Amounts reflect adjustments for (d) inventory pricing.
(7) Amounts reflectadjustments for (e) sales incentives.
(8) Amount reflects impact of the restatement adjustments on minority interest.
36
The following represents the effect of the restatement and reclassification
adjustments in the consolidated statements of income for the nine months ended
August 31, 2002:
Fiscal 2002
For the Nine Months Ended August 31,
--------------------------------------------------------------------------
Restatement Reclassification
As Reported (a) Adjustments Adjustments As Restated
----------- ----------- ----------- -----------
Net sales $ 784,567 $ (1,039) (1)(9) - $ 783,528
Cost of sales 711,350 (3,154) (1)(5)(6) $ 15,488 (2) 723,684
----------- --------- --------- -----------
Gross profit 73,217 2,115 (15,488) 59,844
----------- --------- --------- -----------
Operating expenses:
Selling 21,870 (1)(1) - 21,869
General and administrative 39,716 415 (1)(4)(5) (438)(2) 39,692
Warehousing and technical support 17,873 (66)(1)(4) (15,050)(2) 2,757
----------- --------- --------- -----------
Total operating expenses 79,459 347 (15,488) 64,318
----------- --------- --------- -----------
Operating income (loss) (6,242) 1,768 - (4,474)
Total other income (expense), net 12,909 (3,224) (4)(8) - 9,685
----------- --------- --------- -----------
Income (loss) before provision for (recovery
of) income taxes, minority interest
and before cumulative effect of a change
in accounting for negative goodwill 6,667 (1,456) - 5,211
Provision for (recovery of) income taxes 5,439 (203) (3) - 5,236
Minority interest 905 (86) (9) - 819
----------- --------- --------- -----------
Income (loss) before cumulative effect of a
change in accounting for negative
goodwill 2,133 (1,339) 794
Cumulative effect of a change in
accounting for negative goodwill 240 - - 240
----------- --------- --------- -----------
Net income (loss) $ 2,373 $ (1,339) - $ 1,034
=========== ========= ========= ===========
Netincome (loss) per common share (basic)
before cumulative effect of a change
in accounting for negative
goodwill $ 0.10 $ (0.06) - $ 0.04
Cumulative effect of a change in
accounting for negative goodwill 0.01 - - $ 0.01
---------- -------- --------- -----------
Net income (loss) per common share
(basic) $ 0.11 $ (0.06) - $ 0.05
=========== ========== ========= ===========
37
Fiscal 2002
For the Nine Months Ended August 31,
--------------------------------------------------------------------------
Restatement Reclassification
As Reported (a) Adjustments Adjustments As Restated
----------- ----------- ----------- -----------
Netincome (loss) per common share (diluted)
before cumulative effect of a
change in accounting for negative
goodwill $ 0.10 $ (0.06) - $ 0.04
Cumulative effect of a change in
accounting for negative goodwill 0.01 - - $ 0.01
---------- -------- --------- -----------
Net income (loss) per common share
(diluted) $ 0.11 $ (0.06) - $ 0.05
=========== ========== ========= ===========
Weighted average number of common
shares outstanding (basic) 21,960,652 21,960,652
=========== ===========
Weighted average number of
common shares outstanding
(diluted) 22,000,232 22,000,232
=========== ===========
(a) Includes reclassification of sales incentives (previously reported in
operating expenses) pursuant to EITF 01-9, "Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's
Products)".
(1) Amounts reflect adjustments for (a) timing of revenue.
(2) Amounts reflect adjustments for (g) operating expense reclassification.
(3) Amounts reflect adjustments for (f) income taxes.
(4) Amounts reflect adjustments for (c) foreign currency translation.
(5) Amounts reflect adjustments for (b)litigation.
(6) Amounts reflect adjustments for (d) inventory pricing.
(7) Amounts reflect adjustments for (e) sales incentives.
(8) Amounts reflect adjustments for (h) gain on the issuance of subsidiary
shares.
(9) Amounts reflect impact of restatement adjustments on minority interest.
As a result of the restatement for the quarter ended August 31, 2002, cash
provided by operating activities was decreased $779 and cash provided by
investing activities was increased $779. There has not been any change to cash
used in financing activities.
Critical Accounting Policies
As disclosed in the annual report on Form 10-K for the fiscal year ended
November 30, 2002, the discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in conformity with accounting principles generally
accepted in the United States. The preparation of these financial 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; accounts receivable; sales incentives;
inventory; warranties and income taxes. Since November 30, 2002, there have been
no changes in our critical accounting policies and no other significant changes
to the assumptions and estimates related to them.
38
Results of Operations
The following table sets forth for the periods indicated certain statements
of income data for the Company expressed as a percentage of net sales:
Percentage of Net Sales
Three Months Ended Nine Months Ended
------------------------------------------------
August 31, August 31, August 31, August 31,
2002 2003 2002 2003
------ ------ ------ -----
(As Restated) (As Restated)
Net sales:
Wireless
Wireless products 63.0% 47.5% 63.2% 60.5%
Activation commissions 2.1 1.4 2.5 1.4
Residual fees 0.1 0.2 0.2 0.1
Other 0.1 -- 0.1 --
----- ----- ----- -----
Total Wireless 65.3 49.1 65.9 62.1
----- ----- ----- -----
Electronics
Mobile electronics 22.9 29.4 21.3 23.6
Consumer electronics 6.9 13.8 7.1 9.4
Sound 4.9 7.5 5.6 4.9
Other -- 0.1 0.1 --
----- ----- ----- -----
Total Electronics 34.7 50.9 34.1 37.9
----- ----- ----- -----
Total net sales 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of sales 90.9 89.6 92.4 90.8
----- ----- ----- -----
Gross profit 9.1 10.4 7.6 9.2
Selling 2.5 3.2 2.8 2.8
General and administrative 4.2 5.7 5.1 4.7
Warehousing and technical support 0.4 0.5 0.4 0.5
----- ----- ----- -----
Total operating expenses 7.0 9.4 8.2 7.9
----- ----- ----- -----
Operating income (loss) 2.1 0.9 (0.6) 1.2
Interest and bank charges (0.2) (0.4) (0.3) (0.4)
Equity in income in equity
investments 0.2 0.4 0.2 0.2
Gain on issuance of subsidiary
shares -- -- 1.8 --
Other, net (0.4) (0.1) (0.5) (0.1)
----- ----- ----- -----
Income before provision for income
taxes 1.7 0.8 0.7 0.9
Provision for income taxes 0.8 0.9 0.7 0.5
Minority interest -- 0.3 0.1 --
Change in accounting principle -- -- -- --
----- ----- ----- -----
Net income 0.9 % 0.2 % 0.1 % 0.4 %
===== ===== ===== =====
39
Consolidated Results
Three months ended August 31, 2002 compared to three months ended August 31,
2003
The net sales and percentage of net sales by marketing group and product
line for the three months ended August 31, 2002 and August 31, 2003 are
reflected in the following table:
Three Months Ended
-------------------------------------------------------------
August 31, 2002 August 31, 2003
--------------- ---------------
(As Restated)
Net sales:
Wireless
Wireless products $ 190,374 63.0% $126,312 47.5%
Activation commissions 6,206 2.1 3,843 1.4
Residual fees 352 0.1 576 0.2
Other 378 0.1 (148) -
--------- -------- --------- ----
Total Wireless 197,310 65.3 130,583 49.1
--------- -------- --------- -----
Electronics
Mobile electronics 69,041 22.9 78,292 29.4
Consumer electronics 20,845 6.9 36,857 13.8
Sound 14,796 4.9 19,945 7.5
Other - - 145 0.1
---------- ----- --------- -----
Total Electronics 104,682 34.7 135,239 50.9
---------- -------- --------- -----
Total $ 301,992 100.0% $265,822 100.0 %
========= ====== ========= =======
Net sales for the three months ended August 31, 2003 were $265,822, a 12.0%
decrease from net sales of $301,992 in 2002.
Wireless Group sales were $130,583 for the three months ended August 31,
2003, a 33.8% decrease from sales of $197,310 in 2002. Unit sales of wireless
handsets decreased 32.5% to approximately 816,000 units for the three months
ended August 31, 2003 from approximately 1,208,000 units in 2002. This decrease
was attributable to the lack of new product introductions. The average selling
price of the Company's handsets decreased to $145 per unit for the three months
ended August 31, 2003 from $151 per unit in 2002 due to the product sales being
composed primarily of low-end models with lower selling prices.
Electronics Group sales were $135,239 for the three months ended August 31,
2003, a 29.2% increase from sales of $104,682 in 2002. This increase was in all
product lines. Although sound sales increased as a result of Audiovox Europe
Holdings, the marketplace for fully-featured sound systems overall being
incorporated into vehicles at the factory rather than being sold in the
aftermarket is declining. This declining trend in sound systems is expected to
continue except in the satellite radio product line and may also be favorably
impacted by the recent Recoton acquisition in the speaker and amplifier product
lines. Sales by the Company's international subsidiaries increased 56.7% for the
three months ended August 31, 2003 to approximately $8,061 due to the sales of
40
Audiovox Europe, as a result of the Recoton acquisition, during the quarter of
$6,131. This was partially offset by declines in sales in Malaysia of 59.9% and
Venezuela of 63.2%. The decrease in Venezuela was due to the temporary shutdown
of the operations attributable to political and economic instability, while the
decrease in Malaysia is a result of lower OEM sales.
Gross profit margin for the three months ended August 31, 2003 was 10.5%,
compared to 9.1% in 2002. Margins in the Wireless Group were 3.9% compared to
4.4% in 2002. Margins in the Electronics Group were 16.8% compared to 18.0% in
2002. 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 was a larger portion of the sales in 2003
and, since their products carry higher margins, it offset the decline in
Wireless. Trends will be discussed in further detail in each individual
marketing group MD&A discussion.
Operating expenses increased $4,098 to $25,381 for the three months ended
August 31, 2003, compared to $21,283 in 2002. As a percentage of net sales,
operating expenses increased to 9.5% for the three months ended August 31, 2003
from 7.0% in 2002. Major components of the increase in operating expenses were
in salesmen salaries, advertising, executive and office salaries and employee
benefits primarily in the Electronics Group, because of recent acquisitions and
general growth in business.
Net income for the three months ended August 31, 2003 was $647 compared to
$2,618 in 2002 (as restated). Earnings per share for the three months ended
August 31, 2003 was $0.03, basic and diluted compared to $0.12 for fiscal 2002,
basic and diluted (as restated).
41
Nine months ended August 31, 2002 compared to nine months ended August 31, 2003
The net sales and percentage of net sales by marketing group and product
line for the nine months ended August 31, 2002 and August 31, 2003 are reflected
in the following table:
Nine Months Ended
---------------------------------------------------------------------
August 31, 2002 August 31, 2003
--------------- ---------------
(As Restated)
Net sales:
Wireless
Wireless products $ 495,077 63.2% $ 522,198 60.5%
Activation commissions 19,674 2.5 12,455 1.4
Residual fees 1,492 0.2 1,600 0.1
Other 358 0.1 - -
--------- -------- --------- ----
Total Wireless 516,601 65.9 536,253 62.1
--------- ----- --------- -----
Electronics
Mobile electronics 166,631 21.3 203,488 23.6
Consumer electronics 56,002 7.1 81,114 9.4
Sound 43,651 5.6 42,417 4.9
Other 643 0.1 378 -
--------- -------- --------- ----
Total Electronics 266,927 34.1 327,397 37.9
--------- ----- --------- -----
Total $ 783,528 100.0% $ 863,650 100.0%
========= ====== ========= ======
Net sales for the nine months ended August 31, 2003 were $863,650, a 10.2%
increase from net sales of $783,528 from 2002.
Wireless Group sales were $536,253 for the nine months ended August 31,
2003, a 3.8% increase from sales of $516,601 in 2002. Unit sales of wireless
handsets decreased 10.2% to approximately 3,115,000 units for the nine months
ended August 31, 2003 from approximately 3,468,000 units in 2002. In addition,
the average selling price of the Company's handsets increased to $161 per unit
for the nine months ended August 31, 2003 from $137 per unit in 2002 as a result
of new product introductions in the beginning of the fiscal year. Although unit
sales for the first six months showed an increase, the lack of new product in
the third quarter was responsible for the decline in unit sales for the nine
months.
Electronics Group sales were $327,397 for the nine months ended August 31,
2003, a 22.7% increase from sales of $266,927 in 2002. This increase was largely
due to increased sales in the mobile and consumer electronics product lines.
Offsetting some of this increase was a decline in sound sales, which continue to
decline given the change in the marketplace as fully-featured sound systems are
being incorporated into vehicles at the factory rather than being sold in the
aftermarket.
42
This declining trend in sound systems is expected to continue except in the
satellite radio product line and may also be favorably impacted by the recent
Recoton acquisition in the speaker and amplifier product lines. Sales by the
Company's international subsidiaries decreased 24.5% for the nine months ended
August 31, 2003 to approximately $12,680 due to an 82.1% decrease in Venezuela
due to the temporary shut-down of the operations attributable to political and
economic instability and a 44.0% decrease in Malaysia as a result of lower OEM
sales. These decreases were partially offset by the addition of sales by
Audiovox Europe of $6,131 during the quarter from the Recoton acquisition.
Gross profit margin for the nine months ended August 31, 2003 was 9.1%,
compared to 7.6% in 2002. This increase in profit margin resulted primarily from
an increase in margins in Wireless and a change in the mix of sales to
Electronics from Wireless. Wireless margins were 4.9% compared to 2.6% in 2002.
Wireless margins were favorably impacted by lower sales incentive costs and
lower inventory write-downs. Specifically, inventory write-downs were $1,839 for
the nine months ended August 31, 2003 compared to $5,312 for the nine months
ended August 31, 2002. Margins for the Electronics Group decreased to 16.0% from
17.2% in 2002 due to lower margins in all product categories as a result of
higher sales to larger customers which carry lower margins.
Operating expenses increased $4,628 to $68,946 for the nine months ended
August 31, 2003, compared to $64,318 in 2002. As a percentage of net sales,
operating expenses decreased to 8.0% for the nine months ended August 31, 2003
from 8.2% in 2002. Major components of the increase in operating expenses were
salaries, employee benefits and advertising, partially offset by a decline in
bad debt expense. The operating expenses also reflect two months of operating
expenses for Audiovox Europe Holdings.
Net income for the nine months ended August 31, 2003 was $3,930 compared to
$1,034 in 2002 (as restated). Earnings per share for the nine months ended
August 31, 2003 was $0.18, basic and diluted compared to $0.05 for fiscal 2002,
basic and diluted (as restated).
43
Wireless Results
Three months ended August 31, 2002 compared to three months ended August 31,
2003
The following table sets forth for the periods indicated certain statements
of operations data for Wireless expressed as a percentage of net sales:
Three Months Ended
-----------------------------------------------------------------
August 31, 2002 August 31, 2003
(As Restated)
Net sales:
Wireless products $ 190,374 96.5% $ 126,312 96.7%
Activation commissions 6,206 3.1 3,843 2.9
Residual fees 352 0.2 576 0.4
Other 378 0.2 (148) (0.1)
------------ ------ ---------- ------
Total net sales 197,310 100.0 130,583 100.0
Gross profit 8,594 4.4 5,108 3.9
Operating expenses
Selling 2,785 1.4 2,809 2.2
General and administrative 4,566 2.3 3,972 3.0
Warehousing and technical support 791 0.4 758 0.6
------------ ------ ---------- ------
Total operating expenses 8,142 4.1 7,539 5.8
------------ ------ ---------- ------
Operating income (loss) 452 0.3 (2,431) (1.9)
Other expense (338) (0.2) (178) (0.1)
------------ ------- ---------- ------
Pre-tax income (loss) $ 114 0.1 % $ (2,609) (2.0)%
============ ======= ========== =======
Net sales were $130,583 for the three months ended August 31, 2003, a
decrease of $66,727, or 33.8%, from 2002. Unit sales of wireless handsets
decreased by 392,000 units for the three months ended August 31, 2003, or 32.5%,
to approximately 816,000 units from 1,208,000 units in 2002. This decrease was
attributable to the lack of new product introductions and the product sales
being composed primarily of low-end models with lower selling prices. In
addition, there was a $7,718 decrease in sales incentives compared to 2002 as
there was not a major 2003 product launch during the quarter as occurred in
2002. These programs are expected to continue, however, and will either increase
or decrease based upon competition and customer and market requirements. The
average selling price of handsets also decreased to $145 per unit for the three
months ended August 31, 2003, from $151 per unit in 2002 as product sales were
composed of lower-end models with lower selling prices. Gross profit margins
decreased to 3.9% for the three months ended August 31, 2003 from 4.4% in 2002,
primarily due to sales of lower priced product offset by a decline in incentive
costs and lower inventory write-downs. There were $1,839 inventory write-downs
for the three months ended August 31, 2003 compared to $1,982 in 2002. These
write-downs were based upon open purchase orders from customers and selling
prices as well as indications from our customers based upon current
negotiations. As of August 31, 2003, approximately 31,000 of
44
previously written-down units remained in inventory which were valued at
approximately $5,100. The Company plans to sell these items to its existing
customers during the next year. None of the written down inventory was scrapped.
The Company expects that, due to market conditions and customer consolidation,
it could experience additional write-downs in the future.
Gross margins included reimbursements from a vendor for software upgrades
on sold inventory of $142 and $20 for the three months ended August 31, 2002 and
2003, respectively. Without these reimbursements, gross margins would have been
lower by 0.1% and 0% for the three months ended August 31, 2002 and 2003,
respectively. The Company has received price protection of $16,000 and $0 for
the three months ended August 31, 2002 and 2003, respectively, from a vendor for
certain inventory, of which $7,476 and $0 was recorded as a reduction to cost of
sales, as the related inventory was sold. Without this price protection, gross
profit margins would have been lower by 3.79% and 0% for the three months ended
August 31, 2002 and 2003, respectively. During three months ended August 31,
2003, as compared to the three months ended August 31, 2002, there was a
decrease of $7,718 in sales incentives expense due to a lack of new product
introductions, net of reversals of $469.
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.
Operating expenses decreased $603 for the three months ended August 31,
2003 from 2002. However, as a percentage of net sales, operating expenses
increased to 5.8% during three months ended August 31, 2003, compared to 4.1% in
2002. Selling expenses increased $24 for the three months ended August 31, 2003
compared to 2002, primarily in commissions and salesmen's salaries of $109, due
to the hiring of additional salesmen in Quintex and restructuring of salesmen's
salaries. This increase was partially offset by a decrease of $68 in advertising
and trade shows due to a 2002 advertising campaign that was not repeated in
2003. Numerous other individually insignificant fluctuations account for the
remaining net change in selling expenses. General and administrative expenses
decreased $594 for the three months ended August 31, 2003 compared to 2002.
These decreases were primarily in travel and entertainment of $96, due to less
travel because of lower sales and bad debt expense of $552 due to a 2002
provision that did not recur in 2003. These decreases were partially offset by
increases in employee benefits of $55 due to a profit sharing accrual and
professional fees of $63 for increased auditing costs. Warehousing and technical
support expenses decreased $33 for the three months ended August 31, 2003 from
2002, primarily in overseas buying offices of $86 due to elimination of the use
of the Korean office. This decrease was partially offset by an increase in
payroll taxes and benefits of $38, as a result of increased health care costs.
Numerous individually insignificant fluctuations account for the remaining net
change in warehousing and technical support expenses. Pre-tax loss for the three
months ended August 31, 2003 was $2,609, compared to pre-tax income of $114 for
fiscal 2002.
Management believes that the wireless industry is extremely competitive and
that this competition could affect gross margins and the carrying value of
inventories in the future as new competitors enter the marketplace. This
pressure from increased competition is further enhanced 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
45
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.
Nine months ended August 31, 2002 compared to nine months ended August 31, 2003
The following table sets forth for the periods indicated certain statements
of operations data for Wireless expressed as a percentage of net sales:
Nine Months Ended
-----------------------------------------------------------------
August 31, 2002 August 31, 2003
--------------------------- -------------------------------
(As Restated)
Net sales:
Wireless products $ 495,077 95.8% $ 522,198 97.4%
Activation commissions 19,674 3.8 12,455 2.3
Residual fees 1,492 0.3 1,600 0.3
Other 358 0.1 - -
---------- ------ ----------- ------
Total net sales 516,601 100.0 536,253 100.0
Gross profit 13,632 2.6 26,307 4.9
Operating expenses
Selling 8,398 1.6 8,178 1.5
General and administrative 15,955 3.1 12,218 2.3
Warehousing and technical support 1,899 0.4 2,171 0.4
---------- ------ ----------- ------
Total operating expenses 26,252 5.1 22,567 4.2
---------- ------- ----------- ------
Operating income (loss) (12,620) (2.4) 3,740 0.7
Other expense (2,904) (0.6) (1,614) (0.3)
---------- --------- ----------- ------
Pre-tax income (loss) $ (15,524) (3.0)% $ 2,126 0.4 %
========== ======= =========== =======
Net sales were $536,253 for the nine months ended August 31, 2003, an
increase of $19,652, or 3.8%, from 2002. Unit sales of wireless handsets
decreased by 353,000 units for the nine months ended August 31, 2003, or 10.1%,
to approximately 3,115,000 units from 3,468,000 units in 2002. Although unit
sales for the first six months showed an increase, the lack of new product in
the third quarter was responsible for the decline in unit sales for the nine
months. In addition, there was an $8,341 decrease in sales incentives compared
to 2002 due to lower sales volume and lack of new product introductions. These
programs are expected to continue and will either increase or decrease based
upon competition, customer and market requirements and new product
introductions. The average selling price of handsets increased to $161 per unit
for the nine months ended August 31,
46
2003, from $137 per unit in 2002. This increase was due to higher selling prices
of the newly- introduced digital products during the first six months of the
fiscal year, including products with color LCD's, which have a higher selling
price, partially offset by the lack of new product introductions during the
third quarter.
Gross profit margins increased to 4.9% for the nine months ended August 31,
2003 from 2.6% in 2002, primarily due to lower sales incentive costs and lower
inventory write-downs. There were $1,839 of inventory write-downs for the nine
months ended August 31, 2003, compared to $5,312 in 2002. These write-downs were
based upon open purchase orders from customers and selling prices as well as
indications from our customers based upon current negotiations. As of August 31,
2003, approximately 31,000 of previously written- down units remained in
inventory which were valued at approximately $5,100. The Company plans to sell
these items to its existing customers during the next year. None of the written
down inventory was scrapped. The Company expects that, due to market conditions
and customer consolidation, it could experience additional write-downs in the
future. Gross margins were favorably impacted by reimbursement from a vendor of
$959 and $143 for the nine months ended August 31, 2002 and 2003, respectively,
for software upgrades performed on sold inventory. Without this reimbursement,
gross margins would have been lower by 0.2% and 0% for the nine months ended
August 31, 2002 and 2003, respectively. The Company has received price
protection of $31,350 and $11,850 for the nine months ended August 31, 2002 and
2003, respectively, from a vendor for certain inventory, of which $22,826 and
$11,850 was recorded as a reduction to cost of sales, as related inventory was
sold. Without this price protection, gross profit margins would have been lower
by 4.4% and 2.7% for the nine months ended August 31, 2002 and 2003,
respectively. During the nine months ended August 31, 2003 as compared to the
nine months ended August 31, 2002, there was a decrease of $8,341 in sales
incentive expense as a result of fewer new product introductions, net of
reversals of $787.
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.
Operating expenses decreased $3,685 for the nine months ended August 31,
2003 from 2002. As a percentage of net sales, operating expenses decreased to
4.2% during nine months ended August 31, 2003, compared to 5.1% in 2002. Selling
expenses decreased $220 for the nine months ended August 31, 2003 compared to
2002, primarily in lower commissions of $429 due to lower commissionable sales,
primarily in lower international sales and Quintex operations and restructuring
of commission deals with salesmen, and $84 in travel due to lack of new product
introductions. These decreases were partially offset by increases in salesmen
salaries, payroll taxes and benefits of $308 due to additional salesmen hired
and restructuring of base salaries/commission plans. Numerous other individually
insignificant fluctuations account for the remaining net change in selling
expenses. General and administrative expenses decreased $3,737 for the nine
months ended August 31, 2003 from 2002, primarily in officers' salaries of
$3,053 due to a non-recurring bonus provision and new executive compensation
contract in 2002 and bad debt expense of $1,801 primarily due to the recovery of
a previously charged bad debt and a customer who filed for bankruptcy in 2002,
which did not recur in fiscal 2003. The Company does not consider this a trend
in the overall accounts receivable. Employee benefits increased $255 due to
increased costs under the health care plan, professional fees increased $184
primarily due to increased auditing fees, offset
47
by a reduction in legal fees. Battery recycling charges increased $156, due to a
2002 refund that did not repeat in 2003. Numerous other individually
insignificant fluctuations account for the remaining net change in general and
administrative expenses. Warehousing and technical support expenses increased
$272 for the nine months ended August 31, 2003 from 2002, primarily in direct
labor of $379 due to additional personnel in engineering for product development
and warranty call center for customer service. This increase was partially
offset by decreases in overseas buying offices of $213, due to non-use of the
Korean buying office. Numerous other individually insignificant fluctuations
account for the remaining net change in warehousing and technical support
expenses. Pre-tax income for the nine months ended August 31, 2003 was $2,126,
compared to pre-tax loss of $15,524 for fiscal 2002.
Management believes that the wireless industry is extremely competitive and
that this competition could affect gross margins and the carrying value of
inventories in the future as new competitors enter the marketplace. The Company
competes against suppliers with significantly greater financial resources and
who are able to offer more extensive advertising and greater promotions than the
Company does. This pressure from increased competition is further enhanced by
the consolidation of many of Wireless' customers into a smaller group, dominated
by only a few, large customers. Also, timely delivery and carrier acceptance of
new product could affect our quarterly performance. Our suppliers have to
continually add new products in order for Wireless to improve its margins and
gain market share. These new products require extensive testing and software
development which could delay entry into the market and affect our sales in the
future. In addition, given the anticipated emergence of new technologies in the
wireless industry, the Company will need to sell existing inventory quantities
of current technologies to avoid further write-downs to market.
48
Electronics Results
Three months ended August 31, 2002 compared to three months ended August 31,
2003
The following table sets forth for the periods indicated certain statements
of income data for the Electronics Group expressed as a percentage of net sales:
Three Months Ended
August 31, 2002 August 31, 2003
--------------------------- -------------------------------
(As Restated)
Net sales:
Mobile electronics $ 69,041 66.0% $ 78,292 57.9%
Consumer electronics 20,845 19.9 36,857 27.3
Sound 14,796 14.1 19,945 14.7
Other - - 145 0.1
---------- ------ ----------- ------
Total net sales 104,682 100.0 135,239 100.0
Gross profit 18,857 18.0 22,657 16.8
Operating expenses
Selling 4,368 4.2 5,353 4.0
General and administrative 5,856 5.6 8,374 6.2
Warehousing and technical support 272 0.3 433 0.3
---------- ------ ----------- ------
Total operating expenses 10,496 10.0 14,160 10.5
---------- ------ ----------- ------
Operating income 8,361 8.0 8,497 6.3
Other income (expense) (470) 0.4 361 0.3
---------- ------ ----------- ------
Pre-tax income $ 7,891 7.6% $ 8,858 6.5%
=========== ======== =========== ========
Net sales were $135,239 for the three months ended August 31, 2003, a 29.2%
increase from net sales of $104,682 in 2002. Mobile electronics increased $9,251
(13.4%) during 2003 from 2002. Sales of mobile video within the mobile
electronics category increased 17% for the three months ended August 31, 2003,
from 2002. Consumer electronics increased $16,012 (76.8%) for the three months
ended August 31, 2003, from 2002, primarily in sales of video-in-a-bag and
portable DVD players. Sound sales increased $5,149 (34.8%) primarily from
satellite radio and the impact of the Recoton acquisition. However,
fully-featured sound systems are being incorporated into vehicles at the factory
rather than being sold in the aftermarket. This overall declining trend in sound
systems is expected to continue except in the satellite radio product line. This
OEM trend could also be favorably impacted in the future by the Recoton
acquisition. There was also an increase in sales incentives of $1,926 due to
increased sales. Net sales in the Company's Malaysian subsidiary decreased from
last year by approximately $1,935 primarily from lower OEM business. The
Company's Venezuelan subsidiary experienced a decrease of $1,264 in sales from
last year, due to the temporary closing of the offices due to the impact of
economic and political instability in the country. The acquisition of Audiovox
Europe added $6,131 in net sales to the Group since its
49
acquisition on July 8, 2003.
Gross profit margins decreased to 16.8% for the three months ended August
31, 2003 compared to 18.0% in 2002, primarily in the sound category. There also
was an increase in the sales of video products sold through consumer channels,
which carry a lower gross margin as opposed to other product lines. During the
three months ended August 31, 2003 as compared to the three months ended August
31, 2002, there was an increase in sales incentives expense of $1,926 to $3,362,
net of reversals of $708, as a result of increased sales and Audiovox Europe
Holdings.
Operating expenses increased $3,664 for the three months ended August 31,
2003, a 34.9% increase from operating expenses in 2002, $2,251 was from the
recently acquired Audiovox Europe in Germany. As a percentage of net sales,
operating expenses increased to 10.5% during the three months ended August 31,
2003 compared to 10.0% in 2002. Selling expenses increased $985 during the three
months ended August 31, 2003,$463 was from Audiovox Europe, commissions of $293,
$207 from Audiovox Europe. In addition, selling expenses increased in salaries
of $87 primarily due to increased head count to support the growing business,
travel and entertainment of $79 to support increased sales and the Recoton
acquisition, and an increase in advertising and trade show expense of $384, $370
from Audiovox Europe. General and administrative expenses increased $2,518 from
2002, $1,788 from Audiovox Europe, mostly in salaries of $989 due to Audiovox
Europe and increased headcount, professional fees of $103, $50 from Audiovox
Europe, employee benefits of $658 due to increased health care costs, additional
personnel and benefits paid to certain Venezuelan executives as a result of
restructuring of the Venezuelan operations, office expenses of $366 due to
Audiovox Europe, insurance expense of $117 due to higher premiums and
depreciation and amortization of $105 due to Audiovox Europe. Numerous other
individually insignificant fluctuations account for the remaining net change in
general and administrative expenses. Warehousing and technical support increased
$161 for the three months ended August 31, 2003 from 2002, primarily in overseas
buying office expenses of $189 as a result of increased purchases to support
higher sales levels. Numerous other individually insignificant fluctuations
account for the remaining net change in warehousing and technical support
expenses. Pre-tax income for the three months ended August 31, 2003 was $8,858,
compared to $7,891 for 2002.
The Company believes that the Electronics Group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales and general economic conditions. Also, all of its products are
subject to price fluctuations which could affect the carrying value of
inventories and gross margins in the future.
50
Nine months ended August 31, 2002 compared to nine months ended August 31, 2003
The following table sets forth for the periods indicated certain statements
of income data for the Electronics Group expressed as a percentage of net sales:
Nine Months Ended
August 31, 2002 August 31, 2003
--------------------------- -------------------------------
(As Restated)
Net sales:
Mobile electronics $166,631 62.4% $ 203,488 62.1%
Consumer electronics 56,002 21.0 81,114 24.8
Sound 43,651 16.4 42,417 13.0
Other 643 0.2 378 0.1
---------- ------ ----------- ------
Total net sales 266,927 100.0 327,397 100.0
Gross profit 46,032 17.2 52,431 16.0
Operating expenses
Selling 11,773 4.4 13,748 4.2
General and administrative 16,849 6.3 20,223 6.2
Warehousing and technical support 746 0.3 1,731 0.5
---------- ------ ----------- ------
Total operating expenses 29,368 11.0 35,702 10.9
---------- ------ ----------- ------
Operating income 16,664 6.2 16,729 5.1
Other income (expense) (2,097) (0.8) 335 0.1
---------- ------ ----------- ------
Pre-tax income $ 14,567 5.5 % $ 17,064 5.2 %
========== ======== ========== ========
Net sales were $327,397 for the nine months ended August 31, 2003, a 22.7%
increase from net sales of $266,927 in 2002. Mobile and consumer electronics'
sales increased over last year, partially offset by a decrease in sound and
other. Mobile electronics increased $36,857 (22.1%) during 2003 from 2002. Sales
of mobile video within the mobile electronics category increased 34.5% for the
nine months ended August 31, 2003, from 2002. Consumer electronics increased
$25,112 (44.8%) for the nine months ended August 31, 2003 from 2002, primarily
in sales of video- in-a-bag and portable DVD players. These increases were
partially offset by a decrease in the sound category of $1,234 (2.8%) which was
partially offset by the Recoton acquisition. Given the change in the
marketplace, fully-featured sound systems are being incorporated into vehicles
at the factory rather than being sold in the aftermarket. This declining trend
in sound systems is expected to continue except in the satellite radio product
line. There was also an increase in sales incentives of $2,969 to $6,726, net of
reversals of $1,679, due to higher sales volume. Net sales in the Company's
Malaysian subsidiary decreased from last year by approximately $4,015 primarily
from lower OEM business. The Company's Venezuelan subsidiary experienced a
decrease of $6,139 in sales from last year, due to the temporary closing of the
offices due to the impact of economic and political
51
instability in the country. These decreases were partially offset by the
additional sales from Audiovox Europe of $6,131 since the acquisition of Recoton
on July 8, 2003.
Gross profit margins decreased to 16.0% for the nine months ended August
31, 2003, compared to 17.2% for 2002. This decline was due to sales of older FRS
radios at lower margins in anticipation of newer, higher margined products and
the decrease in international business. There also was an increase in the sales
of video products sold through consumer channels, which carry a lower gross
margin as opposed to other product lines.
Operating expenses increased $6,334 for the nine months ended August 31,
2003, a 21.6% increase from operating expenses in 2002. Audiovox Europe
accounted for $2,251 of this increase. As a percentage of net sales, operating
expenses decreased to 10.9% during the nine months ended August 31, 2003
compared to 11.0% in 2002. Selling expenses increased $1,975 during the nine
months ended August 31, 2003, $256 was from Audiovox Europe, primarily in
commissions of $553 due to an increase of commissionable sales, which was offset
by a decrease in commissionable sales in Code, which has a different commission
rate structure. In addition, selling expenses increased in salaries of $555
primarily due to $260 from Code and general increases from additional personnel,
travel and entertainment of $178 due to an increase of $121 from Code and an
increase in advertising and trade shows of $628, $370 from Audiovox Europe and
general promotions to support the growing business. Numerous other individually
insignificant fluctuations account for the remaining net change in selling
expenses. General and administrative expenses increased $3,376 from 2002, $1,788
from Audiovox Europe, mostly in salaries of $1,587 ($678 from Audiovox Europe),
travel and entertainment of $156 ($95 from Audiovox Europe), insurance expense
of $269 due to higher premiums on general liability and Ocean Cargo as shipments
and sales have increased and employee benefits of $763 due to increased health
care costs, profit sharing accruals, a payment made to certain Venezuelan
executives as a result of restructuring actions, and additional personnel. These
increases were partially offset by decreases in professional fees of $138 due to
a patent infringement fee of $497 during 2002 that did not recur in 2003 and a
reduction in bad debt expense of $581 primarily due to a 2002 customer write-off
due to bankruptcy that did not recur. There was also an increase in the
corporate allocation of $474. Numerous other individually insignificant
fluctuations account for the remaining net change in general and administrative
expenses. Warehousing and technical support increased $985 for the nine months
ended August 31, 2003 from 2002, primarily in direct labor, payroll taxes and
benefits of $713 due to increased headcount. There was also an increase in
overseas buying office expenses of $312 as a result of increased purchases.
Numerous other individually insignificant fluctuations account for the remaining
net change in warehousing and technical support expenses. Pre-tax income for the
nine months ended August 31, 2003 was $17,064, compared to $14,567 for 2002.
The Company believes that the Electronics Group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales and general economic conditions. Also, all of its products are
subject to price fluctuations which could affect the carrying value of
inventories and gross margins in the future.
52
Other Income and Expense
Interest expense and bank charges increased $297 and $413, during the three
and nine months ended August 31, 2003, respectively, from the three and nine
months ended August 31, 2002, respectively, primarily due to higher interest
rates on interest-bearing debt and interest paid on a state tax settlement.
Equity in income of equity investees increased by approximately $269 and
$522, for the three and nine months ended August 31, 2003, respectively,
compared to three and nine months ended August 31, 2002, respectively. The
majority of these increases was due to an increase in the equity income of ASA
due to increased sales and improvement in gross margins. Other expenses
decreased during the quarter 2003 compared to 2002. The foreign exchange losses
were $27 and $784, respectively, for the three and nine months ended August 31,
2003 and $979 and $3,152, respectively, three and nine months ended August 31,
2002. This decrease was due to the devaluation of 14% in 2003 versus 47% in
2002. This decrease in devaluation was due to Venezuela fixing the exchange rate
of the Bolivar with the U.S. Dollar during the first quarter of 2003. Included
in other expenses is a $620 settlement of an administrative agency investigation
involving alleged reimbursement of a fixed nominal amount of federal campaign
contributions during the years 1995 through 1996. We also had an increase
(decrease) in minority interest expense of ($762) and $751 for the three and
nine months ended August 31, 2003 compared to three and nine months ended August
31, 2002, respectively, primarily due to the effect of Toshiba's increased
ownership in ACC.
Provision for Income Taxes
Effective May 29, 2002, the Company's ownership in the Wireless Group was
decreased to 75%. As such, the Company now files two consolidated U.S. Federal
Tax Returns, one for the Wireless Group and one for the Electronics Group.
The effective tax (recovery) rate for the three and nine months ended
August 31, 2003, was 106.7% and 54.2%, respectively, compared to last year's
48.5% and 100.5% for the comparable periods. During the three and nine months
ended August 31, 2002, the Company experienced a high effective tax rate due to
the impact of certain non-deductible items including a bonus payment and the mix
of foreign and domestic earnings. During the three months ended August 31, 2003,
the unprofitability of Wireless resulted in an increased effective rate since
Wireless' losses did not provide any benefit. During the nine months ended
August 31, 2003, Wireless was slightly profitable, resulting in a decrease to
the Company's effective tax rate since Wireless' losses offset such income.
Liquidity and Capital Resources
The Company has historically financed its operations primarily through a
combination of cash from operations, available borrowings under bank lines of
credit and debt and equity offerings.
53
As of August 31, 2003, the Company had working capital (defined as current
assets less current liabilities) of $282,995, which includes cash of $30,711
compared with working capital of $292,687 at November 30, 2002, which included
cash of $2,758. The decrease was principally due to the Recoton acquisition.
Operating activities provided cash of approximately $103,748, primarily
from collections of accounts receivable and decreases in inventory, partially
offset by decreases in accounts payable and accrued expenses and other current
liabilities. Accounts receivable and inventory have been favorably impacted by
collection rates and better turnover. Though this is a favorable condition, the
Company does not expect this to be a trend in the future. Also, inventory levels
are lower due to lower purchases as a result of the lack of new product
introductions in Wireless. Investing activities used approximately $39,274,
primarily from both the acquisition of certain assets of Recoton and the capital
stock of Recoton German Holdings and purchases of property, plant and equipment,
partially offset by the distribution from an equity investee. Financing
activities used approximately $36,487, primarily from net repayments of bank
obligations.
The Company's principal source of liquidity is its revolving credit
agreement which expires July 27, 2004. At August 31, 2003, the credit agreement
provided for $150,000 of available credit, including $10,000 for foreign
currency borrowings. The continued availability of this financing is dependent
upon the Company's operating results which would be negatively impacted by a
decrease in demand for the Company's products. An amendment to the credit
agreement reduced its credit availability from $200,000 to $150,000 during the
third quarter of 2003 as a result of the Company's working capital position and
current anticipated borrowing requirements. The foreign currency borrowing
sublimit was simultaneously reduced to $10,000.
Under the credit agreement, the Company may obtain credit through direct
borrowings and letters of credit. The obligations of the Company under the
credit agreement are guaranteed by certain of the Company's subsidiaries and is
secured by accounts receivable, inventory and the Company's shares of ACC. The
Company's ability to borrow under its credit facility is a maximum aggregate
amount of $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 also allows for commitments up to $50,000 in forward
exchange contracts. In addition, the Company guarantees the borrowings of one of
its equity investees at a maximum of $300.
The credit agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net worth.
Additionally, the agreement includes restrictions and limitations on payments of
dividends, stock repurchases and capital expenditures.
At November 30, 2002, the Company was not in compliance with certain of its
pre-tax income covenants. Furthermore, as of November 30, 2002, the Company was
also not in compliance with the requirement to deliver audited financial
statements 90 days after the Company's fiscal year- end, and as of February 28,
2003, the requirement to deliver unaudited quarterly financial statements 45
days after the Company's quarter end and had not received a waiver. Accordingly,
the Company recorded its outstanding domestic bank obligations of $36,883 in
current liabilities at November 30, 2002.
54
Subsequent to November 30, 2002, the Company repaid its obligation of
$36,883 in full resulting in domestic bank obligations outstanding at August 31,
2003 of $0. The Company subsequently obtained a waiver for the November 30, 2002
and February 28, 2003 violations. The Company was in compliance with all its
bank covenants at August 31, 2003. While the Company has historically been able
to obtain waivers for such violations, there can be no assurance that future
negotiations with its lenders would be successful or that the Company will not
violate covenants in the future, therefore, resulting in amounts outstanding to
be payable upon demand. This credit agreement has no cross covenants with other
credit facilities.
The Company also has revolving credit facilities in Malaysia and Germany to
finance additional working capital needs. The Malaysian credit facility is
partially secured by the Company under three 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 facilities are renewable on an annual basis.
The Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At August 31,
2003, 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 obligations $13,791 $ 554 $ 1,683 $ 1,157 $10,397
Operating leases 7,520 2,066 4,427 1,027 --
------- ------- ------- ------- -------
$21,311 $ 2,620 $ 6,110 $ 2,184 $10,397
======= ======= ======= ======= =======
Total contractual cash
obligations
55
Amount of Commitment
Expiration per period
------------------------------------------------------
Total
Other Commercial Amounts Less than 1-3 4-5 Over
Commitments Committed 1 Year Years Years 5 years
----------- --------- -------- ----- --------- -------
Lines of credit $ 7,278 $ 7,278 -- -- --
Standby letters of credit 3,058 3,058 -- -- --
Guarantees 300 300 -- -- --
Long-term debt 8,250 -- -- $ 8,250 --
Commercial letters of
credit 3,900 3,900 -- -- --
------- ------- ------- ------- ----- -
Total commercial
commitments $22,786 $14,536 -- $ 8,250 -
======= ======= ======= ======= =====
The Company has guaranteed the borrowings of one of its 50%-owned equity
investees (GLM) at a maximum of $300. During the quarter ended May 31, 2003, the
Company adopted FIN 45, "Guarantors Accounting and Disclosure Requirements for
Guarantors, Including Guarantees of Indebtedness of Others" (FIN 45). The
Company has not issued or modified this guarantee after December 31, 2002.
Accordingly, this guarantee has not been reflected on the accompanying
consolidated financial statements (See Note 13).
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.
In June 2003 the Company purchased a building for expansion purposes for
$3,509, which includes closing costs. In addition, the Company sold accounts
receivable, inventory and related intangibles to an equity investee (See Note
11) for $3,600.
56
Related Party Transactions
The Company has entered into several related party transactions which are
described below.
Leasing Transactions
During 1998, the Company entered into a 30-year capital lease for a
building with its principal stockholder and chief executive officer, which is
the headquarters of the Wireless operation. Payments on the lease were based
upon the construction costs of the building and the then-current interest rates.
The effective interest rate on the capital lease obligation is 8%. In connection
with the capital lease, the Company paid certain costs on behalf of its
principal stockholder and chief executive officer in the amount of $1,301. The
advance does not have a specified due date or interest rate. During 2001 and
2002, the entire balance of $1,301 was repaid to the Company.
During 1998, the Company entered into a sale/leaseback transaction with its
principal stockholder and chief executive officer for $2,100 of equipment, which
has been classified as an operating lease. The lease is a five-year lease with
monthly payments of $34. No gain or loss was recorded on the transaction as the
book value of the equipment equaled the fair market value.
The Company also leases certain facilities from its principal stockholder.
Rentals for such leases are considered by management of the Company to
approximate prevailing market rates. Total lease payments required under the
leases for the five-year period ending August 31, 2008 are $2,790.
Amounts Due from Officers
A note due from an officer/director of the Company, which bore interest at
the LIBOR rate, to be adjusted quarterly, plus 1.25% per annum, was paid in full
during fiscal 2002. In addition, during the third quarter, the Company had
outstanding notes due from various officers of the Company aggregating $195,
which have been included in prepaid expenses and other current assets on the
accompanying consolidated balance sheet. The notes bore interest at the LIBOR
rate plus 0.5% per annum. Principal and interest were payable in equal annual
installments beginning July 1, 1999 through July 1, 2003. The notes have been
paid in full. In addition, no new notes with officers or directors of the
Company have been entered into.
Transactions with Toshiba
Inventory on hand at November 30, 2002 and August 31, 2003 purchased from
Toshiba Corporation (Toshiba), the 25% minority shareholder of ACC and major
supplier to ACC, approximated $138,467 and $22,708, respectively. As of November
30, 2002, the Company recorded receivables from Toshiba aggregating
approximately $12,219 for price protection and software upgrades. These amounts
were paid in full during the first quarter of 2003. As of August 31, 2003, the
Company recorded receivables from Toshiba aggregating approximately $3,977 for
price protection. These amounts were paid in full subsequent to August 31, 2003.
57
At November 30, 2002, the Company had accounts payable to Toshiba in the
amount of $91,226. Of this accounts payable $56,417 was subject to an
arrangement with Toshiba, which provides for, among other things, extended
payment terms. This arrangement has since been modified such that payment terms
are no longer extended. The remaining portion of the accounts payable was
payable in accordance with the terms established in the distribution agreement,
which is 30 days. During the first quarter of 2003, the Company paid this amount
in full.
The Company has also received price protection (a reduction in our purchase
price) for inventory on hand in addition to goods sold. During the nine months
ended August 31, 2003, $11,850 of price protection from Toshiba was recorded as
a reduction to cost of sales as related inventory was sold.
Recent Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure". Statement 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally provided by
Statement 123, "Accounting for Stock-Based Compensation". Additionally,
Statement 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosure in both annual and interim financial statements about the
method of accounting for stock-based compensation and the effect of the method
used on reported results. The transitional requirements of Statement 148 will be
effective for all financial statements for fiscal years ending after December
15, 2002. The disclosure requirements shall be effective for financial reports
containing condensed financial statements for interim periods beginning after
December 31, 2002. The Company has adopted the disclosure portion of this
statement for the quarter beginning March 1, 2003, as required. The application
of this standard will have no impact on the Company's consolidated financial
position or results of operations.
The FASB also recently indicated that it will require stock-based employee
compensation to be recorded as a charge to earnings beginning in 2004. We will
continue to monitor the progress on the issuance of this standard.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantors, Including
Guarantees of Indebtedness of Others". FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company adopted
FIN 45 during the quarter ended May 31, 2003. The adoption of FIN 45 did not
have a material effect on the Company's consolidated financial position or
results of operations.
58
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51".
FIN 46 addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46, as revised, must be applied for the first interim or
annual period ending after December 15, 2003. Accordingly, the Company will
adopt this provision of FIN 46 during the quarter ended February 28, 2004. The
adoption of FIN 46 is being evaluated to determine what impact, if any, the
adoption of the provisions will have on the Company's financial condition or
results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting guidance on derivative instruments (including certain
derivative instruments embedded in other contracts) and hedging activities that
fall within the scope of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is effective for all contracts entered
into or modified after June 30, 2003, with certain exceptions, and for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively. The adoption of SFAS No. 149 did not have a material effect on
the Company's financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 changes the accounting guidance for certain financial instruments that,
under previous guidance, could be classified as equity or "mezzanine" equity by
now requiring those instruments to be classified as liabilities (or assets in
some circumstances) in the statement of financial position. Further, SFAS No.
150 requires disclosure regarding the terms of those instruments and settlement
alternatives. SFAS No. 150 is generally effective for all financial instruments
entered into or modified after May 31, 2003, and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have a material effect on the Company's
financial condition or results of operations.
In August 2003, the EITF reached a final consensus regarding Issue No.
03-5, "Applicability of AICPA Statement of Position 97-2, Software Revenue
Recognition to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software". EITF 03-5 involves whether non- software
deliverables included in an arrangement that contains software that is
more-than-incidental to the products or services as a whole are included with
the scope of SOP 97-2 "Software Revenue Recognition". The Company is currently
evaluating the impact of this new pronouncement.
Forward-Looking Statements
Except for historical information contained herein, statements made in this
release that would constitute forward-looking statements may involve certain
risks such as our ability to keep pace with technological advances, significant
competition in the wireless, mobile and consumer electronics 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
59
uncertain economic and political climate in the United States and throughout the
rest of the world and the potential that such climate may deteriorate further
and other risks detailed in the Company's Form 10-K for the fiscal year ended
November 30, 2002 and the Forms 10-Q for the first and second quarters ended
February 28, 2003 and May 31, 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, automotive and consumer electronic
businesses
o technological and market developments in the wireless, automotive and
consumer electronics businesses
o liquidity
o availability of key employees
o expansion into international markets
o the availability of new consumer electronic products
These forward-looking statements are subject to numerous risks,
uncertainties and assumptions about the Company including, among other things:
o the ability to keep pace with technological advances
o significant competition in the wireless, automotive and consumer
electronics businesses
o quality and consumer acceptance of newly introduced products
o the relationships with key suppliers
o the relationships with key customers
o possible increases in warranty expense
o the loss of key employees
o foreign currency risks
o political instability
o changes in U.S. federal, state and local and foreign laws
o changes in regulations and tariffs
o seasonality and cyclicality
o inventory obsolescence, availability and price volatility due to
market conditions
ITEM 3 LEGAL PROCEEDINGS
The Company had been the subject of an administrative agency investigation
involving alleged reimbursement of a fixed nominal amount of federal campaign
contributions during the years 1995 and 1996. During the third quarter of 2003,
the Company entered into a Conciliation Agreement and paid a civil penalty in
the amount of $620.
ITEM 4 CONTROLS AND PROCEDURES
Within the 90-day period immediately preceding the filing of this Report,
the Company's Chief Executive Officer and Principal Financial Officer has each
60
evaluated the effectiveness of the Company's "Disclosure Controls and
Procedures" and has concluded that they were effective. As such term is used
above, the Company's Controls and Procedures are controls and other procedures
of the Company that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Security Exchange Commission's rules
and forms. Disclosure Controls and Procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by the Company in such reports is accumulated and communicated to the
Company's management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date that the Company's Chief Executive Officer and Principal Financial Officer
conducted their evaluations of the Disclosure Controls and Procedures, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
61
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Audiovox Corporation ("the Company")
was held on July 24, 2003 at the Smithtown Sheraton, 110 Vanderbilt Motor
Parkway, Smithtown, New York.
Proxies for the meeting were solicited pursuant to Regulation 14 of the Act
on behalf of the Board of Directors to elect a Board of ten Directors.
There was no solicitation in opposition to the Board of Directors' nominees
for election as directors as listed in the Proxy Statement and all of such
nominees were elected. Class A nominee, Paul C. Kreuch, Jr. received 16,707,406
votes and 714,198 votes were withheld. Class A nominee, Dennis F. McManus
received 16,703,177 votes and 718,117 votes were withheld. Class A nominee,
Irving Halevy received 16,702,050 votes and 719,244 votes were withheld. Class A
nominee, Peter A. Lesser received 16,791,579 votes and 629,715 votes were
withheld.
Class A and Class B nominee, John J. Shalam received 36,869,368 votes and
3,161,466 votes were withheld. Class A and Class B nominee, Philip Christopher
received 36,989,383 votes and 3,041,451 votes were withheld. Class A and Class B
nominee, Charles M. Stoehr received 36,950,858 votes and 3,079,976 votes were
withheld. Class A and Class B nominee, Patrick M. Lavelle received 37,034,452
votes and 2,996,382 votes were withheld. Class A and Class B nominee, Ann M.
Boutcher, received 36,954,460 votes and 3,076,374 votes were withheld. Class A
and Class B nominee, Richard A. Maddia received 37,007,846 votes and 3,022,988
votes were withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
31.1 Certification Pursuant to Section 302 of
The Sarbanes-Oxley Act of 2002 (furnished herewith)
31.2 Certification Pursuant to Section 302 of
The Sarbanes-Oxley Act of 2002 (furnished herewith)
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (furnished herewith)
32.2 Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (furnished herewith)
62
(b) Reports on Form 8-K
For the third quarter ended August 31, 2003, the Company filed
seven (7) reports on Form 8-K.
The first report on Form 8-K, dated June 3, 2003 and
filed June 4, 2003 reported that two (2) press releases were
issued announcing the acquisition of the audio assets of
Recoton and the results for the fourth quarter and fiscal year
ended November 30, 2002.
The second report on Form 8-K, dated and filed June
6, 2003 reported that a press release was issued reporting the
results for the first quarter ended February 28, 2003.
The third report on Form 8-K, dated June 9, 2003 and
filed June 12, 2003 reported that the Company had held a
conference call and live webcast to discuss its financial
results for the fiscal year ended November 30, 2002 and the
quarter ended February 28, 2003.
The fourth report on Form 8-K, dated June 10, 2003
and filed June 16, 2003 reported the Eighth Amendment and
Waiver to the Company's Fourth Amended and Restated Credit
Agreement
The fifth report on Form 8-K, dated June 26, 2003 and
filed July 1, 2003 reported the Ninth Amendment to the
Company's Fourth Amended and Restated Credit Agreement
The sixth report on Form 8-K, dated July 7, 2003 and
filed July 8, 2003 reported that the Company had held a
conference call and live webcast to discuss its financial
results for the quarter ended May 31, 2003.
The seventh report on Form 8-K, dated July 8, 2003
and filed July 23, 2003 reported that the Company, pursuant to
a First Amended and Restated Stock and Asset Purchase
Agreement, had closed on the acquisition of audio assets and
stock of Recoton.
63
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: October 15, 2003
By:/s/Charles M. Stoehr
---------------------------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
64
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, John J. Shalam, certify that:
1. I have reviewed this 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 officers(s) and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and to the audit committee of the registrant's
board of directors (or persons fulfilling 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: October 15, 2003 By: /s/ John J. Shalam
-----------------------
John J. Shalam
Chief Executive Officer
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Charles M. Stoehr, certify that:
1. I have reviewed this 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 officers(s) and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and to the audit committee of the registrant's
board of directors (or persons fulfilling 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: October 15, 2003 By: /s/ Charles M. Stoehr
------------------------
Charles M. Stoehr
Chief Financial Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO 18U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the period ended
August 31, 2003 (the "Report") of Audiovox Corporation (the "Company"), as filed
with the Securities and Exchange Commission on the date hereof, I, John J.
Shalam, the Chief Executive Officer of the Company certify, to the best of my
knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/John J. Shalam
John J. Shalam
President and Chief Executive Officer
October 15, 2003
Exhibit 32.1
CERTIFICATION PURSUANT TO 18U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the period ended
August 31, 2003, (the "Report") of Audiovox Corporation (the "Company"), as
filed with the Securities and Exchange Commission on the date hereof, I, Charles
M. Stoehr, the Chief Financial Officer of the Company certify, to the best of my
knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/Charles M. Stoehr
Charles M. Stoehr
Chief Financial Officer
October 15, 2003
Exhibit 32.2