UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended November 30, 2001
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Commission file number 0-28839
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AUDIOVOX CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-1964841
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 Marcus Blvd., Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 231-7750
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of each class: Which Registered
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Class A Common Stock $.01 par value Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $124,543,557 (based upon closing price on the Nasdaq Stock Market
on March 13, 2002).
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 12, 2002 was:
Class Outstanding
Class A common stock $.01 par value 20,621,338
Class B common stock $.01 par value 2,260,954
PART I
Item 1 - Business
(a) General Development of Business
Audiovox was incorporated in Delaware on April 10, 1987, as successor to a
business founded in 1960 by John J. Shalam, our President, Chief Executive
Officer and controlling stockholder. Its principal executive offices are located
at 150 Marcus Boulevard, Hauppauge, New York 11788, and the telephone number is
631-231-7750.
The Company designs and markets a diverse line of products and provides
related services throughout the world. These products and services include:
o handsets and accessories for wireless communications
o fulfillment services for wireless carriers
o automotive entertainment and security products
o automotive electronic accessories o consumer electronics
The Company generally markets its products under the well-recognized
Audiovox brand name, which it has used for over 37 years. The Company was a
pioneer in the wireless industry, selling its first vehicle-installed wireless
telephone in 1984 as a natural expansion of its automotive aftermarket products
business. The Company's extensive distribution network and its long-standing
industry relationships have allowed the Company to benefit from growing market
opportunities in the wireless industry and to exploit emerging niches in the
consumer electronics business.
The Company operates in two primary markets:
o Wireless communications. The Wireless Company (Wireless), which
accounts for approximately 76% of revenues, sells wireless
handsets and accessories through domestic and international
wireless carriers and their agents, independent distributors and
retailers.
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o Mobile and consumer electronics. The Electronics Group
(Electronics), which accounts for approximately 24% of revenues,
sells autosound, mobile video, mobile electronics and consumer
electronics primarily to mass merchants, power retailers,
specialty retailers, new car dealers, original equipment
manufacturers (OEMs), independent installers of automotive
accessories and the U.S. military.
The business grew significantly in fiscal 2000, primarily because of
increased sales of digital handsets, as the market continued to shift to digital
technology from analog technology. However, the transference of technologies
slowed during fiscal 2001, and the Company's sales decreased from 2000. Net
sales have decreased for Wireless and increased for Electronics as follows:
Percent
2000 2001 Change
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(millions)
Wireless $1,426 $ 967 (32.2)%
Electronics 278 301 8.3
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Total $1,704 $1,268 (25.6)%
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To remain flexible and limit our research and fixed costs, the Company does
not manufacture its products. Instead, the Company has relationships with a
broad group of suppliers who manufacture its products. The Company works
directly with its suppliers in the design, development and testing of all of its
products and performs certain software installation or upgrade for wireless
products and some assembly functions for its electronics products.
The Company's product development efforts focus on meeting changing
consumer demand for technologically-advanced, high-quality products, and the
Company consults with customers throughout the design and development process.
In the wireless business, the Company was among the first to introduce wireless
handsets and mobile phones with one-touch dialing, caller ID and voice-activated
dialing as standard features. In its electronics business, the Company was among
the first to introduce mobile video entertainment products and the MP-3 Internet
music player/recorders. The Company stands behind all of its products by
providing warranties and end-user service support.
Strategy
The Company's objective is to leverage the well-recognized Audiovox brand
name and its extensive distribution network to capitalize on the growing
worldwide demand for wireless products and continue to provide innovative mobile
and consumer electronics products in response to consumer demand. The key
elements of the Company's strategy are:
Enhance and capitalize on the Audiovox brand name. The Company
believes that the "Audiovox" brand name is one of its greatest
strengths. During the past 37 years, the Company has invested to
establish the Audiovox name as a well-known consumer brand for
communications and electronics products. The Company's wireless
handsets generally bear the Audiovox brand name or are co-branded with
a wireless carrier. To further benefit from the Audiovox name,
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the Company continues to introduce new products using its brand name
and licenses its brand name for selected consumer products.
Expand wireless technology offerings to increase market opportunities.
The Company intends to continue to offer an array of
technologically-advanced wireless products, including the introduction
of personal digital assistants (PDA's) with voice capability in fiscal
2002, using all digital standards. The Company's wide selection of
wireless products will allow it to satisfy different carrier demands,
both domestically and internationally.
Capitalize on niche market opportunities in the consumer electronics
industry. The Company intends to continue to use its extensive
distribution and supply networks to capitalize on niche market
opportunities, such as navigation, mobile video, DVD's and cruise
controls, in the consumer electronics industry. The Company believes
that focusing on high-demand, high-growth niche products results in
better profit margins and growth potential for its electronics
business.
Continue to expand international presence. During fiscal 2002, the
Company intends to continue to expand its international wireless
business as it continues to introduce products compatible with
international wireless technologies, such as GSM and CDMA.
Continue to outsource manufacturing to increase operating leverage.
One of the key components of the Company's business strategy is
outsourcing the manufacturing of its products. This allows the Company
to deliver the latest technological advances without the fixed costs
associated with manufacturing.
Continue to provide value-added services to customers and suppliers.
The Company believes that it provides key services, such as product
design, development and testing, sales support, product repair and
warranty, carrier fulfillment services and software upgrading, more
efficiently than its customers and suppliers could provide for
themselves. The Company intends to continue to develop its value-added
services as the market evolves and customer needs change.
(b) Financial Information About Industry Segments
The Company's industry segments are the Wireless Group and the Electronics
Group. Net sales, income before provision for income taxes and total assets
attributable to each segment for each of the last three years are set forth in
Note 21 of the Company's consolidated financial statements included herein.
(c) Narrative Description of Business
Wireless
Wireless, which accounts for approximately 76% of the Company's revenues,
markets wireless handsets and accessories through domestic and international
wireless carriers and their agents, independent distributors and retailers.
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Wireless products and technology
Wireless sells an array of digital handsets, hand-held computing devices
and accessories in a variety of technologies. In fiscal 1999, Wireless expanded
its line of digital handsets and increased its digital sales efforts and, for
fiscal 1999, digital products represented 56% of Wireless' total unit sales.
During fiscal 2000 and 2001, Wireless digital handsets represented 78% and 89%,
respectively, of total unit sales. Wireless generally markets its wireless
products under the Audiovox brand name or co-brands its products with its
carrier customers, such as Verizon Wireless.
In addition to handsets, Wireless sells a complete line of accessories that
includes batteries, hands-free kits, battery eliminators, cases and data cables.
In fiscal 2002, Wireless intends to continue to broaden its digital product
offerings and introduce handsets with new features such as color LCD's,
downloadable ringers and EQII solutions.
Wireless marketing and distribution
Wireless sells wireless products to wireless carriers and the carrier's
respective agents, distributors and retailers. In addition, a majority of its
handsets are designed to meet carrier specifications. In fiscal 2000, the five
largest wireless customers were Verizon Wireless, AllTel Communications, MCI
Worldcom, Brightpoint, Inc. and Canadian Mobility. One of these customers,
Verizon Wireless, accounted for 60.3% of Wireless' net sales for fiscal 2000. In
fiscal 2001, the five largest wireless customers were Verizon Wireless, PrimeCo
Personal Communications LP, Sprint Spectrum LP, Bell Distribution Inc., and
Brightpoint, Inc. One of these customers, Verizon Wireless, accounted for 45.4%
of Wireless' net sales for fiscal 2001. All of these customers represented 70.6%
of Wireless' net sales and 53.9% of consolidated net sales during fiscal 2001.
In addition, Wireless promotes its products through trade and consumer
advertising, participation at trade shows and direct personal contact by its
sales representatives. Wireless also assists wireless carriers with their
marketing campaigns by scripting telemarketing presentations, funding
co-operative advertising campaigns, developing and printing custom sales
literature, providing product fulfillment and logistic services, conducting
in-house training programs for wireless carriers and their agents and providing
assistance in market development.
Wireless operates approximately seven facilities under the name Quintex. In
addition, Wireless licenses the trade name Quintex(R) to seven outlets in
selected markets in the United States. Wireless also serves as an agent for the
following carriers in selected areas: VoiceStream, Nextel, MCI Worldcom, NTelos,
AT & T Wireless, Verizon Wireless, Sprint, and Sprint Spectrum LP. For fiscal
2001, revenues from these operations were 4.6% of total Wireless revenues.
Wireless' policy is to ship its products within 24 hours of a requested
shipment date from public warehouses in Florida, New York, California , New
Jersey, Canada and Netherlands and from leased facilities located in New York
and California.
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Wireless product development, warranty and customer service
Although Wireless does not have its own manufacturing facilities, it works
closely with both customers and suppliers in the design, development and testing
of its products. In particular, Wireless:
o with its wireless customers, determines future market feature
requirements
o works with its suppliers to develop products containing those features
o participates in the design of the features and cosmetics of its
wireless products
o tests products in its own facilities to ensure compliance with
Audiovox standards
o supervises testing of the products in its carrier markets to ensure
compliance with carrier specifications
Wireless' Hauppauge facility is ISO-9001 registered, which requires it to
carefully monitor quality standards in all facets of its business.
Wireless believes customer service is an important tool for enhancing its
brand name and its relationship with carriers. In order to provide full service
to its customers, Wireless warranties its wireless products to the end-user for
periods ranging from up to one year for portable handsets to up to three years
for mobile car phones. To support its warranties, Wireless has approximately
1,100 independent warranty centers throughout the United States and Canada and
has experienced technicians in its warranty repair stations at its headquarters
facility. Wireless has experienced customer service representatives who interact
directly with both end-users and its customers. These representatives are
trained to respond to questions on handset operation and warranty and repair
issues.
Wireless suppliers
Wireless purchases its wireless products from several manufacturers located
in Pacific Rim countries, including Japan, China, Korea, Taiwan and Malaysia. In
selecting its suppliers, Wireless considers quality, price, service, market
conditions and reputation. Wireless generally purchases its products under
short-term purchase orders and does not enter into long-term contracts with its
suppliers. Wireless considers its relations with its suppliers to be good.
Wireless believes that alternative sources of supply are currently available,
although there could be a time lag and increased costs if it were to have an
unplanned shift to a new supplier.
Wireless competition
The market for wireless handsets and accessories is highly competitive and
is characterized by intense price competition, significant price erosion over
the life of a product, demand for value-added services, rapid technological
development and industry consolidation of both customers and manufacturers.
Currently, Wireless' primary competitors for wireless handsets include Motorola,
Nokia, Kyocera and Samsung.
Wireless also competes with numerous established and new manufacturers and
distributors, some of whom sell the same or similar products directly to its
customers. Historically, Wireless' competitors have also included some of its
own suppliers and customers. Many of Wireless' competitors
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offer more extensive advertising and promotional programs than it does.
Wireless competes for sales to carriers, agents and distributors on the
basis of its products and services and price. As its customers are requiring
greater value-added logistic services, Wireless believes that competition will
continually be required to support an infrastructure capable of providing these
services. Wireless' ability to continue to compete successfully will largely
depend on its ability to perform these value-added services at a reasonable
cost.
Wireless' products compete primarily on the basis of value in terms of
price, features and reliability. There have been several periods of extreme
price competition in the wireless industry, particularly when one or more or its
competitors has sought to sell off excess inventory by lowering its prices
significantly.
As a result of global competitive pressures, there has been significant
consolidation in the domestic wireless industry including:
o Cricket and Leap Wireless
o Verizon Wireless: Bell Atlantic, AirTouch Communications, GTE
Mobilnet, PrimeCo Personal Communications LP, Frontier, Ameritech and
Vodafone
o Cingular Wireless: SBC Communications and Bell South
o VoiceStream: Expanded into major markets through acquisition of
Omnipoint
o Telus and Clearnet
These consolidations may result in greater competition for a smaller number
of large customers and may favor one or more of its competitors over Wireless.
Electronics Group
Electronics Industry
The mobile and consumer electronics industry is large and diverse and
encompasses a broad range of products. There are many large manufacturers in the
industry, such as Sony, RCA, Panasonic and JVC, as well as large companies that
specialize in niche products. The Electronics Group participates in selected
niche markets such as autosound, mobile video, vehicle security and selected
consumer electronics.
The introduction of new products and technological advancements drives
growth in the electronics industry. For example, the transition from analog to
digital technology is leading to the development of a new generation of consumer
electronic products. Some of these products include digital satellite radio,
portable DVD, home and mobile video systems, navigation systems and FRS radios.
Electronics products
The Company's electronics products consist of two major categories, mobile
electronics and consumer electronics.
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Mobile electronics products include:
o autosound products, such as radios, speakers, amplifiers and CD
changers
o mobile video products, including overhead and center console mobile
entertainment systems, video cassette players and game options
o automotive security and remote start systems
o automotive power accessories o navigation systems
Consumer electronics include:
o home and portable stereos
o FRS two-way radios
o LCD televisions
o MP-3 Internet music player/recorders
o portable DVD players
The Electronics Group markets its products under the Audiovox(R) brand
name, as well as several other Audiovox-owned trade names that include
Prestige(R), Pursuit(R) and Rampage(TM). Sales by the Company's Malaysian,
Venezuelan and American Radio subsidiaries fall under the Electronics Group. For
the fiscal years ended November 30, 2000 and November 30, 2001, the Electronics
Group's sales by product category were as follows:
Percent
2000 2001 Change
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(millions)
Mobile electronics $ 135.6 $ 159.6 17.7%
Sound 77.8 58.1 (25.3)
Consumer electronics 61.0 81.2 33.1
Other 3.9 2.1 (46.2)
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Total $ 278.3 $ 301.0 8.2%
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In the future, the Electronics Group will continue to focus its efforts on
new technologies to take advantage of market opportunities created by the
digital convergence of data, communications, navigation and entertainment
products.
Licensing
In the late 1990's, the Company began to license its brand name for use on
selected products, such as home and portable stereo systems. Actual sales of
licensed products are not included in the Company's sales figures. However, the
Company licensed customers have reported that, for fiscal 2001, they sold $24
million in licensed goods for which the Company received license fees. License
sales promote the Audiovox brand name without adding any significant costs.
License fees are recognized on a per unit basis upon sale to the end-user and
are recorded in other income. License fees in 2001
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approximated $0.5 million.
Electronics distribution and marketing
The Electronics Group sells its electronics products to:
o mass merchants
o power retailers
o chain stores
o specialty retailers
o distributors
o new car dealers
o the U.S. military
The Electronics Group also sells its products under OEM arrangements with
domestic and/or international subsidiaries of automobile manufacturers such as
Ford Corporation, Daimler Chrysler, General Motors Corporation and Nissan. OEM
projects are a significant portion of the Electronics Group sales, accounting
for approximately 7.8% of the Electronics Group's sales in 2001. These projects
require a close partnership with the customer as the Electronics Group develops
products to their specific requirements. Three of the largest auto makers,
General Motors, Daimler Chrysler and Ford require QS registration for all of
their vendors. The Electronics Group's Hauppauge facility is both QS 9000 and
ISO 9001 registered. In addition, Audiovox Electronics is Q1 rated for the Ford
Motor Company.
In fiscal 2000, the Electronics Group's five largest customers were Nissan,
Wal-Mart, Target, Gulf States Toyota and Circuit City. They represented 21.2% of
the Electronics Group's net sales. In fiscal 2001, the Electronics Group's five
largest customers were Wal-Mart, Target, Ford, KMart, and Circuit City. They
represented 26.6% of the Electronics Group's net sales.
As part of the Electronics Group's sales process, the Electronics Group
provides value-added management services including:
o product design and development
o engineering and testing
o technical and sales support
o electronic data interchange (EDI)
o product repair services and warranty
o nationwide installation network
The Electronics Group has flexible shipping policies designed to meet
customer needs. In the absence of specific customer instructions, the
Electronics Group ships its products within 24 to 48 hours from the receipt of
an order. The Electronics Group makes shipments from public warehouses in
Virginia, Nevada, Florida, New Jersey, California and Canada, Venezuela and
Malaysia and from leased facilities located in New York.
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Electronics product development, warranty and customer service
Although the Electronics Group does not have its own manufacturing
facilities, it works closely with its customers and suppliers in the design,
development and testing of its products. For the Electronics Group's OEM
automobile customers, the Electronics Group performs extensive validation
testing to ensure that its products meet the special environmental and
electronic standards of the manufacturer. The Electronics Group also performs
final assembly of products in its Hauppauge location. The Electronics Group's
product development cycle includes:
o working with key customers and suppliers to identify consumer
trends and potential demand
o working with the suppliers to design and develop products to meet
those demands
o evaluating and testing the products in our own facilities to
ensure compliance with our standards
o performing software design and validation testing
The Electronics Group provides a warranty to the end-users of its
electronics products, generally ranging from 90 days up to the life of the
vehicle for the original owner on some of its automobile-installed products. To
support its warranties, the Electronics Group has independent warranty centers
throughout the United States, Canada, Venezuela and Malaysia. At its Hauppauge
facility, the Electronics Group has a customer service group that provides
product information, answers questions and serves as a technical hotline for
installation help for both end-users and its customers.
Electronics suppliers
The Electronics Group purchases its electronics products from manufacturers
located in several Pacific Rim countries, including Japan, China, Korea, Taiwan,
Singapore and Malaysia. The Electronics Group also uses several manufacturers in
the United States for cruise controls, mobile video and power amplifiers. In
selecting its manufacturers, the Electronics Group considers quality, price,
service, market conditions and reputation. The Electronics Group maintains
buying offices or inspection offices in Taiwan, Korea, China and Hong Kong to
provide local supervision of supplier performance such as price negotiations,
delivery and quality control. The Electronics Group generally purchases its
products under short-term purchase orders and does not have long-term contracts
with its suppliers. Electronics believes that alternative sources of supply are
currently available, although there could be a time lag and increased costs if
it were to have an unplanned shift to a new supplier.
The Electronics Group considers relations with its suppliers to be good. In
addition, the Electronics Group believes that alternative sources of supply are
generally available within 120 days.
Electronics competition
The Electronics Group's electronics business is highly competitive across
all of its product lines, and the Electronics Group competes with a number of
well-established companies that manufacture and sell similar products. The
Electronics Group's mobile electronics products compete against factory-
supplied radios (including General Motors, Ford and Daimler Chrysler), security
and mobile video systems . The Electronics Group's mobile electronics products
also compete in the automotive aftermarket
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against major companies such as Sony, Panasonic, Kenwood and Pioneer. The
Electronics Group's consumer electronics product lines compete against major
consumer electronic companies, such as JVC, Sony, Panasonic, Motorola, RCA and
AIWA. Brand name, design, features and price are the major competitive factors
across all of its product lines.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
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The amounts of net sales and long-lived assets, attributable to each of the
Company's geographic segments for each of the last three fiscal years are set
forth in Note 21 to the Company's consolidated financial statements included
herein. During fiscal 2001, the Company exported approximately $215 million in
product sales.
Trademarks
The Company markets products under several trademarks, including
Audiovox(R), Prestige(R), Pursuit(R) and Rampage(TM) . The trademark Audiovox(R)
is registered in approximately 66 countries. The Company believes that these
trademarks are recognized by customers and are therefore significant in
marketing its products.
Other Matters
Equity Investments
The Company has investments in unconsolidated joint ventures which were
formed to market its products in specific market segments or geographic areas.
The Company seeks to blend its financial and product resources with local
operations to expand its distribution and marketing capabilities. The Company
believes its joint ventures provide a more cost-effective method of focusing on
specialized markets. The Company does not participate in the day-to-day
management of these joint ventures. The Company's significant joint ventures
are:
Percentage Formation
Venture Ownership Date Function
Audiovox Specialized Distribution of products for van, RV
Applications 50.0% 1997 and other specialized vehicles.
20.0% 1997 Distribution of wireless products and
Bliss-Tel Company, accessories in Thailand.
Ltd.
Employees
The Company employs approximately 985 people. The Company's headcount has
been relatively stable for the past several years. The Company considers its
relations with its employees to be good. No employees are covered by collective
bargaining agreements.
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Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are listed below. All
officers of the Company are elected by the Board of Directors to serve one-year
terms. There are no family relationships among officers, or any arrangement or
understanding between any officer and any other person pursuant to which the
officer was selected. Unless otherwise indicated, positions listed in the table
have been held for more than five years.
Name Age Current Position
John J. Shalam 68 President, Chief Executive Officer and
Chairman of the Board of Directors
Philip Christopher 53 Executive Vice President and a Director
Charles M. Stoehr 55 Senior Vice President, Chief Financial
Officer and a Director
Patrick M. Lavelle 50 Senior Vice President, Electronics
Division and a Director
Ann M. Boutcher 51 Vice President, Marketing and a Director
Richard A. Maddia 43 Vice President, MIS and a Director
Paul C. Kreuch, Jr.* 63 Director
Dennis F. McManus* 51 Director
Irving Halevy** 85 Director
*Member of the Audit and Compensation Committees
**Member of the Audit Committee
John J. Shalam has served as President, Chief Executive Officer and as
Director of Audiovox or its predecessor since 1960. Mr. Shalam also serves as
President and a Director of most of Audiovox's operating subsidiaries. Mr.
Shalam is on the Board of Directors of the Electronics Industry Association and
is on the Executive Committee of the Consumer Electronics Association.
Philip Christopher, our Executive Vice President, has been with Audiovox
since 1970 and has held his current position since 1983. Before 1983, he served
as Senior Vice President of Audiovox. Mr. Christopher is Chief Executive Officer
of Audiovox's wireless subsidiary, Audiovox Communications Corp. From 1973
through 1987, he was a Director of our predecessor, Audiovox Corp. Mr.
Christopher serves on the Executive Committee of the Cellular Telephone Industry
Association.
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Charles M. Stoehr has been our Chief Financial Officer since 1979 and was
elected Senior Vice President in 1990. Mr. Stoehr has been a Director of
Audiovox since 1987. From 1979 through 1990, he was a Vice President of
Audiovox.
Patrick M. Lavelle has been a Senior Vice President of the Company since
1991, with responsibility for the Company's mobile and consumer electronics
division. Mr. Lavelle is Chief Executive Officer and President of Audiovox's
electronics subsidiary, Audiovox Electronics Corporation. He was elected to the
Board of Directors in 1993. Mr. Lavelle also serves as Vice Chair of the Mobile
Electronics Division of the Consumer Electronics Association and is a Chairman
of the Mobile Information Technology Subdivision.
Ann M. Boutcher has been our Vice President of Marketing since 1984. Ms.
Boutcher's responsibilities include the development and implementation of our
advertising, sales promotion and public relations programs. Ms. Boutcher was
elected to the Board of Directors in 1995.
Richard A. Maddia has been our Vice President of Information Systems since
1992. Prior thereto, Mr. Maddia was Assistant Vice President, MIS. Mr. Maddia's
responsibilities include development and maintenance of information systems. Mr.
Maddia was elected to the Board of Directors in 1996.
Paul C. Kreuch, Jr. was elected to the Board of Directors in February 1997.
Mr. Kreuch is a Managing Director of WJM Associates, Inc., a leading executive
development firm. Prior career responsibilities include Executive Vice President
of NatWest Bank, N.A. from 1993 to 1996, and, before that, President of National
Westminster Bank, USA.
Dennis F. McManus was elected to the Board of Directors in March 1998. Mr.
McManus is currently the Vice President - New Product Marketing at the LSSi
Corporation. Prior to that Mr. McManus had been self-employed as a
telecommunications consultant. Before that, he was employed by NYNEX Corp. for
over 27 years, most recently as a Senior Vice President and Managing Director.
Mr. McManus held this position from 1991 through December 31, 1997.
Irving Halevy served on the Board of Directors from 1987 to 1997 and was
re-elected to the Board of Directors in 2001. Mr. Halevy is a retired professor
of Industrial Relations and Management at Fairleigh Dickinson University where
he taught from 1952 to 1986. He is also a panel member of the Federal Mediation
and Conciliation Service.
All of our executive officers hold office at the discretion of the Board of
Directors.
Cautionary Factors That May Affect Future Results
We have identified certain risk factors that apply to either Audiovox as a
whole or one of our specific business units. You should carefully consider each
of the following risk factors and all of the other information included or
incorporated by reference in this Form 10-K. If any of these risks, or other
risks not presently known to us or that we currently believe not to be
significant, develop into actual events, then our business, financial condition,
liquidity, or results of operations could be materially adversely affected. If
that happens, the market price of our common stock would likely decline, and
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you may lose all or part of your investment.
We May Not Be Able to Compete Successfully in the Highly Competitive Wireless
Industry.
The market for wireless handsets and accessories is highly competitive and
is characterized by:
o intense price competition
o significant price erosion over the life of a product
o the demand by wireless carriers for value-added services provided by
their suppliers
o rapid technological development
o industry consolidation
Our primary competitors for wireless handsets currently are Motorola,
Nokia, Kyocera and Samsung. In addition, we compete with numerous other
established and new manufacturers and distributors, some of whom sell the same
or similar products directly to our customers. Historically, our competitors
have also included some of our own suppliers and customers. Many of our
competitors offer more extensive advertising and promotional programs than we
do.
During the last decade, there have been several periods of extreme price
competition, particularly when one or more or our competitors has sought to sell
off excess inventory by lowering its prices significantly. In particular, in
1995 several of our larger competitors lowered their prices significantly to
reduce their inventories, which required us to similarly reduce our prices.
These price reductions had a material adverse effect on our profitability. There
can be no assurance that our competitors will not do this again, because, among
other reasons, many of them have significantly greater financial resources than
we do and can withstand substantial price competition. Since we sell products
that tend to have low gross profit-margins, price competition has had, and may
in the future have, a material adverse effect on our financial performance.
The Electronics Business Is Highly Competitive; Our Electronics Business Also
Faces Significant Competition from Original Equipment Manufacturers (OEMs).
The market for electronics is highly competitive across all three of our
product lines. We compete against many established companies who have
substantially greater resources than us. In addition, we compete directly with
OEMs, including divisions of well-known automobile manufacturers, in the
autosound, auto security, mobile video and accessories industry. Most of these
companies have substantially greater financial and other resources than we do.
We believe that OEMs have increased sales pressure on new car dealers with whom
they have close business relationships to purchase OEM-supplied equipment and
accessories. OEMs have also diversified and improved their product lines and
accessories in an effort to increase sales of their products. To the extent that
OEMs succeed in their efforts, this success would have a material adverse effect
on our sales of automotive entertainment and security products to new car
dealers.
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Wireless Carriers and Suppliers May Not Continue to Outsource Value-Added
Services; We May Not Be Able to Continue to Provide Competitive Value-Added
Services.
Wireless carriers purchase from us, rather than directly from our
suppliers, because, among other reasons, we provide added services valued by our
customers. In order to maintain our sales levels, we must continue to provide
these value-added services at reasonable costs to our carrier-customers and
suppliers, including:
o product sourcing
o product distribution
o marketing
o custom packaging
o warranty support
o programming wireless handsets
o testing for carrier system acceptance
Our success depends on the wireless equipment manufacturers, wireless
carriers, network operators and resellers continuing to outsource these
functions rather than performing them in-house. To encourage the use of our
services, we must keep our prices reasonable. If our internal costs of supplying
these services increase, we may not be able to raise our prices to pass these
costs along to our customers and suppliers. As a result of the recent wave of
consolidations in the telecommunications industry, wireless carriers, which are
the largest customers of our wireless business, may attempt to perform these
services themselves. Alternatively, our customers and suppliers may transact
business directly with each other rather than through us. If our customers or
suppliers begin to perform these services internally or do business directly
with each other, it could have a material adverse effect on our sales and our
profits.
Our Success Depends on Our Ability to Keep Pace with Technological Advances in
the Wireless Industry.
Rapid technological change and frequent new product introductions
characterize the wireless product market. Our success depends upon our ability
to:
o identify the new products necessary to meet the demands of the
wireless marketplace, and
o locate suppliers who are able to manufacture those products on a
timely and cost-effective basis.
As a result of the emergence of the digital market, which resulted in the
reduction of selling prices of analog hand-held phones, we recorded analog
inventory write-downs to market of $8.2 million and $13.5 million in 2000 and
2001, respectively. These write-downs had a material adverse effect on our
profitability. During the fourth quarter ended November 30, 2001, the Company
recorded inventory write-downs to market of $7.2 million as a result of the
reduction of selling prices primarily related to digital hand-held phones during
the first quarter of 2002 in anticipation of new digital technologies. There can
be no assurance that this will not occur again given the emergence of new
technologies.
15
Since we do not make any of our own products and do not conduct our own
research, we cannot assure you that we will be able to source the products that
advances in technology require to remain competitive. Furthermore, the
introduction or expected introduction of new products or technologies may
depress sales of existing products and technologies. This may result in
declining prices and inventory obsolescence. Since we maintain a substantial
investment in product inventory, declining prices and inventory obsolescence
could have a material adverse effect on our business and financial results.
We Depend on a Small Number of Key Customers For a Large Percentage of Our
Sales.
The wireless industry is characterized by a small number of key customers.
In fiscal 1999, 65.9% of our wireless sales were to five customers, and for 2000
73.5% of our wireless sales were to five customers. Our five largest customers
accounted for 70.6% of our wireless sales in fiscal 2001, one of which accounted
for 45.4% of our wireless sales in fiscal 2001.
We Do Not Have Long-term Sales Contracts with Any of Our Customers.
Sales of our wireless products are made by oral or written purchase orders
and are terminable at will by either party. The unexpected loss of all or a
significant portion of sales to any one of our large customers could have a
material adverse effect on our performance. Sales of our electronics products
are made by purchase order and are terminated at will at the option of either
party. We do not have long-term sales contracts with any of our customers. The
unexpected loss of all or a significant portion of sales to any one of these
customers could result in a material adverse effect on our performance.
We Could Lose Customers or Orders as a Result of Consolidation in the Wireless
Telecommunications Carrier Industry.
As a result of global competitive pressures, there has been significant
consolidation in the domestic wireless industry:
o Cricket and Leap Wireless
o Verizon Wireless: Bell Atlantic, AirTouch Communications, GTE
Mobilnet, Prime Co Personal Communications LP, Frontier, Ameritech and
Vodafone
o Cingular Wireless: SBC Communications and Bell South
o VoiceStream: Expanded into major markets through acquisition of
Omnipoint
o Telus and Clearnet
Future consolidations could cause us to lose business if any of the new
consolidated entities do not perform as they expect to because of integration or
other problems. In addition, these consolidations will result in a smaller
number of wireless carriers, leading to greater competition in the wireless
handset market, and may favor one or more of our competitors over us. This could
also lead to fluctuations in our quarterly results. If any of these new entities
orders less product from us or elects not to do business with us, it would have
a material adverse effect on our business. In fiscal 2001, the five largest
wireless customers were Verizon Wireless, PrimeCo. Personal Communications LP,
Sprint Spectrum LP, Bell Distribution, Inc. and Brightpoint, Inc. One of these
customers, Verizon Wireless, accounted
16
for 45.4% of Wireless' net sales for fiscal 2001. All of these customers
represented 70.6% of Wireless' net sales and 53.9% of consolidated net sales
during fiscal 2001.
Sales in Our Electronics Business Are Dependent on New Products and Consumer
Acceptance.
Our electronics business depends, to a large extent, on the introduction
and availability of innovative products and technologies. Significant sales of
new products in niche markets, such as Family Radio Service two-way radios,
known as FRS radios, portable DVD players, and mobile video systems, have fueled
the recent growth of our electronics business. If we are not able to continually
introduce new products that achieve consumer acceptance, our sales and profit
margins will decline.
Since We Do Not Manufacture Our Products, We Depend on Our Suppliers to Provide
Us with Adequate Quantities of High Quality Competitive Products on a Timely
Basis.
We do not manufacture our products. We do not have long-term contracts with
any of the suppliers who produce our final products and most of our products are
imported from suppliers under short-term, non-exclusive purchase orders.
Accordingly, we can give no assurance that:
o our supplier relationships will continue as presently in effect
o our suppliers will be able to obtain the components necessary to
produce high-quality, technologically-advanced products for us
o we will be able to obtain adequate alternatives to our supply sources
should they be interrupted
o if obtained, alternatively sourced products of satisfactory quality
would be delivered on a timely basis, competitively priced, comparably
featured or acceptable to our customers
Because of the recent increased demand for wireless and consumer
electronics products, there have been industry-wide shortages of components. As
a result, our suppliers have not been able to produce the quantities of these
products that we desire. Our inability to supply sufficient quantities of
products that are in demand could reduce our profitability and have a material
adverse effect on our relationships with our customers. If any of our supplier
relationships were terminated or interrupted, we could experience an immediate
or long-term supply shortage, which could have a material adverse effect on us.
It is likely that our supply of wireless products would be interrupted before we
could obtain alternative products.
Because We Purchase a Significant Amount of Our Products from Suppliers in
Pacific Rim Countries, We Are Subject to the Economic Risks Associated with
Changes in the Social, Political, Regulatory and Economic Conditions Inherent in
These Countries.
We import most of our products from suppliers in the Pacific Rim. Countries
in the Pacific Rim have experienced significant social, political and economic
upheaval over the past several years. Because of the large concentrations of our
purchases in Pacific Rim countries, particularly Japan, China, Korea, Taiwan and
Malaysia, any adverse changes in the social, political, regulatory and economic
conditions in these countries may materially increase the cost of the products
that we buy from our foreign suppliers or delay shipments of products, which
could have a material adverse effect on our business. In addition, our
dependence on foreign suppliers forces us to order products further in advance
17
than we would if our products were manufactured domestically. This increases the
risk that our products will become obsolete before we can sell our inventory.
We Plan to Expand the International Marketing and Distribution of Our Products,
Which Will Subject Us to Additional Business Risks.
As part of our business strategy, we intend to increase our international
sales, although we cannot assure you that we will be able to do so. Conducting
business outside of the United States subjects us to significant additional
risks, including:
o export and import restrictions, tax consequences and other trade
barriers
o currency fluctuations
o greater difficulty in accounts receivable collections
o economic and political instability
o foreign exchange controls that prohibit payment in U.S. dollars
o increased complexity and costs of managing and staffing international
operations
For instance, our international sales declined by 50% from 1997 to 1998, in
significant part due to financial crises in the Asian markets, particularly
Malaysia. Any of these factors could have a material adverse effect on our
business, financial condition and results of operations.
Fluctuations in Foreign Currencies Could Have a Material Adverse Impact on Our
Business.
We cannot predict the effect of exchange rate fluctuations on our future
operating results. Also, due to the short-term nature of our supply
arrangements, the relationship of the U.S. dollar to foreign currencies will
impact price quotes when negotiating new supply arrangements denominated in U.S.
dollars. As a result, we could experience declining selling prices in our market
without the benefit of cost decreases on purchases from suppliers or we could
experience increasing costs without an ability to pass the costs to the
customers. We cannot assure you that we will be able to effectively limit our
exposure to foreign currencies. Foreign currency fluctuations could cause our
operating results to decline and have a material adverse effect on our ability
to compete. Many of our competitors manufacture products in the United States or
outside the Pacific Rim, which could place us at a competitive disadvantage if
the value of the Pacific Rim currencies increased relative to the currency in
the countries where our competitors obtain their products.
Trade Sanctions Against Foreign Countries or Foreign Companies Could Have a
Material Adverse Impact on Our Business.
As a result of trade disputes, the United States and foreign countries have
occasionally imposed tariffs, regulatory procedures and importation bans on
certain products, including wireless handsets that have been produced in foreign
countries. Trade sanctions or regulatory procedures involving a country in which
we conduct a substantial amount of business could have a material adverse effect
on our operations. Some of the countries we purchase products from are: China,
Japan, Korea, Taiwan and Malaysia. China and Japan have been affected by such
sanctions in the past. In addition, the United States has imposed, and may in
the future impose, sanctions on foreign companies for anti-dumping
18
and other violations of U.S. law. If sanctions were imposed on any of our
suppliers or customers, it could have a material adverse effect on our
operations.
We May Not Be Able to Sustain Our Recent Growth Rates or Maintain Profit
Margins.
Sales of our wireless products, a large portion of our business that
operates on a high-volume, low-margin basis, have varied significantly over the
past several years, from approximately $432 million in fiscal 1998 to
approximately $1.4 billion for fiscal 2000 back to approximately $967 million in
2001. Sales of our electronics products also increased significantly from
approximately $185 million for fiscal 1998 to approximately $301 million for
fiscal 2001. We may not be able to continue to achieve this overall revenue
growth rate or maintain profit margins because, among other reasons, of
increased competition and technological changes as we demonstrated in 2001. In
addition, we expect that our operating expenses will continue to increase as we
seek to expand our business, which could also result in a reduction in profit
margins if we do not concurrently increase our sales proportionately.
If Our Sales During the Holiday Season Fall below Our Expectations, Our Annual
Results Could Also Fall below Expectations.
Seasonal consumer shopping patterns significantly affect our business. We
generally make a substantial amount of our sales and net income during
September, October and November, our fourth fiscal quarter. We expect this trend
to continue. December is also a key month for us, due largely to the increase in
promotional activities by our customers during the holiday season. If the
economy faltered in these periods, if our customers altered the timing or
frequency of their promotional activities or if the effectiveness of these
promotional activities declined, particularly around the holiday season, it
could have a material adverse effect on our annual financial results.
A Decline in General Economic Conditions Could Lead to Reduced Consumer Demand
for the Discretionary Products We Sell.
Consumer spending patterns, especially discretionary spending for products
such as consumer electronics and wireless handsets, are affected by, among other
things, prevailing economic conditions, wage rates, inflation, consumer
confidence and consumer perception of economic conditions. A general slowdown in
the U.S. economy or an uncertain economic outlook could have a material adverse
effect on our sales. So far, the recent economic slowdown has not materially
affected our business. In addition, our mobile electronics business is dependent
on the level of car sales in our markets.
We Depend Heavily on Existing Management and Key Personnel and Our Ability to
Recruit and Retain Qualified Personnel.
Our success depends on the continued efforts of John Shalam, Philip
Christopher, C. Michael Stoehr and Patrick Lavelle, each of whom has worked with
Audiovox for over two decades, as well as our other executive officers and key
employees. We do not have employment contracts with any of our executive
officers or key employees. The loss or interruption of the continued full-time
service of certain of our executive officers and key employees could have a
material adverse effect on our business.
19
In addition, to support our continued growth, we must effectively recruit,
develop and retain additional qualified personnel both domestically and
internationally. Our inability to attract and retain necessary qualified
personnel could have a material adverse effect on our business.
We Are Responsible for Product Warranties and Defects.
Even though we outsource manufacturing, we provide warranties for all of
our products for which we have provided an estimated liability. Therefore, we
are highly dependent on the quality of our suppliers. The warranties for our
electronics products range from 90 days to the lifetime of a vehicle for the
original owner. The warranties for our wireless products generally range from
one to three years. In addition, if we are required to repair a significant
amount of product, the value of the product could decline while we are repairing
the product. In particular, in 1998, a software problem caused us to recall a
specific line of analog handsets. After a $1 million reimbursement from the
manufacturer for warranty costs, this recall resulted in a net pre-tax charge of
$6.6 million to cover the decline in the selling price of the product during the
period we were repairing the handsets. We cannot assure you that we will not
have similar problems in the future or that our suppliers will reimburse us for
any warranty problems.
Our Capital Resources May Not Be Sufficient to Meet Our Future Capital and
Liquidity Requirements.
We believe that we currently have sufficient resources to fund our existing
operations for the foreseeable future through our cash flows and borrowings
under our credit facility. However, we may need additional capital to operate
our business if:
o market conditions change
o our business plans or assumptions change
o we make significant acquisitions
o we need to make significant increases in capital expenditures or
working capital
We cannot assure you that we would be able to raise additional capital on
favorable terms, if at all. If we could not obtain sufficient funds to meet our
capital requirements, we would have to curtail our business plans. We may also
raise funds to meet our capital requirements by issuing additional equity, which
could be dilutive to our stockholders.
Restrictive Covenants in Our Credit Facility May Restrict Our Ability to
Implement Our Growth Strategy, Respond to Changes in Industry Conditions, Secure
Additional Financing and Make Acquisitions.
Our credit facility contains restrictive covenants that:
o require us to attain specified pre-tax income
o limit our ability to incur additional debt
o require us to achieve specific financial ratios
o restrict our ability to make capital expenditures or acquisitions
20
If our business needs require us to take on additional debt, secure
financing or make significant capital expenditures or acquisitions, and we are
unable to comply with these restrictions, we would be forced to negotiate with
our lenders to waive these covenants or amend the terms of our credit facility.
At May 31, 2001, November 30, 2001 and in the first quarter of 2002, the Company
was not in compliance with certain of its pre-tax income covenants. The Company
received waivers for the May 31, 2001 and February 28, 2002 violations and has
not received a waiver for the November 30, 2001 violation related to pre-tax
income. Accordingly, the bank obligations of $86,525 have been classified as a
current liability on the accompanying consolidated balance sheet. Management is
in the process of requesting a waiver for the violation. Subsequent to November
30, 2001, the Company repaid $79,800 of its $86,525 obligation at November 30,
2001, resulting in bank obligations outstanding at March 15, 2002 of $6,725. The
Company will violate its pre-tax income covenant if it reports a pre-tax loss
for the quarter ended May 31, 2002. Achieving pre-tax income for this quarter is
significantly dependant upon the timing of customer acceptance of new
technologies, customer demand and the ability of our vendors to supply
sufficient quantities to fulfill anticipated customer demand, among other
factors. Although we have been able in the past to obtain waivers, we cannot
assure you that any future negotiations with our lenders would be successful.
There Are Claims of Possible Health Risks from Wireless Handsets.
Claims have been made alleging a link between the non-thermal
electromagnetic field emitted by wireless handsets and the development of
cancer, including brain cancer. The television program 20/20 on ABC reported
that several of the handsets available on the market, when used in certain
positions, emit radiation to the user's brain in amounts higher than permitted
by the Food and Drug Administration. The scientific community is divided on
whether there is any risk associated with the use of wireless handsets and, if
so, the magnitude of the risk. Unfavorable publicity, whether or not warranted,
medical studies or findings or litigation could have a material adverse effect
on our growth and financial results.
In the past, several plaintiffs' groups have brought class actions against
wireless handset manufacturers and distributors, including us, alleging that
wireless handsets have caused cancer. To date, none of these actions has been
successful. However, actions based on these or other claims may succeed in the
future and have a material adverse effect on us.
Several Domestic and Foreign Governments Are Considering, or Have Recently
Adopted, Legislation That Restricts the Use of Wireless Handsets While Driving.
Several foreign governments have adopted, and a number of U.S. state and
local governments are considering or have recently enacted, legislation that
would restrict or prohibit the use of a wireless handset while driving a vehicle
or, alternatively, require the use of a hands-free telephone. For example, Ohio
and New York have adopted statutes that restricts the use of wireless handsets
or requires the use of a hands-free kit while driving. Widespread legislation
that restricts or prohibits the use of wireless handsets while operating a
vehicle could have a material adverse effect on our future growth.
21
Our Stock Price Could Fluctuate Significantly.
The market price of our common stock could fluctuate significantly in
response to various factors and events, including:
o operating results being below market expectations
o announcements of technological innovations or new products by us
or our competitors
o loss of a major customer or supplier
o changes in, or our failure to meet, financial estimates by
securities analysts
o industry developments
o economic and other external factors
o period-to-period fluctuations in our financial results
o financial crises in foreign countries
o general downgrading of our industry sector by securities analysts
In addition, the securities markets have experienced significant price and
volume fluctuations over the past several years that have often been unrelated
to the operating performance of particular companies. These market fluctuations
may also have a material adverse effect on the market price of our common stock.
John J. Shalam, Our President and Chief Executive Officer, Owns a Significant
Portion of Our Common Stock and Can Exercise Control over Our Affairs.
Mr. Shalam beneficially owns approximately 54% of the combined voting power
of both classes of common stock. This will allow him to elect our Board of
Directors and, in general, to determine the outcome of any other matter
submitted to the stockholders for approval. Mr. Shalam's voting power may have
the effect of delaying or preventing a change in control of Audiovox.
We have two classes of common stock: Class A common stock is traded on the
Nasdaq Stock Market under the symbol VOXX, and Class B common stock, which is
not publicly traded and substantially all of which is beneficially owned by Mr.
Shalam. Each share of Class A common stock is entitled to one vote per share and
each share of Class B common stock is entitled to ten votes per share. Both
classes vote together as a single class, except in certain circumstances, for
the election and removal of directors and as otherwise may be required by
Delaware law. Since our charter permits shareholder action by written consent,
Mr. Shalam may be able to take significant corporate actions without prior
notice and a shareholder meeting.
Item 2 - Properties
As of November 30, 2001, the Company leased a total of twenty-four
operating facilities located in nine states. The leases have been classified as
operating leases, with the exception of one, which is recorded as a capital
lease. Wireless utilizes eight of these facilities located in California, New
York, Virginia and Canada. The Electronics Group utilizes sixteen of these
facilities located in California, Florida, Georgia, Massachusetts, New York,
Ohio, Tennessee and Texas. These facilities serve as offices, warehouses,
distribution centers or retail locations for both Wireless and Electronics.
22
Additionally, the Company utilizes public warehouse facilities located in
Norfolk, Virginia and Sparks, Nevada for its Electronics Group and in Miami,
Florida, Toronto, Canada, Farmingdale, New York, Rancho Dominguez, California
and Tilburg, Netherlands for its Wireless Group. The Company also owns and
leases facilities in Canada, Venezuela and Malaysia for its Electronics Group.
Item 3 - Legal Proceedings
The Company is currently, and has in the past been, a party to routine
litigation incidental to its business. During 2001, the Company, along with
other suppliers, manufacturers and distributors of hand-held wireless
telephones, was named as a defendant in five class action lawsuits alleging
damages relating to exposure to radio frequency radiation from hand-held
wireless telephones. These class actions have been consolidated and transferred
to a Multi-District Litigation Panel before the United States District Court of
the District of Maryland. There are various procedural motions pending and no
discovery has been conducted to date. The Company has asserted indemnification
claims against the manufacturers of the hand-held wireless telephones. The
Company is vigorously defending these class action lawsuits. The Company does
not expect the outcome of any pending litigation to have a material adverse
effect on its consolidated financial position.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2001.
23
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
- -------------------------------------------------------------------------------
Summary of Stock Prices and Dividend Data
The Class A Common Stock of Audiovox are traded on the Nasdaq Stock Market
under the symbol VOXX. No dividends have been paid on the Company's common
stock. The Company is restricted by agreements with its financial institutions
from the payment of common stock dividends while certain loans are outstanding
(see Liquidity and Capital Resources of Management's Discussion and Analysis).
There are approximately 522 holders of record of our Class A Common Stock and 4
holders of Class B Convertible Common Stock.
Class A Common Stock
Average
Daily
Trading
Fiscal Period High Low Volume
- ------------- ---- --- ------
2000
First Quarter 65.50 25.00 443,904
Second Quarter 72.50 16.63 713,149
Third Quarter 30.94 13.69 740,123
Fourth Quarter 18.88 9.00 355,056
2001
First Quarter 14.13 373,083
Second Quarter 12.13 7.28 162,019
Third Quarter 12.10 8.37 82,509
Fourth Quarter 9.39 5.90 105,022
24
Item 6 - Selected Financial Data
Years ended November 30, 1997, 1998, 1999, 2000 and 2001:
(Dollars in thousands, except per share data)
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Net sales $ 640,681 $ 618,237 $ 1,161,533 $ 1,704,459 $ 1,267,746
Income (loss) before extraordinary item 21,022 2,972 27,246 25,040 (8,209)
Extraordinary item -- -- -- 2,189 --
Net income (loss) 21,022 2,972 27,246 27,229 (8,209)
Net income (loss) per common share
before extraordinary item:
Basic 1.11 0.16 1.43 1.17 (0.38)
Diluted 1.09 0.16 1.39 1.11 (0.38)
Net income (loss) per common share:
Basic 1.11 0.16 1.43 1.27 (0.38)
Diluted 1.09 0.16 1.39 1.21 (0.38)
Total assets 289,827 279,679 475,083 501,887 533,368
Long-term obligations, less current
installments 38,996 33,724 122,798 23,468 10,040
Stockholders' equity 187,892 177,720 216,744 330,503 321,946
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking Statements
This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Words such as "may," "believe," "estimate,"
"expect," "plan," "intend," "project," "anticipate," "continues," "could,"
"potential," "predict" and similar expressions may identify forward-looking
statements. The Company has based these forward-looking statements on its
current expectations and projections about future events, activities or
developments. The Company's actual results could differ materially from those
discussed in or implied by these forward-looking statements. Forward-looking
statements include statements relating to, among other things:
o growth trends in the wireless, 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
25
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 and availability
The Company markets its products under the Audiovox brand name as well as
private labels to 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
95%-owned subsidiary of Audiovox, and Quintex, which is a wholly-owned
subsidiary of ACC. ACC markets wireless handsets and accessories on a wholesale
basis to wireless carriers primarily in the United States and, to a lesser
extent, carriers overseas. Quintex is a small operation for the direct sale of
handsets, accessories and wireless telephone service.
The Electronics Group consists of two wholly-owned subsidiaries, Audiovox
Electronics Corporation (AEC) and American Radio Corp., and three majority-owned
subsidiaries, Audiovox Communications (Malaysia) Sdn. Bhd., Audiovox Holdings
(M) Sdn. Bhd. and Audiovox Venezuela, C.A. The Electronics Group markets
automotive sound and security systems, electronic car accessories, home and
portable sound products, FRS radios, in-vehicle video systems, flat-screen
televisions, DVD's and navigation systems. Sales are made through an extensive
distribution network of mass merchandisers, power retailers and others. In
addition, the Company sells some of its products directly to automobile
manufacturers on an OEM basis.
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.
From fiscal 1996 through 2001, several major events and trends have
affected the Company's results and financial conditions.
Wireless increased its handset sales from 2.1 million units in fiscal 1996
to an all-time high of 8.9 million units in fiscal 2000 back to 7.0 million
units in 2001. This overall growth in unit sales from
26
1996 was primarily due to:
o the introduction of digital technology, which has allowed carriers to
significantly increase subscriber capacity
o reduced cost of service and expanded feature options
During this period, Wireless' unit gross profit margin declined due to
continued strong competition. Wireless' gross margin dollars has significantly
increased overall due to the overall large increases in net sales.
Sales by the Electronics Group were $188.4 million in 1996 and $193.9
million in 1997, but declined in 1998 to $185.0 million, primarily due to the
financial crisis in Asia, particularly Malaysia. Sales for fiscal 1999, fiscal
2000 and fiscal 2001 were $242.5 million, $278.3 million and $301.0 million,
respectively. During this period, the Company's sales were impacted by the
following items:
o the growth of our consumer electronic products business from $2.9
million in fiscal 1996 to $81.2 million in fiscal 2001
o the introduction of mobile video entertainment systems and other new
technologies
o the Asian financial crisis in 1998
o growth of OEM business
Gross margins in the Company's electronics business increased from 18.9% in
1996 to 20.3% for fiscal 2001 due, in part, to higher margins in mobile video
products, other new technologies and products and the growth of the
international business.
The Company's total operating expenses have increased at a slower rate than
sales since 1996. Total operating expenses were $83.3 million in 1996 and $111.1
million in 2001. The Company has invested in management systems and improved its
operating facilities to increase its efficiency.
During the period 1996 to 2001, the Company's balance sheet was
strengthened by the conversion of its $65 million 6 1/4% subordinated
convertible debentures due 2001 into approximately 9.7 million shares of Class A
common stock, the gain, net of taxes, of $23.7 million from the sale of CellStar
stock held by the Company and the 2.3 million share follow-on offering in which
the Company received $96.6 million net proceeds.
All financial information, except share and per share data, is presented in
thousands.
Critical Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission (SEC), requires all companies to include a
discussion of critical accounting policies or method used in the preparation of
financial statements. Note 1 of the Notes to the Consolidated Financial
Statements includes a summary of the significant accounting policies and methods
used in the preparation of the Consolidated Financial Statements. The following
is a brief discussion of the more critical accounting policies and methods used
by the Company.
27
In addition, Financial Reporting Release No. 61 was recently released by
the SEC to require all companies to include a discussion to address, among other
things, liquidity, off-balance sheet arrangements, contractual obligations and
commercial commitments.
General
The consolidated financial statements of the Company are prepared in
conformity with accounting principles generally accepted in the United States of
America. As such, the Company is required to make certain estimates, judgments
and assumptions that management believes are reasonable based upon the
information available. These estimates and assumptions affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. The
significant accounting policies which the Company believes are the most critical
to aid in fully understanding and evaluating the reported consolidated financial
results include the following:
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment
and passage of title to the customer. The Company also records an estimate of
returns. Management continuously monitors and tracks such product returns and
records a provision for the estimated amount of such future returns, based on
historical experience and any notification the Company receives of pending
returns. While such returns have historically been within management's
expectations, a significant product return was recorded in 2001, which was
netted against revenue. The Company cannot guarantee that it will continue to
experience the same return rates that it has in the past. Although the Company
generally does not give price protection to its customers, on occasion, the
Company will offer such price protection to its customers. The Company accrues
for price protection when such agreements are entered into with its customers,
which was netted against revenue. There can be no assurances that the Company
will not need to offer price protection to its customers in the future. Any
significant price protection agreements or increase in product returns could
have a material adverse impact on the Company's operating results for the period
or periods in which such price protection is offered or returns materialize.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's current
credit worthiness, as determined by a review of their current credit
information. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that have been
identified. The Company's reserve for estimated credit losses at November 30,
2001 was $5.6 million. While such credit losses have historically been within
management's expectations and the provisions established, the Company cannot
guarantee that it will continue to experience the same credit loss rates that
have been experienced in the past. Since the Company's accounts receivable is
concentrated in a relatively few number of customers, a significant change in
the liquidity or financial position of any one of these customers could have a
material adverse impact on the collectability of the Company's accounts
receivables and future operating results. See
28
Cautionary Factors That May Affect Future Results - We Depend on a Small Number
of Key Customers For a Large Percentage of Our Sales.
Trade and Promotional Allowances
The Company offers trade and promotional co-operative advertising
allowances, market development funds and volume incentive rebates to certain of
its customers. These arrangements allow customers to take deductions against
amounts owed to the Company for product purchases or entitle them to receive a
payment from the Company. The Company negotiates varying terms regarding the
amounts and types of arrangements dependant upon the products involved, customer
or type of advertising. These arrangements are made primarily on a verbal basis.
The Company initially accrues for all of its co-operative advertising
allowances, market development funds and volume incentive rebates as this
represents the Company's full obligation. With respect to the volume incentive
rebates, the customers are required to purchase a specified volume of a
specified product. The Company accrues for the rebate as product is shipped.
When specified volume levels are not achieved, and, therefore, the customer is
not entitled to the funds, the Company revises its estimate of its liability.
The accrual for co-operative advertising allowances, market development funds
and volume incentive rebates at November 30, 2001 was $10.4 million. The Company
continuously monitors the requests made by its customers and revises its
estimate of the liability under these arrangements based upon the likelihood of
its customers not requesting the funds. The Company's estimates of amounts
requested by its customers in connection with these arrangements may prove to be
inaccurate, in which case the Company may have understated or overstated the
provision required for these arrangements. In the future, if the liability for
these arrangements is determined to be overstated, the Company would be required
to recognize such additional operating income at the time such determination is
made. Likewise, if the liability for these arrangements is determined to be
understated, the Company would be required to recognize such additional
operating expenses at the time the customer makes such requests. Therefore,
although the Company makes every effort to ensure the accuracy of its estimates,
any significant unanticipated changes in the purchasing volume of its customers
could have a significant impact on the liability and the Company's reported
operating results.
Inventories
The Company values its inventory at the lower of the actual cost to
purchase and/or the current estimated market value of the inventory less
expected costs to sell the inventory. The Company regularly reviews inventory
quantities on-hand and records a provision for excess and obsolete inventory
based primarily on the Company's estimated forecast of product demand. As
demonstrated in recent years, demand for the Company's products can fluctuate
significantly. A significant sudden increase in the demand for the Company's
products could result in a short-term increase in the cost of inventory
purchases while a significant decrease in demand could result in an increase in
the amount of excess inventory quantities on-hand. In addition, the Company's
industry is characterized by rapid technological change and frequent new product
introductions that could result in an increase in the amount of obsolete
inventory quantities on-hand. In such situations, the Company generally does not
obtain price protection from its vendors, however, on occasion, the Company has
received price protection which reduces the cost of inventory. There can be no
assurances that the Company will be successful in negotiating such price
protection from its vendors in the future. Additionally, the Company's estimates
of future product
29
demand may prove to be inaccurate, in which case the Company may have
understated or overstated the provision required for excess and obsolete
inventory. In the future, if the Company's inventory is determined to be
overvalued, it would be required to recognize such costs in its cost of goods
sold at the time of such determination. Likewise, if the Company does not
properly estimate the lower of cost or market of its inventory and it is
therefore determined to be undervalued, it may have over- reported its cost of
goods sold in previous periods and would be required to recognize such
additional operating income at the time of sale. Therefore, although the Company
makes every effort to ensure the accuracy of its forecasts of future product
demand, any significant unanticipated changes in demand or technological
developments could have a significant impact on the value of the Company's
inventory and its reported operating results. 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. In particular, at November 30, 2001, the Company had on
hand 575,000 units of a certain phone model, which , after write-down, was
valued at $75,423. In the near future, the Company expects to introduce a new
model, as well as new technologies and, therefore, no guarantee can be made that
further reductions in the carrying value of this model or any other models will
not be required. See Cautionary Factors That May Affect Future Results - Our
Success Depends on Our Ability to Keep Pace with Technological Advances in the
Wireless Industry.
Warranties
The Company offers warranties of various lengths to its customers depending
upon the specific product. The Company's standard warranties require the Company
to repair or replace defective product returned to the Company during such
warranty period at no cost to the customer. The Company records an estimate for
warranty related costs based upon its actual historical return rates and repair
costs at the time of sale, which are included in cost of sales. The estimated
liability for future warranty expense amounted to $9.2 million at November 30,
2001, which has been included in accrued expenses and other current liabilities.
While the Company's warranty costs have historically been within its
expectations and the provisions established, the Company cannot guarantee that
it will continue to experience the same warranty return rates or repair costs
that have been experienced in the past. A significant increase in product return
rates, or a significant increase in the costs to repair the Company's products,
could have a material adverse impact on its operating results for the period or
periods in which such returns or additional costs materialize.
30
Results of Operations
The following table sets forth for the periods indicated certain statements
of operations data for the Company expressed as a percentage of net sales:
Percentage of Net Sales
Years Ended November 30,
--------------------------------
1999 2000 2001
---- ---- ----
Net sales:
Wireless
Wireless products 76.2% 81.7% 73.9%
Activation commissions 2.1 1.7 2.1
Residual fees 0.3 0.1 0.2
Other 0.5 0.2 0.1
----- ----- -----
Total Wireless 79.1 83.7 76.3
----- ----- -----
Electronics
Mobile electronics 10.1 7.9 12.6
Sound 7.1 4.6 4.6
Consumer electronics 3.3 3.6 6.4
Other 0.3 0.2 0.1
----- ----- -----
Total Electronics 20.9 16.3 23.7
----- ----- -----
Total net sales 100.0 100.0 100.0
Cost of sales (88.4) (91.0) (92.1)
----- ----- -----
Gross profit 11.6 9.0 7.9
Selling (3.2) (2.7) (3.2)
General and administrative (3.8) (2.9) (3.7)
Warehousing, assembly and repair (1.3) (1.1) (1.9)
----- ----- -----
Total operating expenses (8.3) (6.7) (8.8)
----- ----- -----
Operating income (loss) 3.3 2.3 (0.9)
Interest and bank charges (0.4) (0.4) (0.5)
Equity in income in equity investments 0.3 0.2 0.3
Gain on sale of investments 0.3 0.1 --
Gain on hedge of available-for-sale securities -- 0.1 --
Gain on issuance of subsidiary shares 0.3 -- --
Other, net (0.2) 0.1 0.1
----- ----- -----
Income (loss) before provision for (recovery of) income
taxes 3.6 2.4 (1.0)
(Provision for) recovery of income taxes (1.3) (0.9) (0.4)
Extraordinary item -- 0.1 --
----- ----- -----
Net income (loss) 2.3 % 1.6 % (0.6)%
===== ===== =====
31
The net sales and percentage of net sales by product line and marketing
group for the fiscal years ended November 30, 1999, 2000 and 2001 are reflected
in the following table. Certain reclassifications and recaptionings have been
made to the data for periods prior to fiscal 2001 in order to conform to fiscal
2001 presentation.
Fiscal Year Ended November 30,
-----------------------------------------------------------------------------------------
1999 2000 2001
------------------ -------------------- ---------------------
Net sales:
Wireless
Products $ 885,130 76.2% $1,391,741 81.7% $ 936,734 73.9%
Activation
commissions 24,412 2.1 28,983 1.7 26,879 2.1
Residual fees 2,939 0.3 1,852 0.1 2,396 0.2
Other 6,197 0.5 3,619 0.2 692 0.1
---------- ----- ---------- ----- ---------- -----
Total Wireless 918,678 79.1 1,426,195 83.7 966,701 76.3
---------- ----- ---------- ----- ---------- -----
Electronics
Mobile electronics 117,946 10.1 135,557 7.9 159,619 12.6
Sound 82,800 7.1 77,790 4.6 58,104 4.6
Consumer electronics 38,150 3.3 60,968 3.6 81,161 6.4
Other 3,959 0.3 3,949 0.2 2,161 0.1
---------- ----- ---------- ----- ---------- -----
Total Electronics 242,855 20.9 278,264 16.3 301,045 23.7
---------- ----- ---------- ----- ---------- -----
Total $1,161,533 100.0% $1,704,459 100.0% $1,267,746 100.0%
========== ===== ========== ===== ========== =====
Fiscal 2000 Compared to Fiscal 2001
Consolidated Results
Net sales for fiscal 2001 were $1,267,746, a 25.6% decrease from net sales
of $1,704,459 in fiscal 2000. Wireless Group sales were $966,701 in fiscal year
2001, a 32.2% decrease from sales of $1,426,195 in fiscal 2000. Unit sales of
wireless handsets decreased 21.4% to approximately 7,000,000 units in fiscal
2001 from approximately 8,909,000 units in fiscal 2000. The average selling
price of the Company's handsets decreased to $127 per unit in fiscal 2001 from
$150 per unit in fiscal 2000.
Electronics Group sales were $301,045 in fiscal 2001, an 8.2% increase from
sales of $278,264 in fiscal 2000. This increase was largely due to increased
sales in the mobile video and consumer electronics product lines. Sales by the
Company's international subsidiaries increased 6.2% in fiscal 2001 to
approximately $28.0 million, primarily due to a 41.7% increase in Venezuela,
partially offset by a 17.8% decrease in Malaysia.
Gross profit margin for fiscal 2001 was 7.9%, compared to 9.0% in fiscal
2000. This decline in profit margin resulted primarily from $20,650 of inventory
write-downs to market and margin reductions in Wireless attributable to
increased sales of digital products, which have lower margins offset by the
reimbursement of $4,550 received from a manufacturer for upgrades. Due to
specific technical requirements of individual carrier customers, carriers place
large purchase commitments for digital handsets with Wireless, which results in
a lower selling price which then lowers gross margins.
32
Operating expenses were $111,075 in fiscal 2001, compared to $113,844 in
fiscal 2000. As a percentage of net sales, operating expenses increased to 8.8%
in fiscal 2001 from 6.7% in fiscal 2000. Operating loss for fiscal 2001 was
$10,537, compared to operating income of $38,524 in 2000.
During 2000, the Company also recorded an extraordinary gain of $2,189 in
connection with the extinguishment of debt.
Net loss for fiscal 2001 was $8,209 compared to net income of $27,229 in
fiscal 2000. Loss per share was $(0.38), basic and diluted compared to $1.17,
basic, and $1.11, diluted, and $1.27, basic and $1.21, diluted after
extraordinary item, in fiscal 2000.
Wireless Results
The following table sets forth for the fiscal years indicated certain
statements of operations data for Wireless expressed as a percentage of net
sales:
2000 2001
Net sales:
Wireless products $ 1,391,741 97.6% $ 936,734 96.9%
Activation commissions 28,983 2.0 26,879 2.8
Residual fees 1,852 0.1 2,396 0.2
Other 3,619 0.3 692 0.1
----------- ----- --------- -----
Total net sales 1,426,195 100.0 966,701 100.0
Gross profit 93,184 6.5 39,176 4.1
Total operating expenses 54,524 3.8 49,219 5.1
----------- ----- --------- -----
Operating income (loss) 38,660 2.7 (10,043) (1.0)
Other expense (7,663) (0.5) (7,689) (0.8)
----------- ----- --------- -----
Pre-tax income (loss) $ 30,997 2.2% $ (17,732) (1.8)%
=========== ===== ========= =====
Wireless is composed of ACC and Quintex, both subsidiaries of the
Company.
Net sales were $966,701 in fiscal 2001, a decrease of $459,494, or 32.2%,
from fiscal 2000. Unit sales of wireless handsets decreased by 1,909,000 units
in fiscal 2001, or 21.4%, to approximately 7,000,000 units from 8,909,000 units
in fiscal 2000. This decrease was attributable to decreased sales of both analog
and digital handsets which was due to delayed digital product acceptances by our
customers and slower sales. The average selling price of handsets decreased to
$127 per unit in fiscal 2001 from $150 per unit in fiscal 2000. Unit gross
profit margins decreased to 3.1% in fiscal 2001 from 5.7% in fiscal 2000,
reflecting an increase in average unit cost. During 2000 and 2001, Wireless
adjusted the carrying value of its analog inventory by recording write-downs to
market of $8,152 and $13,500, respectively. These charges enabled Wireless to
effectively exit the active analog hand-held market. However, even as Wireless
and the wireless communications market continues to shift away from analog to
digital technology, Wireless will continue, upon request by its customers, to
sell analog telephones on a limited basis to specific customers to support
specific carrier programs. During the fourth quarter ended November 30, 2001,
Wireless adjusted the carrying value of certain digital inventory by recording
33
a write-down to market of $7,150. During the quarter ended November 30, 2001,
the Company recorded a reduction to cost of sales of approximately $4,550 for
reimbursement from a manufacturer for upgrades performed in 2001 on certain
digital phones which partially offset the decline in margins.
Operating expenses decreased to $49,219 in fiscal 2001 from $54,524 in
fiscal 2000. As a percentage of net sales, however, operating expenses increased
to 5.1% during fiscal 2001 compared to 3.8% in fiscal 2000. Selling expenses
decreased in fiscal 2001 from fiscal 2000, primarily in divisional marketing
expenses. During 2000 and 2001, $8,265 and $12,820, respectively, was recorded
in income as a result of changes in the estimated amount due under accrued
market development and cooperative advertising programs. This decrease was
partially offset by an increase in commissions. General and administrative
expenses decreased in fiscal 2001 from fiscal 2000, primarily in bad debt
expense, partially offset by increases in office salaries and travel.
Warehousing, assembly and repair expenses increased in fiscal 2001 from fiscal
2000, primarily in direct labor. Pre-tax loss for fiscal 2001 was $(17,732), a
decrease of $48,729 from fiscal 2000.
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. Also, timely
delivery and carrier acceptance of new product could affect our quarterly
performance. Suppliers have to continually add new products in order for the
Company to improve margins. The change to 1XXT and GPS phones requires extensive
testing and software development which could delay entry into the market and
affect our digital sales in the future. In addition, given the anticipated
emergence of new technologies in the wireless industry, the Company will need to
sell existing inventory quantities of current technologies to avoid further
write-downs to market.
Electronics Results
The following table sets forth for the fiscal years indicated certain
statements of income data for the Electronics Group expressed as a percentage of
net sales:
2000 2001
Net sales:
Mobile electronics $ 135,557 48.7% $ 159,619 53.0%
Sound 77,790 27.9 58,104 19.3
Consumer electronics 60,968 21.9 81,161 27.0
Other 3,949 1.5 2,161 0.7
--------- ----- --------- -----
Total net sales 278,264 100.0 301,045 100.0
Gross profit 60,066 21.6 61,225 20.3
Total operating expenses 43,360 15.6 48,491 16.1
--------- ----- --------- -----
Operating income 16,706 6.0 12,734 4.2
Other expense (1,937) (0.7) (178) --
--------- ----- --------- -----
Pre-tax income $ 14,769 5.3% $ 12,556 4.2%
========= ===== ========= =====
34
Net sales were $301,045 in fiscal 2001, an 8.2% increase from net sales of
$278,264 in fiscal 2000. Mobile and consumer electronics' sales increased over
last year, partially offset by a decrease in sound. Mobile electronics increased
$24,062 (17.8%) during 2001 from 2000. Sales of mobile video within the mobile
electronics category increased over 27% in fiscal 2001 from fiscal 2000.
Consumer electronics increased 33.1% to $81,161 in fiscal 2001 from $60,968 in
fiscal 2000. These increases were due to the introduction of new product lines
in both categories. These increases were partially offset by a decrease in the
sound category, particularly SPS, AV, private label and Prestige audio lines.
Gross profit margins decreased to 20.3% in fiscal 2001 from 21.6% in fiscal
2000, primarily in AV, Private Label and Prestige Security, partially offset by
an increase in Prestige Audio and international operations.
Operating expenses were $48,491 in fiscal 2001, an 11.8% increase from
operating expenses of $43,360 in fiscal 2000. As a percentage of net sales,
operating expenses increased to 16.1% during fiscal 2001 compared to 15.6% in
fiscal 2000. Selling expenses increased during fiscal 2001, primarily in
commissions, advertising and divisional marketing. General and administrative
expenses increased from fiscal 2000, mostly in office salaries, insurance, bad
debt, depreciation and amortization. Warehousing and assembly expenses increased
in fiscal 2001 from fiscal 2000, primarily due to field warehousing expense and
direct labor. Pre-tax income for fiscal 2001 was $12,556, a decrease of $2,213
from fiscal 2000.
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, certain of its products are
subject to price fluctuations which could affect the carrying value of
inventories and gross margins in the future.
Other Income and Expense
Interest expense and bank charges decreased $388 during fiscal 2001 from
fiscal 2000, primarily due to decreased interest rates on similar borrowing
levels.
Equity in income of equity investees increased by approximately $1,014 for
fiscal 2001 compared to fiscal 2000. The majority of the increase was due to
increases in the equity income of ASA.
In addition, there were several non-recurring transactions which resulted
in other income of $3,886 in fiscal 2000.
Provision for Income Taxes
The effective tax expense rate for 2000 was 37.3%. The effective tax
benefit rate in 2001 was 32.4%. The decrease in the effective tax rate is due to
the Company having a loss in 2001 for federal purposes combined with state tax
expense on certain profitable subsidiaries.
35
Fiscal 1999 Compared to Fiscal 2000
Consolidated Results
Net sales for fiscal 2000 were $1,704,459, a 46.7% increase from net sales
of $1,161,533 in fiscal 1999. Wireless Group sales were $1,426,195 in fiscal
year 2000, a 55.2% increase from sales of $918,678 in fiscal 1999. Unit sales of
wireless handsets increased 46.9% to approximately 8,909,000 units in fiscal
2000 from approximately 6,067,000 units in fiscal 1999. The average selling
price of the Company's handsets increased to $150 per unit in fiscal 2000 from
$140 per unit in fiscal 1999.
Electronics Group sales were $278,264 in fiscal 2000, a 14.6% increase from
sales of $242,855 in fiscal 1999. This increase was largely due to increased
sales in the mobile video and consumer electronics product lines. Sales by the
Company's international subsidiaries increased 2.8% in fiscal 2000 to
approximately $25.8 million as a result of improvements in the Malaysian
subsidiary.
Gross profit margin for fiscal 2000 was 9.0%, compared to 11.6% in fiscal
1999. This decline in profit margin resulted primarily from an $8,152 analog
inventory cost reduction and margin reductions in Wireless attributable to
increased sales of digital handsets, which have lower margins. Due to specific
technical requirements of individual carrier customers, carriers place large
purchase commitments for digital handsets with Wireless, which results in a
lower selling price which then lowers gross margins. Gross profit increased
13.2% to $152,368 in fiscal 2000, versus $134,628 in fiscal 1999.
Operating expenses were $113,844 in fiscal 2000, compared to $96,391 in
fiscal 1999. As a percentage of net sales, operating expenses decreased to 6.7%
in fiscal 2000 from 8.3% in fiscal 1999. Operating income for fiscal 2000 was
$38,524, an increase of $287 from fiscal 1999.
During 2000, the Company also recorded an extraordinary gain of $2,189 in
connection with the extinguishment of debt.
Net income for fiscal 2000 was $27,229 compared to $27,246 in fiscal 1999.
Earnings per share before extraordinary item were $1.17, basic, and $1.11,
diluted, and $1.27, basic and $1.21, diluted after extraordinary item, in fiscal
2000 compared to $1.43, basic and $1.39, diluted, in fiscal 1999.
36
Wireless Results
The following table sets forth for the fiscal years indicated certain
statements of income data for Wireless expressed as a percentage of net sales:
1999 2000
Net sales:
Wireless products $ 885,130 96.3% $ 1,391,741 97.6%
Activation commissions 24,412 2.7 28,983 2.0
Residual fees 2,939 0.3 1,852 0.1
Other 6,197 0.7 3,619 0.3
--------- ----- ----------- -----
Total net sales 918,678 100.0 1,426,195 100.0
Gross profit 81,679 8.9 93,184 6.5
Total operating expenses 44,248 4.8 54,524 3.8
--------- ----- ----------- -----
Operating income 37,431 4.1 38,660 2.7
Other expense (6,176) 0.7 (7,663) (0.5)
--------- ----- ----------- -----
Pre-tax income $ 31,255 3.4% $ 30,997 2.2%
========= ===== =========== =====
Wireless is composed of ACC and Quintex, both subsidiaries of the Company.
Net sales were $1,426,195 in fiscal 2000, an increase of $507,517, or
55.3%, from fiscal 1999. Unit sales of wireless handsets increased by 2,842,000
units in fiscal 2000, or 46.9%, to approximately 8,909,000 units from 6,067,000
units in fiscal 1999. This increase was attributable to sales of portable,
digital products. The addition of a new supplier also provided a variety of new
digital, wireless products that contributed to the sales increase. The average
selling price of handsets increased to $150 per unit in fiscal 2000 from $140
per unit in fiscal 1999. The number of new wireless subscriptions processed by
Quintex increased 30.9% in fiscal 2000, with a corresponding increase in
activation commissions of approximately $4,571 in fiscal 2000. The average
commission received by Quintex per activation decreased by approximately 9.3% in
fiscal 2000 from fiscal 1999 due to changes within the commission structure with
the various carriers. Unit gross profit margins decreased to 5.7% in fiscal 2000
from 7.8% in fiscal 1999, reflecting an increase in average unit cost, partially
offset by an increase in selling prices. During 2000, Wireless adjusted the
carrying value of its analog inventory by recording an $8,152 cost reduction.
This charge will enable Wireless to effectively exit the active analog market.
However, even as Wireless and the wireless communications market continues to
shift away from analog to digital technology, Wireless will continue to sell
analog telephones on a limited basis to specific customers to support specific
carrier programs.
Operating expenses increased to $54,524 in fiscal 2000 from $44,248 in
fiscal 1999. As a percentage of net sales, however, operating expenses decreased
to 3.8% during fiscal 2000 compared to 4.8% in fiscal 1999. Selling expenses
increased in fiscal 2000 from fiscal 1999, primarily in commissions and
divisional marketing expenses. General and administrative expenses increased in
fiscal 2000 from fiscal 1999, primarily in office salaries, temporary personnel,
depreciation and amortization. Warehousing, assembly and repair expenses
increased in fiscal 2000 from fiscal 1999, primarily in direct labor. Pre-tax
income for fiscal 2000 was $30,997, a decrease of $258 from fiscal 1999.
37
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. Also, timely
delivery and carrier acceptance of new product could affect our quarterly
performance.
Electronics Results
The following table sets forth for the fiscal years indicated certain
statements of income data for the Electronics Group expressed as a percentage of
net sales:
1999 2000
Net sales:
Mobile electronics $ 117,946 48.6% $ 135,557 48.7%
Sound 82,800 34.1 77,790 27.9
Consumer electronics 38,150 15.7 60,968 21.9
Other 3,959 1.6 3,949 1.5
--------- ----- --------- -----
Total net sales 242,855 100.0 278,264 100.0
Gross profit 53,025 21.9 60,066 21.6
Total operating expenses 38,645 15.9 43,360 15.6
--------- ----- --------- -----
Operating income 14,380 5.9 16,706 6.0
Other expense (3,021) (1.2) (1,937) (0.7)
--------- ----- --------- -----
Pre-tax income $ 11,359 4.7% $ 14,769 5.3%
========= ===== ========= =====
Net sales were $278,264 in fiscal 2000, a 14.6% increase from net sales of
$242,855 in fiscal 1999. Mobile and consumer electronics' sales increased over
last year, partially offset by decreases in sound and other. Mobile electronics
increased 14.9% to $135,557 during 2000 from 1999. Sales of mobile video within
the mobile electronics category increased over 40% in fiscal 2000 from fiscal
1999. Consumer electronics increased 59.8% to $60,968 in fiscal 2000 from
$38,150 in fiscal 1999. These increases were due to the introduction of new
product lines in both categories. These increases were partially offset by a
decrease in the sound category, particularly SPS, AV, private label and Prestige
audio lines.
Operating expenses were $43,360 in fiscal 2000, a 12.2% increase from
operating expenses of $38,645 in fiscal 1999. Selling expenses increased during
fiscal 2000, primarily in commissions, salesmen's salaries, advertising and
divisional marketing. General and administrative expenses increased from fiscal
1999, mostly in office salaries, occupancy costs, depreciation and amortization.
Warehousing and assembly expenses increased in fiscal 2000 from fiscal 1999,
primarily due to field warehousing expense. Pre-tax income for fiscal 2000 was
$14,769, an increase of $3,410 from fiscal 1999.
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, certain of its products are
subject to price fluctuations which could affect the carrying value of
inventories and gross margins in the future.
38
Other Income and Expense
Interest expense and bank charges increased $1,598 during fiscal 2000 from
fiscal 1999.
Equity in income of equity investees, net, decreased by approximately
$1,685 for fiscal 2000 compared to fiscal 1999. The majority of the decrease was
due to decreases in the equity income of ASA and TALK. The decrease in ASA was
due to a decrease in sales of mobile video products. The decrease in TALK was
due to a change from analog to GSM within the wireless marketplace. During
fiscal 2000, the Company disposed of its equity investment in TALK.
During 1999, the Company recorded an other-than-temporary decline in market
value of its Shintom common stock in the amount of $1,953 and a related deferred
tax benefit of $761. The write- down has been recorded as a component of other
expense in the consolidated statements of operations.
During 1999, the Company purchased an additional 3,100,000 Japanese yen
(approximately $27,467) of Shintom Debentures and exercised its option to
convert 2,882,788 Japanese yen of Shintom debentures into shares of Shintom
common stock. The Company sold the Shintom common stock yielding net proceeds of
$27,916 and a gain of $3,501.
During 2000, the Company exercised its option to convert 800,000 Japanese
yen of Shintom debentures into shares of Shintom common stock. The Company sold
the Shintom common stock, yielding net proceeds of $12,376 and a gain of $1,850.
During 2000, the Company sold 200,000 shares of its CellStar common stock
yielding net proceeds of $851 and a gain of $537. In connection with the sale of
the shares, the Company recognized $1,499 ($929 net of taxes) representing the
net gain on the hedge of the available-for-sale securities (See Note 20(a)(2) to
the consolidated financial statements for further discussion).
On March 31, 1999, Toshiba Corporation, a major supplier, purchased 5% of
the Company's subsidiary, ACC, a supplier of wireless products for $5,000 in
cash. The Company currently owns 95% of ACC; prior to the transaction, ACC was a
wholly-owned subsidiary. As a result of the issuance of ACC's shares, the
Company recognized a gain of $3,800 ($2,470 net of deferred taxes) during 1999.
Provision for Income Taxes
The effective tax rate for 1999 and 2000 was 36.2% and $37.3%,
respectively. The increase in the effective tax rate was due to increased
foreign taxes offset by a decrease in the valuation allowance and a decrease in
state income taxes.
Liquidity and Capital Resources
The Company has historically financed its operations primarily through a
combination of available borrowings under bank lines of credit and debt and
equity offerings. As of November 30, 2001, the Company had working capital
(defined as current assets less current liabilities) of $282,913, which includes
cash of $3,025 compared with working capital of $305,105 at November 30, 2000,
which
39
includes cash of $6,431. Operating activities used approximately $74,076,
primarily from an increase in inventory and a decrease in accounts payable,
accrued expenses and other current liabilities, partially offset by a decrease
in accounts receivable. Investing activities provided approximately $2,026,
primarily from proceeds from distribution from an equity investee, partially
offset by the purchase of property, plant and equipment. Financing activities
provided approximately $68,685, primarily from borrowings from bank
institutions.
In February 2000, the Company completed a follow on offering of 3,565,000
Class A common shares at a price to the public of $45.00 per share. Of the
3,565,000 shares sold, the Company offered 2,300,000 shares and 1,265,000 shares
were offered by selling shareholders. Audiovox received approximately $96,573
after deducting expenses. The Company used these net proceeds to repay a portion
of amounts outstanding under their revolving credit facility, any portion of
which can be reborrowed at any time. The Company did not receive any of the net
proceeds from the sale of shares by the selling shareholders.
The Company's principal source of liquidity is its revolving credit
agreement which expires July 27, 2004. The credit agreement provides for
$250,000 of available credit, including $15,000 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.
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. As of
November 30, 2000, availability of credit under the credit agreement is a
maximum aggregate amount of $250,000, subject to certain conditions, based upon
a formula taking into account the amount and quality of its accounts receivable
and inventory. At November 30, 2001, the amount of unused available credit is
$78,551. 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 May 31, 2001, November 30, 2001 and in the first quarter of 2002, the
Company was not in compliance with certain of its pre-tax income covenants. The
Company received waivers for the May 31, 2001 and February 28, 2002 violations
and has not received a waiver for the November 30, 2001 violation related to
pre-tax income. Accordingly, the bank obligations of $86,525 have been
classified as a current liability on the accompanying consolidated balance
sheet. Management is in the process of requesting a waiver for the violation.
Subsequent to November 30, 2001, the Company repaid $79,800 of its $86,525
obligation at November 30, 2001, resulting in bank obligations outstanding at
March 15, 2002 of $6,725. The Company will violate its pre-tax income covenant
if it reports a pre-tax loss for the quarter ended May 31, 2002. Achieving
pre-tax income for this quarter is significantly dependant upon the timing of
customer acceptance of new technologies, customer demand and the ability of our
vendors to supply sufficient quantities to fulfill anticipated customer demand,
among
40
other factors. While the Company was able to obtain waivers for such violations
in 2001 and for the first quarter ended February 28, 2002, there can be no
assurance that future negotiations with the lenders would be successful,
therefore, resulting in amounts outstanding to be payable upon demand. This
credit agreement has no cross covenants with the other credit facilities
described below.
The Company also has revolving credit facilities in Malaysia to finance
additional working capital needs. As of November 30, 2001, the available line of
credit for direct borrowing, letters of credit, bankers' acceptances and other
forms of credit approximately $5,242. The Malaysian credit facilities are
partially secured by the Company under three standby letters of credit of
$1,300, $800 and $1,400 and are payable on demand or upon expiration of the
standby letters of credit which expire on January 15, 2002, August 31, 2002 and
August 31, 2002, respectively. The Company renewed the January 15, 2002 letter
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 Company also has revolving credit facilities in Venezuela to finance
additional working capital needs. The Venezuelan credit facility is secured by
the Company under a standby letter of credit in the amount of $3,500 which
expires on May 31, 2002 and is payable upon demand or upon expiration of the
standby letter of credit.
The Company also has a revolving credit facility in Brazil to finance
additional working capital needs. The Brazilian credit facility is secured by
the Company under a standby letter of credit in the amount of $100, which
expires on October 1, 2002 and is payable on demand or upon expiration of the
standby letter of credit. At November 30, 2001, outstanding obligations under
the credit facility were $254 Brazilian Bolivars ($100), and interest on the
credit facility ranged from 24% to 27%.
At November 30, 2001, the Company had outstanding standby letters of credit
aggregating $604 which expires on various dates from May 10, 2002 to July 31,
2002.
The Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At November 30,
2001, such obligations and commitments are as follows:
Payments Due By Period
----------------------------------------------------
Contractual Cash Less than After
Obligations Total 1 Year 1-3 Years 4-5 Years 5 years
Capital lease obligations $14,758 $ 553 $1,659 $1,137 $11,409
Operating leases 5,297 2,045 3,075 177 --
Other current
obligations 5,267 5,267 -- -- --
------- ------ ------ ------ -------
Total contractual cash
obligations $25,322 $7,865 $4,734 $1,314 $11,409
======= ====== ====== ====== =======
41
Amount of Commitment
Expiration per period
---------------------------------------------------
Other Total
Commercial Amounts Less than 1-3 4-5 Over
Commitments Committed 1 Year Years Years 5 years
- ----------- --------- -------- ------ ------ -------
Lines of credit $ 92,213 $ 92,213 -- - --
Standby letters
of credit 7,704 7,704 -- - --
Guarantees 300 300 -- - --
Commercial
letters of
credit 37,635 37,635 -- - --
-------- -------- ----- - -
Total commercial
commitments $137,852 $137,852 $-- - --
======== ======== ===== = ===
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.
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.
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. During 2000 and 2001, $800 was repaid to the
42
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
and several officers. Rentals for such leases are considered by management of
the Company to approximately prevailing market rates. Total lease payments
required under the leases for the five-year period ending November 30, 2005 are
$2,919.
Amounts Due from Officers
During 2000, the Company advanced $620 to an officer/director of the
Company which has been included in prepaid expenses and other current assets on
the accompanying consolidated balance sheet. On December 1, 2000, the Company
obtained an unsecured note in the amount of $620 for the advance. The note,
which bears interest at the LIBOR rate, to be adjusted quarterly, plus 1.25% per
annum, was due, principle and interest, on November 30, 2001. Subsequently, the
note was reissued for $651, including accrued interest, under the same terms,
due November 30, 2002. In addition, the Company has outstanding notes due from
various officers of the Company aggregating $235 as of November 30, 2001, which
have been included in other assets on the accompanying consolidated balance
sheet. The notes bear interest at the LIBOR rate plus 0.5% per annum. Principle
and interest are payable in equal annual installments beginning July 1, 1999
through July 1, 2003.
Transactions with Shintom and TALK
In April 2000, AX Japan purchased land and a building (the Property) from
Shintom Co., Ltd. (Shintom) for 770,000,000 Yen (approximately $7,300) and
entered into a leaseback agreement whereby Shintom has leased the Property from
AX Japan for a one-year period. This lease is being accounted for as an
operating lease by AX Japan. Shintom is a stockholder who owns all of the
outstanding preferred stock of the Company and is a manufacturer of products
purchased by the Company through its previously- owned equity investment, TALK
Corporation (TALK). The Company currently holds stock in Shintom and has
previously invested in Shintom convertible debentures.
The purchase of the Property by AX Japan was financed with a 500,000,000
Yen ($4,671) subordinated loan obtained from Vitec Co., Ltd. (Vitec), a
150,000,000 Yen loan ($1,397) from Pearl First (Pearl) and a 140,000,000 Yen
loan ($1,291) from the Company. The land and building have been included in
property, plant and equipment, and the loans have been recorded as notes payable
on the accompanying consolidated balance sheet as of November 30, 2001 . Vitec
is a major supplier to Shintom, and Pearl is an affiliate of Vitec. The loans
bear interest at 5% per annum, and principle is payable in equal monthly
installments over a six-month period beginning six months subsequent to the date
of the loans. The loans from Vitec and Pearl are subordinated completely to the
loan from the Company, and, in liquidation, the Company receives payment first.
43
Upon the expiration of six months after the transfer of the title to the
Property to AX Japan, Shintom has the option to repurchase the Property or
purchase all of the shares of stock of AX Japan. These options can be extended
for one additional six month period. The option to repurchase the building is at
a price of 770,000,000 Yen plus the equity capital of AX Japan (which in no
event can be less than 60,000,000 Yen) and can only be made if Shintom settles
any rent due AX Japan pursuant to the lease agreement. The option to purchase
the shares of stock of AX Japan is at a price not less than the aggregate par
value of the shares and, subsequent to the purchase of the shares, AX Japan must
repay the outstanding loan due to the Company. If Shintom does not exercise its
option to repurchase the Property or the shares of AX Japan, or upon occurrence
of certain events, AX Japan can dispose of the Property as it deems appropriate.
The events which result in the ability of AX Japan to be able to dispose of the
Property include Shintom petitioning for bankruptcy, failing to honor a check,
failing to pay rent, etc. If Shintom fails, or at any time becomes financially
or otherwise unable to exercise its option to repurchase the Property, Vitec has
the option to repurchase the Property or purchase all of the shares of stock of
AX Japan under similar terms as the Shintom options.
In connection with this transaction, the Company received 100,000,000 Yen
($922) from Shintom for its 2,000 shares of TALK stock. The Company had the
option to repurchase the shares of TALK at a purchase price of 50,000 Yen per
share, with no expiration date. Given the option to repurchase the shares of
TALK, the Company did not surrender control over the shares of TALK and,
accordingly, had not accounted for this transaction as a sale. In August 2000,
the Company surrendered its option to repurchase the shares of TALK. As such,
the Company recorded a gain on the sale of shares in the amount of $427 in
August 2000.
AX Japan had the option to delay the repayment of the loans for an
additional six months if Shintom extended its options to repurchase the Property
or stock of AX Japan. In September 2000, Shintom extended its option to
repurchase the Property and AX Japan delayed its repayment of the loans for an
additional six months.
In March 2001, upon the expiration of the additional six-month period, the
Company and Shintom agreed to extend the lease for an additional one-year
period. In addition, Shintom was again given the option to purchase the Property
or shares of stock of AX Japan after the expiration of a six-month period or
extend the option for one additional six-month period. AX Japan was also given
the option to delay the repayment of the loans for an additional six months if
Shintom extended its option for an additional six months.
The Company engages in transactions with Shintom and TALK. TALK, which
holds world-wide distribution rights for product manufactured by Shintom, has
given the Company exclusive distribution rights on all wireless personal
communication products for all countries except Japan, China, Thailand and
several mid-eastern countries. Through October 2000, the Company held a 30.8%
interest in TALK. The Company no longer holds an equity interest in TALK.
Transactions with Shintom and TALK include financing arrangements and
inventory purchases which approximated 11%, 7% and 1.5% for the years ended
November 30, 1999, 2000 and 2001, respectively, of total inventory purchases. At
November 30, 1999, 2000 and 2001, the Company had recorded $20, $1 and $331,
respectively, of liability due to TALK for inventory purchases included
44
in accounts payable. The Company also had documentary acceptance obligations
payable to TALK as of November 30, 1999. There were no documentary acceptance
obligations payable to TALK as of November 30, 2000 and 2001. At November 30,
1999, 2000 and 2001, the Company had recorded a receivable from TALK in the
amount of $3,741, $3,823 and $265, respectively, a portion of which is payable
with interest, which is reflected in receivable from vendors on the accompanying
consolidated financial statements.
Transactions with Toshiba
On March 31, 1999, Toshiba Corporation, a major supplier, purchased 5% of
the Company's subsidiary, Audiovox Communications Corp. (ACC), a supplier of
wireless products for $5,000 in cash. The Company currently owns 95% of ACC;
prior to the transaction ACC was a wholly-owned subsidiary. As a result of the
issuance of ACC's shares, the Company recognized a gain of $3,800 in 1999
($2,204 after provision for deferred taxes). The gain on the issuance of the
subsidiary's shares have been recognized in the consolidated statements of
operations in accordance with the Company's policy on the recognition of such
transactions.
In February 2000 and 2001, the Board of Directors of Audiovox
Communications Corp. (ACC), declared a dividend payable to its shareholders,
Audiovox Corporation, a 95% shareholder, and Toshiba Corporation (Toshiba), a 5%
shareholder. ACC paid Toshiba its share of the dividend, which approximated $859
and $1,034 in 2000 and 2001, for the years ended November 30, 1999 and 2000,
respectively.
During the year ended November 30, 2001, 34% of the Company's inventory
purchases were from Toshiba Corporation (Toshiba). Toshiba owns 5% of the
Company's Wireless subsidiary. Inventory on hand at November 30, 2001 purchased
from Toshiba approximated $99,816. During the quarter ended November 30, 2001,
the Company recorded a receivable in the amount of $4,550 from Toshiba for
upgrades that were performed by the Company in 2001 on certain models which
Toshiba manufactured. Subsequent to November 30, 2001, the amount was received
in full.
Impact of Inflation and Currency Fluctuation
Inflation has not had a significant impact on the Company's financial
position or operating results. To the extent that the Company expands its
operations into Latin America and the Pacific Rim, the effects of inflation and
currency fluctuations in those areas could have growing significance to its
financial condition and results of operations. Fluctuations in the foreign
exchange rates in Pacific Rim countries have not had a material adverse effect
on the Company's consolidated financial position, results of operations or
liquidity.
While the prices that the Company pays for the products purchased from its
suppliers are principally denominated in United States dollars, price
negotiations depend in part on the relationship between the foreign currency of
the foreign manufacturers and the United States dollar. This relationship is
dependent upon, among other things, market, trade and political factors.
45
Seasonality
The Company typically experiences some seasonality in its operations. The
Company generally experiences a substantial amount of its sales during
September, October and November. December is also a key month for the Company
due to increased demand for its products during the holiday season. This
increase results from increased promotional and advertising activities from the
Company's customers to end-users.
Recent Accounting Pronouncements
In April 2001, the Emerging Issues Task Force (EITF) reached a final
consensus on EITF Issue No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products," (EITF 00-25) which
requires that unless specific criteria are met, consideration from a vendor to a
retailer (e.g. "slotting fees", cooperative advertising agreements, "buy downs",
etc.) be recorded as a reduction from revenue, as opposed to selling expense.
This consensus is effective for fiscal quarters beginning after December 15,
2001. Management of Company is in the process of assessing the impact that
implementing EITF 00-25 will have on the consolidated financial statements.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" (Statement 141), and Statement No. 142, "Goodwill and Other
Intangible Assets" (Statement 142). Statement 141 requires companies to account
for acquisitions entered into after June 30, 2001 using purchase method and
establishes criteria to be used in determining whether acquired intangible
assets are to be recorded separately from goodwill. These criteria are to be
applied to business combinations completed after June 30, 2001. Statement 141
will require, upon adoption of Statement 142, that the Company evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and make any necessary reclassifications in order to
conform with the new criteria in Statement 141 for recognition apart from
goodwill. The Company does not believe that implementation of Statement 141 will
have an impact on the Company's financial position and results of operations.
Statement 142 requires that goodwill and intangible assets with indefinite
useful lives no longer to be amortized, but rather will be tested for impairment
at least annually. Statement 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values and reviewed for impairment in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (Statement 121). Upon adoption of Statement
142, the company will be required to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will adopt the requirement of the
provisions of Statement 142 effective December 1, 2002 and, accordingly, will
reverse into income unamortized negative goodwill, which approximates $240 at
November 30, 2001. In addition, implementation of Statement 142 will result in
the Company no longer recording amortization expense relating to its $4,732 of
goodwill, net of accumulated amortization, recorded as of November 30, 2001 of
approximately $342 per year. The Company's goodwill consists solely of equity
method goodwill and, as such, will
46
continued to be evaluated for impairment under Statement 121. The Company has no
other intangible assets with indefinite lives.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (Statement 143). Statement 143 is effective for fiscal
years beginning after June 15, 2002, and establishes an accounting standard
requiring the recording of the fair value of liabilities associated with the
retirement of long-lived assets in the period in which they are incurred. The
Company does not expect the adoption of Statement 143 to have a significant
effect on its results of operations or its financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets" (Statement 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", while retaining
the fundamental recognition and measurement provisions of that statement.
Statement No. 144 requires that a long-lived asset to be abandoned, exchanged
for a similar productive asset or distributed to owners in a spin-off to be
considered held and used until it is disposed of. However, Statement No. 144
requires that management consider revising the depreciable life of such
long-lived asset. With respect to long-lived assets to be disposed of by sale,
Statement No. 144 retains the provisions of Statement No. 121 and, therefore,
requires that discontinued operations no longer be measured on a net realizable
value basis and that future operating losses associated with such discontinued
operations no longer be recognized before they occur. Statement No. 144 is
effective for all fiscal quarters of fiscal years beginning after December 15,
2001, and will thus be adopted by the Company on December 1, 2002. The Company
has not determined the effect, if any, that the adoption of Statement No. 144
will have on the Company's consolidated financial statements.
In November 2001, the EITF reached several consensuses on Issue 01-9,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products." This Issue is a codification of the issues addressed in
EITF 00-14, "Accounting for Certain Sales Incentives," and EITF 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Product," as well as issues 2 and 3 of Issue 00-22, "Accounting for
'Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers,
and Offers for Free Products or Services to Be Delivered in the Future." In
addition, several reconciling and clarifying issues that were identified in the
codification process were addressed. The consensuses codified in Issue 01-9 must
be applied in financial statements for any interim or annual period beginning
after December 15, 2001, with the exception of the consensus on one issue which
must be applied in financial statements for any interim or annual period ending
after February 15, 2001. Accordingly, the consensus on one issue will be
effective for the quarter ended February 28, 2002 and the entire consensus which
will be effective for the quarter ended May 31, 2002. Management of the Company
is in the process of assessing the impact that implementing EITF 01-9 will have
on the consolidated financial statements.
47
Item 7a - Quantitative and Qualitative Disclosures About Market Risk
Market Risk Sensitive Instruments
The market risk inherent in the Company's market risk sensitive instruments
and positions is the potential loss arising from adverse changes in marketable
equity security prices, foreign currency exchange rates and interest rates.
Marketable Securities
Marketable securities at November 30, 2001, which are recorded at fair
value of $5,777 and include net unrealized losses of $(1,647), have exposure to
price risk. This risk is estimated as the potential loss in fair value resulting
from a hypothetical 10% adverse change in prices quoted by stock exchanges and
amounts to $578 as of November 30, 2001. Actual results may differ.
Interest Rate Risk
The Company's bank loans expose earnings to changes in short-term interest
rates since interest rates on the underlying obligations are either variable or
fixed for such a short period of time as to effectively become variable. The
fair values of the Company's bank loans are not significantly affected by
changes in market interest rates.
Foreign Exchange Risk
In order to reduce the risk of foreign currency exchange rate fluctuations,
the Company hedges transactions denominated in a currency other than the
functional currencies applicable to each of its various entities. The
instruments used for hedging are forward contracts with banks. The changes in
market value of such contracts have a high correlation to price changes in the
currency of the related hedged transactions. There were no hedge transactions at
November 30, 2001. Intercompany transactions with foreign subsidiaries and
equity investments are typically not hedged. Therefore, the potential loss in
fair value for a net currency position resulting from a 10% adverse change in
quoted foreign currency exchange rates as of November 30, 2001 is not
applicable.
The Company is subject to risk from changes in foreign exchange rates for
its subsidiaries and equity investments that use a foreign currency as their
functional currency and are translated into U.S. dollars. These changes result
in cumulative translation adjustments which are included in accumulated other
comprehensive income. On November 30, 2001, the Company had translation exposure
to various foreign currencies with the most significant being the Malaysian
ringgit, Thailand baht and Canadian dollar. The Company also has a Venezuelan
subsidiary in which translation adjustments are included in net income. The
potential loss resulting from a hypothetical 10% adverse change in quoted
foreign currency exchange rates, as of November 30, 2001, amounts to $634.
Actual results may differ.
Certain of the Company's investments in marketable securities and notes
payable are subject to risk from changes in the Japanese yen rate. As of
November 30, 2001, the amount of loss in fair value resulting from a
hypothetical 10% adverse change in the Japanese yen rate approximates $699.
48
Actual results may differ.
Item 8 - Consolidated Financial Statements and Supplementary Data
The consolidated financial statements of the Company as of November 30,
2000 and 2001 and for each of the years in the three-year period ended November
30, 2001, together with the independent auditors' report thereon of KPMG LLP,
independent auditors, are filed under this Item 8.
Selected unaudited, quarterly financial data of the Company for the years
ended November 30, 2000 and 2001 appears below:
QUARTER ENDED
----------------------------------------------
Feb. 28 May 31 Aug. 31 Nov. 30
------- ------ ------- -------
(Dollars in thousands, except per share data)
2000
Net sales $340,608 $ 382,055 $470,920 $ 510,876
Gross profit 34,868 37,131 42,747 37,622
Operating expenses 25,787 28,120 27,689 32,248
Income before provision for income taxes 8,773 11,071 15,427 4,694
Provision for income taxes 3,473 4,160 5,471 1,821
Income before extraordinary item 5,300 6,911 9,956 2,873
Extraordinary item -- -- -- 2,189
Net income 5,300 6,911 9,956 5,062
Net income per common share before extraordinary item:
Basic 0.27 0.32 0.45 0.13
Diluted 0.25 0.30 0.44 0.13
Net income per common share:
Basic 0.27 0.32 0.45 0.23
Diluted 0.25 0.30 0.44 0.23
2001
Net sales $331,052 $ 276,634 $314,258 $ 345,802
Gross profit 29,840 10,544 31,513 28,642
Operating expenses 26,250 23,725 28,717 32,382
Income (loss) before provision for (recovery of) income taxes 4,024 (12,912) 1,624 (4,882)
Provision for (recovery of) income taxes 1,458 (4,649) 618 (1,364)
Net income (loss) 2,566 (8,263) 1,006 (3,518)
Net income (loss) per common share:
Basic 0.12 (0.38) 0.05 (0.16)
Diluted 0.12 (0.38) 0.05 (0.16)
49
Independent Auditors' Report
The Board of Directors and Stockholders
Audiovox Corporation:
We have audited the accompanying consolidated balance sheets of Audiovox
Corporation and subsidiaries as of November 30, 2000 and 2001, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for each of the years in the three-year period
ended November 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Audiovox Corporation
and subsidiaries as of November 30, 2000 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended November 30, 2001, in conformity with accounting principles generally
accepted in the United States of America.
s/KPMG LLP
----------
KPMG LLP
Melville, New York
March 15, 2002
4850
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
November 30, 2000 and 2001
(In thousands, except share data)
2000 2001
Assets
Current assets:
Cash $ 6,431 $ 3,025
Accounts receivable, net 279,402 227,209
Inventory, net 140,065 225,662
Receivable from vendor 5,566 6,919
Prepaid expenses and other current assets 6,830 7,632
Deferred income taxes, net 11,172 11,997
--------- ---------
Total current assets 449,466 482,444
Investment securities 5,484 5,777
Equity investments 11,418 10,268
Property, plant and equipment, net 27,996 25,687
Excess cost over fair value of assets acquired and other intangible assets, net 5,098 4,742
Deferred income taxes, net 100 3,148
Other assets 2,325 1,302
--------- ---------
$ 501,887 $ 533,368
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 61,060 $ 57,162
Accrued expenses and other current liabilities 62,569 41,854
Income taxes payable 6,274 3,035
Bank obligations 8,104 92,213
Notes payable 5,868 5,267
Current installment of long-term debt 486 --
--------- ---------
Total current liabilities 144,361 199,531
Bank obligations 15,000 --
Capital lease obligation 6,260 6,196
Deferred compensation 2,208 3,844
--------- ---------
Total liabilities 167,829 209,571
--------- ---------
Minority interest 3,555 1,851
--------- ---------
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 2,500
Common stock:
Class A; 30,000,000 and 60,000,000 authorized 2000 and 2001, respectively;
20,291,046 and 20,615,846 issued 2000 and 2001, respectively;
19,528,554 and 19,706,309 outstanding 2000 and 2001,
respectively 204 207
Class B convertible; 10,000,000 authorized; 2,260,954 issued and
outstanding 22 22
Paid-in capital 248,468 250,785
Retained earnings 90,371 82,162
Accumulated other comprehensive loss (5,058) (6,344)
Treasury stock, at cost, 762,492 and 909,537 Class A common stock 2000
and 2001, respectively (6,004) (7,386)
--------- ---------
Total stockholders' equity 330,503 321,946
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 501,887 $ 533,368
========= =========
See accompanying notes to consolidated financial statements.
51
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended November 30, 1999, 2000 and 2001
(In thousands, except per share data)
1999 2000 2001
Net sales $ 1,161,533 $ 1,704,459 $ 1,267,746
Cost of sales 1,026,905 1,552,091 1,167,208
----------- ----------- -----------
Gross profit 134,628 152,368 100,538
----------- ----------- -----------
Operating expenses:
Selling 36,606 45,942 41,151
General and administrative 44,748 47,020 46,405
Warehousing, assembly and repair 15,037 20,882 23,519
----------- ----------- -----------
Total operating expenses 96,391 113,844 111,075
----------- ----------- -----------
Operating income (loss) 38,237 38,524 (10,537)
----------- ----------- -----------
Other income (expense):
Interest and bank charges (4,712) (6,310) (5,922)
Equity in income of equity investees 4,257 2,572 3,586
Gain on sale of investments 3,501 2,387 --
Gain on hedge of available-for-sale securities -- 1,499 --
Gain on issuance of subsidiary shares 3,800 -- --
Other, net (2,360) 1,293 727
----------- ----------- -----------
Total other income (expense), net 4,486 1,441 (1,609)
----------- ----------- -----------
Income (loss) before provision for (recovery of) income taxes
and extraordinary item 42,723 39,965 (12,146)
Provision for (recovery of) income taxes 15,477 14,925 (3,937)
----------- ----------- -----------
Income (loss) before extraordinary item 27,246 25,040 (8,209)
Extraordinary item-gain on extinguishment of debt -- 2,189 --
----------- ----------- -----------
Net income (loss) $ 27,246 $ 27,229 $ (8,209)
=========== =========== ===========
Net income (loss) per common share before extraordinary item:
Basic $ 1.43 $ 1.17 $ (0.38)
=========== =========== ===========
Diluted $ 1.39 $ 1.11 $ (0.38)
=========== =========== ===========
Net income (loss) per common share:
Basic $ 1.43 $ 1.27 $ (0.38)
=========== =========== ===========
Diluted $ 1.39 $ 1.21 $ (0.38)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
52
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years Ended November 30, 1999, 2000 and 2001
(In thousands, except share data)
Accum-
ulated
Other Gain on
Compre- Hedge of Total
hensive Available Stock-
Preferred Common Paid-In Retained Income for Sale Treasury holders'
Stock Stock Capital Earnings (Loss) Securities Stock Equity
------- ------- ------- -------- ------- ---------- ----- -------
Balances at
November 30, 1998 2,500 195 143,339 35,896 (1,550) 929 (3,589) 177,720
Comprehensive income:
Net income -- -- -- 27,246 -- -- -- 27,246
Other comprehensive income, net of tax:
Foreign currency translation adjustment -- -- -- -- 940 -- -- 940
Unrealized gain on marketable securities, net of
tax effect of $3,540 -- -- -- -- 5,775 -- -- 5,775
--------
Other comprehensive income 6,715
--------
Comprehensive income 33,961
Compensation expense (income) -- -- 158 -- -- -- -- 158
Exercise of stock options into 364,550 shares of
common stock and issuance of 39,305 shares under the
Restricted Stock Plan --
4 2,775 -- -- -- -- 2,779
Tax benefit of stock options exercised -- -- 1,101 -- -- -- -- 1,101
Conversion of debentures into 70,565 shares -- 1 1,248 -- -- -- -- 1,249
Issuance of warrants -- 1 662 -- -- -- -- 663
Purchase of warrants -- -- (5) -- -- -- -- (5)
Acquisition of 122,982 common shares -- -- -- -- -- -- (882) (882)
------ ------- ------ ------ --------
Balances at
November 30, 1999 2,500 201 149,278 63,142 5,165 929 (4,471) 216,744
Comprehensive income:
Net income -- -- -- 27,229 -- -- -- 27,229
Other comprehensive loss, net of tax: -- -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- (104) -- -- (104)
Unrealized loss on marketable securities,
net of tax effect of $(6,202) -- -- -- -- (10,119) -- -- (10,119)
--------
Other comprehensive loss -- -- -- -- -- -- -- (10,223)
--------
Comprehensive income -- -- -- -- -- -- -- 17,006
Exercise of stock options into 121,300 shares
of common stock and issuance of 11,671 shares under
the Restricted Stock Plan -- 1 836 -- -- -- -- 837
Tax benefit of stock options exercised -- -- 1,270 -- -- -- -- 1,270
Conversion of debentures into 30,170 shares -- 1 534 -- -- -- -- 535
Issuance of 2,300,000 shares in connection with stock
offering -- 23 96,550 -- -- -- -- 96,573
Acquisition of 141,455 common shares -- -- -- -- -- -- (1,533) (1,533)
Recognition of gain on hedge of available-for-sale
securities -- -- -- -- -- (929) -- (929)
------ ------- ------ ------ -------
Balances at
November 30, 2000 2,500 226 248,468 90,371 (5,058) -- (6,004) 330,503
53
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
(continued)
Years Ended November 30, 1999, 2000 and 2001
(In thousands, except share data)
Accum-
ulated
Other Gain on
Compre- Hedge of Total
hensive Available Stock-
Preferred Common Paid-In Retained Income for Sale Treasuryholders'
Stock Stock Capital Earnings (Loss) Securities Stock Equity
------- ------- ------- -------- ------- ---------- ----- -----
Comprehensive loss:
Net loss -- -- -- (8,209) -- -- -- (8,209)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment -- -- -- -- (455) -- -- (455)
Unrealized loss on marketable securities,
net of tax effect of $(509) -- -- -- -- (831) -- -- (831)
--------
Other comprehensive loss -- -- -- -- -- -- -- (1,286)
--------
Comprehensive loss -- -- -- -- -- -- -- (9,495)
Exercise of stock options into 10,000 shares of -- -- 77 -- -- -- -- 77
common stock
Conversion of stock warrants into 314,800 shares -- 3 2,240 -- -- -- -- 2,243
Acquisition of 147,045 common shares -- -- -- -- -- -- (1,382) (1,382)
------ -------- ------- ------- ------ ------ -------- --------
Balances at
November 30, 2001 2,500 229 250,785 82,162 (6,344) -- (7,386) 321,946
===== ======= ======= ======= ====== ====== ======== ========
See accompanying notes to consolidated financial statements.
54
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended November 30, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
Cash flows from operating activities:
Net income (loss) $ 27,246 $ 27,229 $ (8,209)
Adjustment to reconcile net income (loss)
Depreciation and amortization 3,288 4,128 4,476
Provision for bad debt expense 3,255 2,519 1,936
Equity in income of equity investments, net (4,257) (2,572) (3,586)
Minority interest (220) 1,087 (670)
Gain on sale of investments (3,501) (427) --
Gain from the sale of shares of equity investment -- (2,387) --
Gain on hedge of available-for-sale securities -- (1,499) --
Gain on issuance of subsidiary shares (3,800) -- --
Other-than-temporary decline in market value of investment security 1,953 -- --
Deferred income tax benefit, net (565) (6,034) (3,364)
Extraordinary item -- (2,189) --
(Gain) loss on disposal of property, plant and equipment, net 36 (1) (18)
Income tax benefit on exercise of stock options (1,163) (1,270) --
Changes in:
Accounts receivable (109,889) (45,531) 49,632
Receivable from vendor (8,371) 3,761 (1,353)
Inventory (64,533) (3,945) (86,025)
Accounts payable, accrued expenses and other current liabilities 56,615 18,974 (23,907)
Income taxes payable 5,185 (659) (3,258)
Investment securities-trading -- (2,211) (1,633)
Prepaid expenses and other, net 3,105 4,399 1,903
--------- -------- --------
Net cash used in operating activities (95,616) (6,628) (74,076)
--------- -------- --------
Cash flows from investing activities:
Purchases of investment securities (14,151) -- --
Purchases of property, plant and equipment, net (4,822) (12,047) (2,608)
Net proceeds from sale of investment securities 11,201 13,227 --
Proceeds from distribution from an equity investee 1,648 1,286 4,634
Proceeds from issuance of subsidiary shares 5,000 -- --
Proceeds from the sale of shares of equity investment -- 922 --
--------- -------- --------
Net cash provided by (used in) investing activities (1,124) 3,388 2,026
--------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) of bank obligations 93,428 (94,674) 69,299
Issuance of notes payable -- 5,868 --
Payment of dividend to minority shareholder of subsidiary -- (859) (1,034)
Net repayments under documentary acceptances (1,910) (1,994) --
Debt issuance costs (1,175) -- --
Principal payments on capital lease obligation (19) (19) (29)
Proceeds from exercise of stock options and warrants 3,442 837 2,317
Repurchase of Class A common stock (882) (1,534) (1,382)
Principal payments on subordinated debt -- -- (486)
Net proceeds from sale of common stock -- 96,573 --
--------- -------- --------
Net cash provided by financing activities 92,884 4,198 68,685
--------- -------- --------
Effect of exchange rate changes on cash (15) (54) (41)
--------- -------- --------
Net increase (decrease) in cash (3,871) 904 (3,406)
Cash at beginning of period 9,398 5,527 6,431
--------- -------- --------
Cash at end of period $ 5,527 $ 6,431 $ 3,025
========= ======== ========
See accompanying notes to consolidated financial statements.
55
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
November 30, 1999, 2000 and 2001
(Dollars in thousands, except share and per share data)
(1) Summary of Significant Accounting Policies
(a) Description of Business
Audiovox Corporation and its subsidiaries (the Company) design
and market a diverse line of products and provide related
services throughout the world. These products and services
include handsets and accessories for wireless communications,
fulfillment services for wireless carriers, automotive
entertainment and security products, automotive electronic
accessories and consumer electronics.
The Company operates in two primary markets:
(1) Wireless communications. The Wireless Group markets wireless
handsets and accessories through domestic and international
wireless carriers and their agents, independent distributors
and retailers.
(2) Mobile and consumer electronics. The Electronics Group sells
autosound, mobile electronics and consumer electronics
primarily to mass merchants, power retailers, specialty
retailers, new car dealers, original equipment manufacturers
(OEMs), independent installers of automotive accessories and
the U.S. military.
(b) Principles of Consolidation
The consolidated financial statements include the financial
statements of Audiovox Corporation and its wholly-owned and
majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in
consolidation.
(c) Cash Equivalents
Investments with original maturities of three months or less
are considered cash equivalents. There were no cash
equivalents at November 30, 2000 and 2001.
(d) Revenue Recognition
Revenues are recorded at the time of shipment and passage of
title to the customer. In the fourth quarter of 2001, the
Company adopted Staff Accounting Bulleting 101, "Revenue
Recognition in Financial Statements" (SAB101). The Company's
adoption of SAB101 did not have an impact on its
consolidated financial position or results of
(Continued)
56
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
operations.
(e) Co-operative Advertising Allowances, Market Development
Funds and Volume Incentive Rebates
Accruals for trade and promotional co-operative advertising
allowances, market development funds and volume incentive
rebates are established either when the related revenues are
recognized or the related advertising takes place in
accordance with Statement of Position 93-7, "Accounting for
Advertising Costs". These discounts and allowances are
reflected in the accompanying consolidated balance sheets as
a reduction of accounts receivable as they are utilized by
customers to reduce their trade indebtedness to the Company
and in selling expenses in the accompanying consolidated
statements of operations.
The Company initially accrues for all of its co-operative
advertising allowances, market development funds and volume
incentive rebates as this represents the Company's full
obligation. With respect to the volume incentive rebates,
the customers are required to purchase a specified volume of
a specified product. The Company accrues for the rebate as
product is shipped. When specified volume levels are not
achieved, and, therefore, the customer is not entitled to
the funds, the Company revises its estimate of its
liability. In addition, the Company will revise its estimate
of its liability based upon its customers not requesting the
funds. The accrual for co-operative advertising allowances,
market development funds and volume incentive rebates at
November 30, 2000 and 2001 of $16,092 and $10,366,
respectively, represents managements best estimate of
amounts owed under these arrangements. Due to uncertainties
inherent in the estimation process, it is at least
reasonably possible that the accrual will be further revised
in the near term. During 1999, 2000 and 2001, the Company
recorded in income $4,095, $8,265 and $12,820, respectively,
which represents revisions to previously established
co-operative advertising allowances, market development
funds and volume incentive rebates accruals.
Co-operative advertising allowances, market development
funds and volume incentive rebate expenses approximated
$15,390, $21,923 and $16,027 for the years ended November
30, 1999, 2000 and 2001, respectively.
In April 2001, the Emerging Issues Task Force (EITF) reached
a final consensus on EITF Issue NO. 00-25, "Vendor Income
Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products," which requires that ,
unless specific criteria are met, consideration from a
vendor to a retailer (e.g. "slotting fees", cooperative
advertising agreements, "buy downs", etc.) be recorded as a
reduction from revenue, as opposed to selling expense. This
consensus is effective for fiscal quarters beginning after
December 15, 2001. Management of Company is in the process
of assessing the
(Continued)
57
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
impact that implementing EITF Issue No. 00-25 will have on
the consolidated financial statements.
In November 2001, the EITF reached several consensuses on
Issue 01-9, "Accounting for Consideration Given by a Vendor
to a Customer or a Reseller of the Vendor's Products." This
Issue is a codification of the issues addressed in EITF
00-14, "Accounting for Certain Sales Incentives," and EITF
00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Product,"
as well as issues 2 and 3 of Issue 00-22, "Accounting for
'Points' and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services
to Be Delivered in the Future." In addition, several
reconciling and clarifying issues that were identified in
the codification process were addressed. The consensuses
codified in Issue 01-9 must be applied in financial
statements for any interim or annual period beginning after
December 15, 2001, with the exception of the consensus on
one issue which must be applied in financial statements for
any interim or annual period ending after February 15, 2001.
Accordingly, the consensus on one issue will be effective
for the quarter ended February 28, 2002 and the entire
consensus will be effective for the quarter ended May 31,
2002. Management of the Company is in the process of
assessing the impact that implementing EITF 01-9 will have
on the consolidated financial statements.
(f) Inventory
Inventory consists principally of finished goods and is
stated at the lower of cost (primarily on a weighted moving
average basis) or market. The markets in which the Company
competes are characterized by declining prices, intense
competition, rapid technological change and frequent new
product introductions. The Company maintains a significant
investment in inventory and, therefore, is subject to the
risk of losses on write-downs to market and inventory
obsolescence. During the fourth quarter of 2000, the Company
decided to substantially exit the analog phone line of
business to reflect the shift in the wireless industry from
analog to digital technology and recorded a charge of
approximately $8,152 to reduce its carrying value of its
analog inventory to estimated market value. During the
second quarter of 2001, the Company recorded an additional
charge of approximately $13,500 to further adjust the
carrying value of its analog inventory to market. During the
fourth quarter ended November 30, 2001, the Company recorded
inventory write-downs to market of $7,150 as a result of the
reduction of selling prices primarily related to digital
hand-held phones during the first quarter of 2002 in
anticipation of new digital technologies. It is reasonably
possible that additional write-downs to market may be
required in the future, however, no estimate can be made of
such losses. 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. In
particular, at November 30, 2001, the Company had on hand
575,000 units of a certain phone model, which approximated
$75,423.
(Continued)
58
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In the near future, the Company expects to introduce a new
model, as well as new technologies. No guarantee can be made
that further reductions in the carrying value of this or
other models will not be required in the future.
(g) Investment Securities
The Company classifies its equity securities in one of two
categories: trading or available- for-sale. Trading
securities are bought and held principally for the purpose
of selling them in the near term. All other securities not
included in trading are classified as available- for-sale.
Trading and available-for-sale securities are recorded at
fair value. Unrealized holding gains and losses on trading
securities are included in earnings. Unrealized holding
gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and
are reported as a component of accumulated other
comprehensive income until realized. Realized gains and
losses from the sale of available-for-sale securities are
determined on a specific identification basis.
A decline in the market value of any available-for-sale
security below cost that is deemed other-than-temporary
results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for
the security is established. Dividend and interest income
are recognized when earned.
(h) Derivative Financial Instruments
Effective December 1, 2000, the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (Statement 133), which establishes new
accounting and reporting guidelines for derivative
instruments and hedging activities. Statement 133 requires
the recognition of all derivative financial instruments as
either assets or liabilities in the statements of financial
condition and measurement of those instruments at fair
value. Changes in the fair values of those derivatives are
reported in earnings or other comprehensive income (loss)
depending on the designation of the derivative and whether
it qualifies for hedge accounting. The accounting for gains
and losses associated with changes in the fair value of a
derivative and the effect on the consolidated financial
statements will depend on its hedge designation and whether
the hedge is highly effective in achieving offsetting
changes in the fair value or cash flows of the asset or
liability hedged. Under the provisions of Statement 133, the
method that will be used for assessing the effectiveness of
a hedging derivative, as well as the measurement approach
for determining the ineffective aspects of the hedge, must
be established at the inception of the hedged instrument.
The adoption of Statement 133 had no impact on the Company's
results of operations or financial position.
(Continued)
59
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company's evaluations of hedge effectiveness are subject
to assumptions based on the terms and timing of the
underlying exposures. For a fair value hedge, both the
effective and ineffective portions of the change in fair
value of the derivative instrument, along with an adjustment
to the carrying amount of the hedge item for fair value
changes attributable to the hedge risk, are recognized in
earnings. For a cash flow hedge, changes in the fair value
of a derivative instrument that is highly effective are
deferred in accumulated other comprehensive income or loss
until the underlying hedged item is recognized in earnings.
The ineffective portion is recognized in earnings
immediately. If a fair value or cash flow hedge was to cease
to qualify for hedge accounting or be terminated, it would
continue to be carried on the balance sheet at fair value
until settled, but hedge accounting would be discontinued
prospectively. If a forecasted transaction were no longer
probable of occurring, amounts previously deferred in
accumulated other comprehensive income would be recognized
immediately in earnings.
The Company, as a policy, does not use derivative financial
instruments for trading purposes. A description of the
derivative financial instruments used by the Company
follows:
(1) Forward Exchange Contracts
The Company conducts business in several foreign currencies
and, as a result, is subject to foreign currency exchange
rate risk due to the effects that exchange rate movements of
these currencies have on the Company's costs. To minimize
the effect of exchange rate fluctuations on costs, the
Company enters into forward exchange rate contracts. The
Company, as a policy, does not enter into forward exchange
contracts for trading purposes. The forward exchange rate
contracts are entered into as hedges of inventory purchase
commitments and of trade receivables due in foreign
currencies.
Gains and losses on the forward exchange contracts that
qualify as hedges are reported as a component of the
underlying transaction. Foreign currency transactions which
have not been hedged are marked to market on a current basis
with gains and losses recognized through income and
reflected in other income (expense). In addition, any
previously deferred gains and losses on hedges which are
terminated prior to the transaction date are recognized in
current income when the hedge is terminated (Note 20(a)(1)).
(2) Equity Collar
As of November 30, 1999, the Company had an equity collar
for 200,000 of its shares in CellStar Corporation (CellStar)
(Note 20(a)(2)). The equity collar was recorded on the
balance sheet at fair value with gains and losses on the
(Continued)
60
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
equity collar reflected as a separate component of
stockholders' equity. The equity collar acted as a hedging
item for the CellStar shares. During 2000, the Company sold
200,000 shares of CellStar common stock and in connection
with the sale of the shares, recognized $1,499 ($929 net of
taxes) representing the net gain on the hedge of the
available-for-sale securities (Note 20(a)(2)).
(i) Debt Issuance Costs
Costs incurred in connection with the restructuring of bank
obligations (Note 11(a)) have been capitalized. During 2000, the
Company capitalized $148 in fees associated with the
restructuring and various amendments to the Company's credit
agreement. These charges are amortized over the lives of the
respective agreements. Amortization expense of these costs
amounted to $160, $434 and $336 for the years ended November 30,
1999, 2000 and 2001, respectively.
(j) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Equipment under
capital lease is stated at the present value of minimum lease
payments. Depreciation is calculated on the straight-line method
over the estimated useful lives of the assets as follows:
Buildings 20-30 years
Furniture, fixtures and displays 5-10 years
Machinery and equipment 5-10 years
Computer hardware and software 3-5 years
Automobiles 3 years
Leasehold improvements are amortized over the shorter of the
lease term or estimated useful life of the asset. Assets acquired
under capital lease are amortized over the term of the lease.
In July 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (Statement 143). Statement 143 is effective for
fiscal years beginning after June 15, 2002, and establishes an
accounting standard requiring the recording of the fair value of
liabilities associated with the retirement of long-lived assets
in the period in which they are incurred. The Company does not
expect the adoption of Statement 143 to have a significant effect
on its results of operations or its financial position.
(Continued)
61
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(k) Intangible Assets
Intangible assets consist of patents, trademarks and the excess
cost over fair value of equity investments (goodwill). Excess
cost over fair value of equity investments is being amortized, on
a straight-line basis, over periods not exceeding twenty years.
The costs of other intangible assets are amortized on a
straight-line basis over their respective lives.
Accumulated amortization approximated $3,145 and $3,502 at
November 30, 2000 and 2001, respectively. Amortization of the
excess cost over fair value of assets acquired and other
intangible assets amounted to $429, $547 and $344 for the years
ended November 30, 1999, 2000 and 2001, respectively.
On an ongoing basis, the Company reviews the valuation and
amortization of its intangible assets. As a part of its ongoing
review, the Company estimates the fair value of intangible assets
taking into consideration any events and circumstances which may
diminish fair value.
The recoverability of the excess cost over fair value of assets
acquired is assessed by determining whether the amortization over
its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of
impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the
Company's average cost of funds. The assessment of the
recoverability of the excess cost over fair value of assets
acquired will be impacted if estimated future operating cash
flows are not achieved.
In July 2001, the FASB issued Statement No. 141, "Business
Combinations" (Statement 141), and Statement No. 142, "Goodwill
and Other Intangible Assets" (Statement 142). Statement 141
requires companies to account for acquisitions entered into after
June 30, 2001 using purchase method and establishes criteria to
be used in determining whether acquired intangible assets are to
be recorded separately from goodwill. These criteria are to be
applied to business combinations completed after June 30, 2001.
Statement 141 will require, upon adoption of Statement 142, that
the Company evaluate its existing intangible assets and goodwill
that were acquired in a prior purchase business combination, and
make any necessary reclassifications in order to conform with the
new criteria in Statement 141 for recognition apart from
goodwill. The Company does not believe that implementation of
Statement 141 will have an impact on the Company's financial
position and results of operations.
Statement 142 requires that goodwill and intangible assets with
indefinite useful lives no longer to be amortized, but rather
will be tested for impairment at least annually. Statement 142
also requires that intangible assets with definite useful lives
be amortized
(Continued)
62
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
over their respective estimated useful lives to their
estimated residual values and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". Upon adoption of Statement 142, the company
will be required to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company must identify its
reporting units and determine the carrying value of each
reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to
those reporting units as of the date of adoption. The
Company will adopt the requirement of the provisions of
Statement 142 effective December 1, 2002. Implementation of
Statement 142 will result in the Company no longer recording
amortization expense relating to its $4,732 of goodwill, net
of accumulated amortization, recorded as of November 30,
2001 of approximately $342 per year. The Company's goodwill
consists solely of equity method goodwill and, as such, will
continue to be evaluated for impairment under Statement 121.
The Company has no other intangible assets with indefinite
lives.
(l) Equity Investments
The Company has common stock investments which are accounted
for by the equity method as the Company owns between 20% and
50% of the common stock (Note 9).
(m) Cellular Telephone Commissions
Under various agency agreements, the Company receives an
initial activation commission for obtaining subscribers for
cellular telephone services. The agreements may contain
provisions for additional commissions based upon usage and
length of continued subscription. The agreements also
provide for the reduction or elimination of initial
activation commissions if subscribers deactivate service
within stipulated periods. The Company has provided a
liability for estimated cellular deactivations which is
reflected in the accompanying consolidated financial
statements as a reduction of accounts receivable.
The Company recognizes sales revenue for the initial
activation and residual commissions based upon usage on the
accrual basis. Such commissions approximated $29,547,
$32,475 and $29,859 for the years ended November 30, 1999,
2000 and 2001, respectively. Related commissions paid to
outside selling representatives for cellular activations are
included in cost of sales in the accompanying consolidated
statements of operations and amounted to $19,884, $23,186
and $22,390 for the years ended November 30, 1999, 2000 and
2001, respectively.
(Continued)
63
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(n) Advertising
The Company expenses the costs of advertising as incurred,
excluding co-operative advertising allowances, market
development funds and volume incentive rebates (Note 1(e)).
During the years ended November 30, 1999, 2000 and 2001, the
Company had no direct response advertising.
(o) Warranty Expenses
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. At November 30, 2000 and 2001, the liability for
future warranty expense amounted to $8,263 and $9,165,
respectively.
(p) Foreign Currency
With the exception of a subsidiary operation in Venezuela,
which has been deemed a hyper inflationary economy, assets
and liabilities of those subsidiaries and equity investees
located outside the United States whose cash flows are
primarily in local currencies have been translated at rates
of exchange at the end of the period or historical exchange
rates, as appropriate. Revenues and expenses have been
translated at the weighted average rates of exchange in
effect during the period. Gains and losses resulting from
translation are accumulated in the cumulative foreign
currency translation account in accumulated other
comprehensive income. For the operation in Venezuela,
financial statements are translated at either current or
historical exchange rates, as appropriate. These
adjustments, along with gains and losses on currency
transactions, are reflected in the consolidated statements
of operations.
Exchange gains and losses on intercompany balances of a
long-term nature are also recorded in the cumulative foreign
currency translation adjustment account in accumulated other
comprehensive income. Exchange gains and losses on
available-for-sale investment securities are recorded in the
unrealized gain (loss) on marketable securities in
accumulated other comprehensive income. Other foreign
currency transaction gains (losses) of $(1,046), $193 and
$200 for the years ended November 30, 1999, 2000 and 2001,
respectively, were included in other income.
(q) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and
(Continued)
64
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary
differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that
includes the enactment date.
(r) Net Income (Loss) Per Common Share
Basic earnings (loss) per common share is based upon the weighted
average number of common shares outstanding during the period.
Diluted earnings (loss) per common share reflects the potential
dilution that would occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
Dilutive net loss per common share for fiscal 2001 is the same as
basic net loss per common share due to the anti-dilutive effect
of the assumed conversion of preferred shares and exercise of
stock options.
(s) Supplementary Financial Statement Information
Interest income of approximately $943, $1,616 and $670 for the
years ended November 30, 1999, 2000 and 2001 respectively, is
included in other, net, in the accompanying consolidated
statements of operations.
(t) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
including the allowance for doubtful accounts, inventory
valuation and co-operative advertising, market development funds
and volume incentive rebates 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.
(u) Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of
The Company accounts for its long-lived assets in accordance with
the provisions of SFAS No.121. Statement 121 requires that
long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by comparison of the carrying amount of an asset to
the future net cash flows expected to be generated by the asset.
If such assets
(Continued)
65
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
cost to sell.
In October 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment of Long-Lived Assets" (Statement 144), which
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supersedes
Statement 121 while retaining the fundamental recognition and
measurement provisions of that statement. Statement 144 requires
that a long-lived asset to be abandoned, exchanged for a similar
productive asset or distributed to owners in a spin-off to be
considered held and used until it is disposed of. However,
Statement 144 requires that management consider revising the
depreciable life of such long-lived asset. With respect to
long-lived assets to be disposed of by sale, Statement 144
retains the provisions of Statement 121 and, therefore, requires
that discontinued operations no longer be measured on a net
realizable value basis and that future operating losses
associated with such discontinued operations no longer be
recognized before they occur. Statement 144 is effective for all
fiscal quarters of fiscal years beginning after December 15,
2001, and will thus be adopted by the Company on December 1,
2002. The Company has not determined the effect, if any, that the
adoption of Statement 144 will have on the Company's consolidated
financial statements.
(v) Accounting for Stock-Based Compensation
The Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and related
interpretations, in accounting for its stock-based compensation
plans (APB No. 25).
(w) Reporting Comprehensive Income
Effective December 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (Statement 130). Statement 130 requires that all items
recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement
that is displayed with the same prominence as other annual
financial statements. Other comprehensive income may include
foreign currency translation adjustments, minimum pension
liability adjustments and unrealized gains and losses on
investment securities classified as available- for-sale.
(Continued)
66
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(x) Reclassifications
Certain reclassifications have been made to the 1999 and 2000
consolidated financial statements in order to conform to the 2001
presentation.
In fiscal 2001, the Company adopted the provisions of Emerging
Issue Task Force (EITF) Issue No. 00-10, "Accounting for Shipping
and Handling Fees and Costs", which requires the Company to
report all amounts billed to a customer related to shipping and
handling as revenue. The Company includes all costs incurred for
shipping and handling as cost of sales. The Company has
reclassified such billed amounts, which were previously netted in
cost of sales to net sales. As a result of this reclassification,
net sales and cost of goods sold were increased by $1,996, $2,163
and $1,548 for years ended November 30, 1999, 2000 and 2001,
respectively.
(2) Issuance of Subsidiary Shares
On March 31, 1999, Toshiba Corporation, a major supplier, purchased 5% of
the Company's subsidiary, Audiovox Communications Corp. (ACC), a supplier
of wireless products for $5,000 in cash. The Company currently owns 95% of
ACC; prior to the transaction ACC was a wholly- owned subsidiary. As a
result of the issuance of ACC's shares, the Company recognized a gain of
$3,800 in 1999 ($2,204 after provision for deferred taxes). The gain on the
issuance of the subsidiary's shares have been recognized in the
consolidated statements of operations in accordance with the Company's
policy on the recognition of such transactions.
In February 2000 and 2001, the Board of Directors of Audiovox
Communications Corp. (ACC), declared a dividend payable to its
shareholders, Audiovox Corporation, a 95% shareholder, and Toshiba
Corporation (Toshiba), a 5% shareholder. ACC paid Toshiba its share of the
dividend, which approximated $859 and $1,034 in 2000 and 2001, for the
years ended November 30, 1999 and 2000, respectively.
(3) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
For the Years Ended November 30,
--------------------------------
1999 2000 2001
---- ---- ----
Cash paid during the years for:
Interest, excluding bank charges $ 2,994 $ 4,870 $3,883
Income taxes $12,039 $21,069 $3,550
(Continued)
67
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Non-cash Transactions:
During 1999 and 2000, the Company exercised its option to convert 2,282,788
and 800,000 Japanese yen (approximately $24,026 and $7,595) of Shintom Co.
Ltd. (Shintom) convertible debentures (Shintom debentures) into
approximately 48,100,000 and 33,900,000 shares of Shintom common stock,
respectively (Note 13).
During the years ended November 30, 1999, 2000 and 2001, the Company
recorded an unrealized holding gain (loss) relating to available-for-sale
marketable equity securities, net of deferred income taxes, of $5,775,
$(10,119) and $(831), respectively, as a separate component of accumulated
other comprehensive income (loss) (Note 17).
During 1999 and 2000, $1,249 and $535 of its $65,000 6 1/4% subordinated
debentures were converted into 70,565 and 30,170 shares, respectively, of
Class A common stock (Note 13).
During 2001, 314,800 warrants were exercised and converted into 314,800
shares of common stock (Note 16(d)).
(4) Transactions With Major Suppliers
(a) Sale/Leaseback Transaction
In April 2000, AX Japan purchased land and a building (the Property)
from Shintom Co., Ltd. (Shintom) for 770,000,000 Yen (approximately
$7,300) and entered into a leaseback agreement whereby Shintom leased
the Property from AX Japan for a one-year period. This lease is being
accounted for as an operating lease by AX Japan. Shintom is a
stockholder who owns all of the outstanding preferred stock of the
Company and is a manufacturer of products purchased by the Company
through its previously-owned equity investee, TALK Corporation (TALK).
The Company currently holds stock in Shintom and has previously
invested in Shintom convertible debentures (Note 7).
The purchase of the Property by AX Japan was financed with a
500,000,000 Yen ($4,671) subordinated loan obtained from Vitec Co.,
Ltd. (Vitec), a 150,000,000 Yen loan ($1,397) from Pearl First (Pearl)
and a 140,000,000 Yen loan ($1,291) from the Company. The land and
building have been included in property, plant and equipment, and the
loans have been recorded as notes payable on the accompanying
consolidated balance sheet as of November 30, 2001 . Vitec is a major
supplier to Shintom, and Pearl is an affiliate of Vitec. The loans
bear interest at 5% per annum, and principle is payable in equal
monthly installments over a six-month period beginning six months
subsequent to the date of the loans. The loans from Vitec and Pearl
are subordinated completely to the loan from the Company, and, in
liquidation, the Company receives payment first.
(Continued)
68
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Upon the expiration of six months after the transfer of the title to
the Property to AX Japan, Shintom had the option to repurchase the
Property or purchase all of the shares of stock of AX Japan. This
option could be extended for one additional six month period. The
option to repurchase the building is at a price of 770,000,000 Yen
plus the equity capital of AX Japan (which in no event can be less
than 60,000,000 Yen) and can only be made if Shintom settles any rent
due AX Japan pursuant to the lease agreement. The option to purchase
the shares of stock of AX Japan is at a price not less than the
aggregate par value of the shares and, subsequent to the purchase of
the shares, AX Japan must repay the outstanding loan due to the
Company. If Shintom does not exercise its option to repurchase the
Property or the shares of AX Japan, or upon occurrence of certain
events, AX Japan can dispose of the Property as it deems appropriate.
The events which result in the ability of AX Japan to be able to
dispose of the Property include Shintom petitioning for bankruptcy,
failing to honor a check, failing to pay rent, etc. If Shintom fails,
or at any time becomes financially or otherwise unable to exercise its
option to repurchase the Property, Vitec has the option to repurchase
the Property or purchase all of the shares of stock of AX Japan under
similar terms as the Shintom options.
AX Japan had the option to delay the repayment of the loans for an
additional six months if Shintom extended its options to repurchase
the Property or stock of AX Japan. In September 2000, Shintom extended
its option to repurchase the Property and AX Japan delayed its
repayment of the loans for an additional six months.
In March 2001, upon the expiration of the additional six-month period,
the Company and Shintom agreed to extend the lease for an additional
one-year period. In addition, Shintom was again given the option to
purchase the Property or shares of stock of AX Japan after the
expiration of a six-month period or extend the option for one
additional six-month period. AX Japan was also given the option to
delay the repayment of the loans for an additional six months if
Shintom extended its option for an additional six months.
In connection with this transaction, the Company received 100,000,000
Yen ($922) from Shintom for its 2,000 shares of TALK stock. The
Company had the option to repurchase the shares of TALK at a purchase
price of 50,000 Yen per share, with no expiration date. Given the
option to repurchase the shares of TALK, the Company did not surrender
control over the shares of TALK and, accordingly, had not accounted
for this transaction as a sale. In August 2000, the Company
surrendered its option to repurchase the shares of TALK. As such, the
Company recorded a gain on the sale of shares in the amount of $427 in
August 2000.
(Continued)
69
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) Inventory Purchases - Shintom and TALK
The Company engages in transactions with Shintom and TALK. TALK, which
holds world-wide distribution rights for product manufactured by
Shintom, has given the Company exclusive distribution rights on all
wireless personal communication products for all countries except
Japan, China, Thailand and several mid-eastern countries. Through
October 2000, the Company held a 30.8% interest in TALK (Note 13). The
Company no longer holds an equity interest in TALK.
Transactions with Shintom and TALK include financing arrangements and
inventory purchases which approximated 11%, 7% and 1.5% for the years
ended November 30, 1999, 2000 and 2001, respectively, of total
inventory purchases. At November 30, 1999, 2000 and 2001, the Company
had recorded $20, $1 and $331, respectively, of liability due to TALK
for inventory purchases included in accounts payable. The Company also
had documentary acceptance obligations payable to TALK as of November
30, 1999 (Note 11(b)). There were no documentary acceptance
obligations payable to TALK as of November 30, 2000 and 2001. At
November 30, 1999, 2000 and 2001, the Company had recorded a
receivable from TALK in the amount of $3,741, $3,823 and $265,
respectively, a portion of which is payable with interest (Note 6),
which is reflected in receivable from vendors on the accompanying
consolidated financial statements.
(c) Inventory Purchases - Other
Inventory purchases from two major suppliers approximated 56%, 72% and
75% of total inventory purchases for the years ended November 30,
1999, 2000 and 2001, respectively. Although there are a limited number
of manufacturers of its products, management believes that other
suppliers could provide similar products on comparable terms. A change
in suppliers, however, could cause a delay in product availability and
a possible loss of sales, which would affect operating results
adversely.
(Continued)
70
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Accounts Receivable
Accounts receivable is comprised of the following:
November 30,
-------------------------
2000 2001
---- ----
Trade accounts receivable and other $303,864 $245,408
Less:
Allowance for doubtful accounts 6,921 5,616
Allowance for cellular deactivations 1,254 2,035
Allowance for co-operative advertising, cash discounts
and market development funds 16,287 10,548
-------- --------
$279,402 $227,209
======== ========
(6) Receivable from Vendors
The Company recorded receivable from vendors in the amount of $5,566 and
$6,919 as of November 30, 2000 and 2001, respectively. Receivable from
vendor represents prepayments on product shipments, defective product
reimbursements and interest receivable at a rate of 7.87% and 4.03% at
November 30, 2000 and 2001, respectively, on amounts due from TALK (Note 9)
and $4,550 at November 30, 2001 for reimbursements for costs incurred by
the Company for upgrades that were performed by the Company in 2001 on
certain models which Toshiba manufactured.
(Continued)
71
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Investment Securities
As of November 30, 2000, the Company's investment securities consists
of $3,273 of available-for- sale marketable securities which consist
primarily of 1,530,000 shares of CellStar Common Stock and 1,904,000
shares of Shintom common stock and trading securities of $2,211 which
consists of mutual funds that are held in connection with the deferred
compensation plan (Note 16(f)). As of November 30, 2001, the Company's
investment securities consist of $1,933 of available-for-sales
marketable securities, which consist primarily of 1,530,000 shares of
CellStar Common Stock and 1,904,000 shares of Shintom common stock, and
trading securities of $3,844, which consist of mutual funds that are
held in connection with the deferred compensation plan. The cost, gross
unrealized gains and losses and aggregate fair value of the investment
securities available-for-sale as of November 30, 2000 and 2001 were as
follows:
2000 2001
------ -----
Gross Gross
Unrealized Aggregate Unrealized Aggregate
Holding Fair Holding Fair
Cost Gain (Loss) Value Cost Gain (Loss) Value
---- ----------- ----- ---- ----------- -----
CellStar Common
Stock $ 2,401 $ 133 $2,534 $ 2,401 $(1,055) $1,346
Shintom Common
Stock 1,179 (440) 739 1,179 (592) 587
------- ------- ------ ------- ------- ------
$ 3,580 $ (307) $3,273 $ 3,580 $(1,647) $1,933
======= ======= ====== ======= ======= ======
Related deferred tax assets of $116 and $626 were as recorded at
November 30, 2000 and 2001, respectively, as a reduction to the
unrealized holding loss included in accumulated other comprehensive
loss.
During 1998, the Company purchased 400,000 Japanese yen (approximately
$3,132) of Shintom debentures and exercised its option to convert the
Shintom debentures into shares of Shintom common stock. During the
fourth quarter of 1999, the Company recorded an other-than-temporary
decline in market value of its Shintom common stock in the amount of
$1,953 and a related deferred tax benefit of $761. The write-down has
been recorded as a component of other expense in the consolidated
statements of operations.
During 1999, the Company purchased 3,100,000 Japanese yen
(approximately $27,467) of Shintom debentures and exercised its option
to convert 2,882,788 Japanese yen of Shintom debentures into shares of
Shintom common stock. The Company sold the Shintom common stock
yielding net proceeds of $27,916 and a gain of $3,501.
(Continued)
72
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During 2000, the Company exercised its option to convert 800,000
Japanese yen of Shintom debentures into shares of Shintom common stock.
The Company sold the Shintom common stock, yielding net proceeds of
$12,376 and a gain of $1,850.
During 2000, the Company sold 200,000 shares of its CellStar common
stock yielding net proceeds of $851 and a gain of $537.
During 2000 and 2001, the net unrealized holding loss on trading
securities that has been included in earnings is $370 and $779,
respectively.
(8) Property, Plant and Equipment
A summary of property, plant and equipment, net, is as follows:
November 30,
-------------------------------
2000 2001
Land $ 4,959 $ 4,493
Buildings 4,564 4,168
Property under capital lease 7,141 7,246
Furniture, fixtures and displays 1,909 2,129
Machinery and equipment 5,866 6,590
Computer hardware and software 12,023 13,108
Automobiles 588 658
Leasehold improvements 3,793 4,117
-------- --------
40,843 42,509
Less accumulated depreciation and amortization (12,847) (16,822)
-------- --------
$ 27,996 $ 25,687
======== ========
The amortization of the property under capital lease is included in
depreciation and amortization expense.
Computer software includes approximately $3,133 and $2,396 of
unamortized costs as of November 30, 2000 and 2001, respectively,
related to the acquisition and installation of management information
systems for internal use.
Depreciation and amortization of plant and equipment amounted to
$2,875, $3,426 and $4,174 for the years ended November 30, 1999, 2000
and 2001, respectively. Included in accumulated depreciation and
amortization is amortization of computer software costs of $1,051, $702
and $776 for the years ended November 30, 1999, 2000 and 2001,
respectively. Included in accumulated depreciation and amortization is
amortization of property under capital lease of $240 for each of the
years ended November 30, 1999, 2000 and 2001, respectively.
(Continued)
73
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company acts as a lessor in an operating lease for land and a
building with a cost of $6,687 and accumulated depreciation of $146
(Note 19).
(9) Equity Investments
As of November 30, 2001, the Company's 72% owned subsidiary, Audiovox
Communications Sdn. Bhd., had a 29% ownership interest in Avx Posse
(Malaysia) Sdn. Bhd. (Posse) which monitors car security commands
through a satellite based system in Malaysia. In addition, the Company
had a 20% ownership interest in Bliss-tel which distributes cellular
telephones and accessories in Thailand, and the Company had 50%
non-controlling ownership interests in three other entities: Protector
Corporation (Protector) which acts as a distributor of chemical
protection treatments; ASA which acts as a distributor to specialized
markets for RV's and van conversions, of televisions and other
automotive sound, security and accessory products; and G.L.M. Wireless
Communications, Inc. (G.L.M.) which is in the cellular telephone,
pager and communications business in the New York metropolitan area.
During 2000, the Company entered into an agreement to cease the
operations of its 50% owned investment in Audiovox Pacific Pty.,
Limited, which was a former distributor of cellular telephones and
automotive sound and security products in Australia and New Zealand.
Also during fiscal 2000, the Company entered into an agreement to
transfer to the other equity partner its 50% ownership equity in
Quintex West, which is in the cellular telephone and related
communication products business, as well as the automotive
after-market products business. No consideration was given or no gain
or loss was recorded in connection with either of the above
transactions as both equity investments had been previously written
down, and the Company had no on-going obligations to the entities or
the other equity partner.
The Company previously held a 30.8% investment in TALK which was
disposed of during fiscal 2000 (Notes 4(b) and 13).
The Company's net sales to the equity investees amounted to $4,605,
$3,233 and $2,656 for the years ended November 30, 1999, 2000 and 2001,
respectively. The Company's purchases from the equity investees
amounted to $146,803, $119,444 and $5,592 for the years ended November
30, 1999, 2000 and 2001, respectively. The Company recorded $1,735,
$1,432 and $746 of outside representative commission expenses for
activations and residuals generated by G.L.M. on the Company's behalf
during fiscal year 1999, 2000 and 2001, respectively.
Included in accounts receivable at November 30, 2000 and 2001 are trade
receivables due from its equity investments aggregating $861 and $561,
respectively. Receivable from vendor includes $3,823 and $265 due from
TALK as of November 30, 2000 and 2001, respectively, which represents
prepayments on product shipments and interest payable in monthly
installments. At November 30, 2000 and 2001, included in accounts
payable and other accrued expenses
(Continued)
74
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
were obligations to equity investments aggregating $30 and $13,
respectively. There were no documentary acceptance obligations
outstanding to TALK at November 30, 2000 and 2001.
For the years ended November 30, 1999, 2000 and 2001, interest income
earned on equity investment notes and other receivables approximated
$482, $602 and $157, respectively. Interest expense on documentary
acceptances payable to TALK approximated $228 and $11 in 1999 and 2000,
respectively.
(10) Unearned Revenue
As of November 30, 2000 and 2001, included in accrued expenses and
other current liabilities on the accompanying consolidated balance
sheet, is $27,150 and $8,314, respectively, of which represents
prepayments for future product shipments. The Company will recognize
the revenue as product shipments are made.
(11) Financing Arrangements
(a) Bank Obligations
The Company maintains a revolving credit agreement with
various financial institutions which expires July 27, 2004. As
a result, bank obligations under the credit agreement have
been classified as long-term at November 30, 2000 and 2001.
The credit agreement provides for $250,000 of available
credit, including $15,000 for foreign currency borrowings.
Under the credit agreement, the Company may obtain credit
through direct borrowings and letters of credit. The
obligations of the Company under the credit agreement are
guaranteed by certain of the Company's subsidiaries and is
secured by accounts receivable, inventory and the Company's
shares of ACC. As of November 30, 2001, availability of credit
under the credit agreement is a maximum aggregate amount of
$250,000, subject to certain conditions, based upon a formula
taking into account the amount and quality of its accounts
receivable and inventory. At November 30, 2001, the amount of
unused available credit is $78,551. The credit agreement also
allows for commitments of $50,000 in forward exchange
contracts (Note 20(a)(1)).
(Continued)
75
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Outstanding obligations under the credit agreement at November
30, 2000 and 2001 were as follows:
November 30,
------------------------------
2000 2001
---- ----
Revolving Credit Notes -- $13,525
Eurodollar Notes $15,000 73,000
------- -------
$15,000 $86,525
======= =======
Interest rates are as follows: revolving credit notes at .50%
above the prime rate, which was approximately 8.5%, 9.5% and
5.5% at November 30, 1999, 2000 and 2001, respectively, and
Eurodollar Notes at 1.50% above the Libor rate which was
approximately 6.48%, 6.8% and 3.38% at November 30, 1999, 2000
and 2001, respectively. The Company pays a commitment fee on
the unused portion of the line of 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. At
May 31, 2001, November 30, 2001 and in the first quarter of
2002, the Company was not in compliance with certain of its
pre-tax income covenants. The Company received waivers for
the May 31, 2001 and February 28, 2002 violations and has
not received a waiver for the November 30, 2001 violation
related to pre-tax income. Accordingly, the bank obligations
of $86,525 have been classified as a current liability on
the accompanying consolidated balance sheet. Management is
in the process of requesting a waiver for the violation.
Subsequent to November 30, 2001, the Company repaid $79,800
of its $86,525 obligation at November 30, 2001, resulting in
bank obligations outstanding at March 15, 2002 of $6,725.
The Company also has revolving credit facilities in Malaysia
(Malaysian Credit Agreement) to finance additional working
capital needs. As of November 30, 2001, the available line of
credit for direct borrowing, letters of credit, bankers'
acceptances and other forms of credit approximated $5,242. The
credit facilities are partially secured by three standby
letters of credit of $1,300, $800 and $1,400 and are payable
upon demand or upon expiration of the standby letters of
credit on January 15, 2002, August 31, 2002 and August 31,
2002, respectively. The Company renewed the January 15, 2002
letter of credit. The obligations of the Company under the
Malaysian Credit Agreement are also secured by the property
and building owned by Audiovox Communications Sdn. Bhd.
Outstanding obligations under the Malaysian Credit Agreement
at November 30, 2000 and 2001 were approximately $4,693 and
$3,514, respectively. At November 30, 1999, interest on the
credit facility ranged from 7.4% to 9.6%. At November 30,
(Continued)
76
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
2000 interest on the credit facility ranged from 7.25% to
7.50%. At November 30, 2001, interest on the credit facility
ranged from 6.5% to 7.0%.
As of November 30, 2000 and 2001, Audiovox Venezuela had notes
payable of approximately 2,354,600 and 1,622,834 Venezuelan
Bolivars ($3,411 and $2,074 at November 30, 2000 and 2001)
outstanding to a bank. Interest on the notes payable is 10.7%.
The notes are scheduled to be repaid within one year and, as
such, are classified as short term. The notes payable are
secured by a standby letter of credit in the amount of $3,500
by the Company and is payable upon demand or upon expiration
of the standby letter of credit on May 31, 2002.
The Company also has a revolving credit facility in Brazil to
finance additional working capital needs. The Brazilian credit
facility is secured by the Company under a standby letter of
credit in the amount of $100, which expires on October 1, 2002
and is payable on demand or upon expiration of the standby
letter of credit. At November 30, 2001, outstanding
obligations under the credit facility were $254 Brazilian
Bolivars ($100), and interest on the credit facility ranged
from 24% to 27 %.
At November 30, 2001, the Company had outstanding standby
letters of credit aggregating $604 which expire on various
dates from May 10, 2002 to July 31, 2002.
The maximum month-end amounts outstanding under the credit
agreement and Malaysian Credit Agreement borrowing facilities
during the years ended November 30, 1999, 2000 and 2001 were
$110,595, $156,854 and $94,291, respectively. Average
borrowings during the years ended November 30, 1999, 2000 and
2001 were $29,835, $52,010 and $49,692, respectively, and the
weighted average interest rates were 9.6%, 8.9% and 8.2%,
respectively.
(b) Documentary Acceptances
The Company had various unsecured documentary acceptance lines
of credit available with suppliers to finance inventory
purchases. The Company does not have written agreements
specifying the terms and amounts available under the lines of
credit. There were no documentary acceptances outstanding at
November 30, 2000 or 2001.
The maximum month-end documentary acceptances outstanding
during the year ended November 30, 2000 was $997. Average
borrowings during the year ended November 30, 2000 was $164,
and the weighted average interest rate, including fees, was
6.6%. There were no documentary acceptances outstanding during
the year ended November 30, 2001.
(Continued)
77
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Notes Payable
A summary of notes payable follows:
November 30,
-------------------------------
2000 2001
Note payable due to Vitec (Note 4(a)) $4,514 $4,051
Note payable due to Pearl (Note 4(a)) 1,354 1,216
------ ------
$5,868 $5,267
====== ======
The notes bear interest at 5% and are payable in equal monthly
installments over a six-month period beginning in October 2000. As a
result of the extension of `Shintom's option to repurchase the Property
or purchase all of the shares of stock of AX Japan (Note 4), the
commencement of repayment was delayed to April 2001 and again to March
2002. Accordingly, the notes payable have been classified as current in
the accompanying consolidated balance sheet.
(13) Long-Term Debt
On March 15, 1994, the Company completed the sale of $65,000, 6 1/4%
subordinated debentures due 2001 and entered into an indenture
agreement. The subordinated debentures were convertible into shares of
the Company's Class A common stock, par value $.01 per share at an
initial conversion price of $17.70 per share, subject to adjustment
under certain circumstances. The indenture agreement contained various
covenants. The bonds were subject to redemption by the Company in
whole, or in part, at any time after March 15, 1997, at certain
specified amounts. On May 9, 1995, the Company issued warrants to
certain beneficial holders of these subordinated debentures (Note
16(d)).
During fiscal 2000, holders of the Company's $65,000 subordinated
convertible debentures exercised their option to convert $534
debentures for 30,170 shares of the Company's Class A common stock. As
a result of this conversion and the conversions that took place prior
to 2000, the remaining subordinated debentures of $486 was included as
current installments of long-term debt at November 30, 2000. During
2001, the Company paid $486 to the remaining holders of the Company's
subordinated convertible debentures as such there is no convertible
debentures outstanding at November 30, 2001.
On October 20, 1994, the Company issued a note payable for 500,000
Japanese yen to finance its investment in TALK (Note 9). The note was
scheduled to be repaid on October 20, 2004 and bore interest at 4.1%.
The note could be repaid by cash payment or by giving 10,000 shares of
its TALK investment to the lender. The lender had an option to acquire
2,000 shares of TALK held by the Company in exchange for releasing the
Company from 20% of the face value
(Continued)
78
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
of the note at any time after October 20, 1995. In October 2000, the
Company exercised its option to repay the note by returning the 10,000
shares of its TALK investment to the lender. In connection with the
transaction, the Company recognized an extraordinary gain in the amount
of $2,189 representing the difference between the loan, which
approximated $4,578, and the Company's recorded investment in TALK,
which approximated $2,389, at the time of the transaction.
(14) Income Taxes
The components of income (loss) before the provision for (recovery of)
income taxes are as follows:
November 30,
----------------------------------------------------------
1999 2000 2001
Domestic Operations $42,668 $ 37,119 $(10,329)
Foreign Operations 55 2,846 183
------- -------- --------
$42,723 $ 39,965 $(10,146)
======= ======== ========
Total income tax expense (benefit) was allocated as follows:
November 30,
-------------------------------------
1999 2000 2001
Statement of operations $ 15,477 $ 14,925 $(3,937)
Stockholders' equity:
Unrealized holding gain (loss) on investment
securities recognized for financial
reporting purposes 3,540 (6,202) (509)
Unrealized holding gain (loss) on equity
collar recognized for financial reporting
purposes -- 570 --
Income tax benefit of employee stock option
exercises (1,101) (1,270) --
-------- -------- -------
Total income tax expense (benefit) $ 17,916 $ 8,023 $(4,446)
======== ======== =======
(Continued)
79
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The provision for (recovery of) income taxes is comprised of:
Federal Foreign State Total
1999:
Current $ 14,565 $ (116) $ 1,593 $ 16,042
Deferred (118) (431) (16) (565)
-------- ------- -------- --------
$ 14,447 $ (547) $ 1,577 $ 15,477
======== ======= ======== ========
2000:
Current $ 18,471 $ 656 $ 1,832 $ 20,959
Deferred (4,481) (704) (849) (6,034)
-------- ------- -------- --------
$ 13,990 $ (48) $ 983 $ 14,925
======== ======= ======== ========
2001:
Current $ (1,995) $ 359 $ 1,063 $ (573)
Deferred (2,435) 153 (1,082) (3,364)
-------- ------- -------- --------
$ (4,430) $ 512 $ (19) $ (3,937)
======== ======= ======== ========
A reconciliation of the provision for income taxes computed at the
Federal statutory rate to the reported provision for income taxes is as
follows:
November 30,
----------------------------------------------------------------
1999 2000 2001
Tax provision at Federal
statutory rates $ 14,953 35.0% $ 13,988 35.0% $(4,251) (35.0)%
Undistributed income (losses)
from equity investments (373) (0.9) -- -- -- --
State income taxes, net of
Federal benefit 1,025 2.4 639 1.6 (12) (0.1)
Decrease in beginning-of-the-
year balance of the
valuation allowance for
deferred tax assets (989) (2.3) (1,041) (2.6) (227) (1.9)
Foreign tax rate differential 38 0.1 (59) (0.1) 448 3.7
Other, net 823 1.9 1,398 3.4 105 1.0
-------- ---- -------- ---- ------- ----
$ 15,477 36.2% $ 14,925 37.3% $(3,937) (32.4)%
======== ==== ======== ==== ======= ====
(Continued)
80
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The significant components of deferred income tax recovery for the
years ended November 30, 2000 and 2001 are as follows:
November 30,
------------------------------
2000 2001
---- ----
Deferred tax recovery (exclusive of the effect
of other components listed below) $ (4,993) $ (3,137)
Decrease in beginning-of-the-year balance of the valuation
allowance for deferred tax assets (1,041) (227)
---------- -----------
$ (6,034) $ (3,364)
========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred liabilities are
presented below:
November 30,
----------------------------------
2000 2001
---- ----
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts and cellular deactivations $ 2,290 $ 1,971
Inventory, principally due to additional costs
capitalized for tax purposes pursuant to the Tax
Reform Act of 1986 687 1,075
Inventory, principally due to valuation reserve 4,276 5,421
Accrual for future warranty costs 2,684 3,241
Plant, equipment and certain intangibles, principally
due to depreciation and amortization 1,146 1,442
Net operating loss carryforwards, state and foreign 755 870
Contributions - 41
Accrued liabilities not currently deductible and other 382 705
Investment securities - 463
Deferred compensation plans 862 1,492
----------- ---------
Total gross deferred tax assets 13,082 16,721
Less: valuation allowance (343) (116)
---------- ----------
Net deferred tax assets 12,739 16,605
--------- --------
Deferred tax liabilities:
Investment securities (35) -
Issuance of subsidiary shares (1,432) (1,460)
--------- ---------
Total gross deferred tax liabilities (1,467) (1,460)
--------- ---------
Net deferred tax asset $11,272 $15,145
======== ========
81
The net change in the total valuation allowance for the year ended
November 30, 2001 was a decrease of $227. 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 primarily for net operating loss
carryforwards in certain states and foreign countries as well as other
deferred tax assets in foreign countries. Based on the Company's
ability to carry back future reversals of deferred tax assets to taxes
paid in current and prior years and the Company's historical taxable
income record, adjusted for unusual items, management believes it is
more likely than not that the Company will realize the benefit of the
net deferred tax assets existing at November 30, 2001. Further,
management believes the existing net deductible temporary differences
will reverse during periods in which the Company generates net taxable
income. There can be no assurance, however, that the Company will
generate any earnings or any specific level of continuing earnings in
the future. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
At November 30, 2001, the Company had net operating loss carryforwards
for state income tax purposes of approximately $16,064, which are
available to offset future state taxable income, if any, which will
expire through the year ended November 30, 2021.
(15) Capital Structure
The Company's capital structure is as follows:
Voting
Rights
Par Shares Per Liquidation
Security Value Shares Authorized Outstanding Share Rights
-------- ----- ------ -------
------------------------------ ------------------------------
November 30, November 30,
------------------------------ ------------------------------
2000 2001 2000 2001
---- ---- ---- ----
$50 per
Preferred Stock $50.00 50,000 50,000 50,000 50,000 - share
Series Preferred Stock 0.01 1,500,000 1,500,000 - - - -
Ratably
with
Class A Common Stock 0.01 60,000,000 60,000,000 19,478,554 19,706,309 One Class B
====
Class B Common Stock 0.01 10,000,000 10,000,000 2,260,954 2,260,954 Ten Ratably
====
with
Class A
The holders of Class A and Class B common stock are entitled to receive cash
or property dividends declared by the Board of Directors. The Board can
declare cash dividends for Class A common stock in amounts equal to or
greater than the cash dividends for Class B common
(Continued)
82
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
stock. Dividends other than cash must be declared equally for both classes.
Each share of Class B common stock may, at any time, be converted into one
share of Class A common stock.
The 50,000 shares of non-cumulative Preferred Stock outstanding are owned by
Shintom and have preference over both classes of common stock in the event
of liquidation or dissolution.
The Company's Board of Directors approved the repurchase of 1,563,000 shares
of the Company's Class A common stock in the open market under a share
repurchase program (the Program). As of November 30, 2000 and 2001, 762,492
and 909,537 shares, respectively, were repurchased under the Program at an
average price of $10.80 and $10.05 per share, respectively, for an aggregate
amount of $6,004 and $7,386, respectively.
As of November 30, 2000 and 2001, 2,926,653 and 2,916,653 shares of the
Company's Class A common stock are reserved for issuance under the Company's
Stock Option and Restricted Stock Plans and 372,258 for all convertible
securities and warrants outstanding at November 30, 2000. There were no
convertible securities or warrants outstanding at November 30, 2001 (Notes
13 and 16).
In February 2000, the Company sold, pursuant to an underwritten public
offering, 2,300,000 shares of its Class A common stock at a price of $45.00
per share. The Company received $96,573 in net proceeds after deducting
underwriting commission and offering expenses. The net proceeds from the
offering were used to repay a portion of amounts outstanding under the
revolving credit facility.
On April 6, 2000, the stockholders approved a proposal to amend the
Company's Certificate of Incorporation to increase the number of authorized
shares of Class A common stock, par value $.01, from 30,000,000 to
60,000,000.
Undistributed earnings from equity investments included in retained earnings
amounted to $4,869 and $3,742 at November 30, 2000 and 2001, respectively.
(16) Stock-Based Compensation and Stock Warrants
(a) Stock Options
The Company has stock option plans under which employees and
non-employee directors may be granted incentive stock options
(ISO's) and non-qualified stock options (NQSO's) to purchase shares
of Class A common stock. Under the plans, the exercise price of the
ISO's will not be less than the market value of the Company's Class
A common stock or greater than 110% of the market value of the
Company's Class A common stock on the date of grant. The exercise
price of the NQSO's may not be less than 50% of the market value of
the Company's Class A common stock on the date of grant.
(Continued)
83
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The options must be exercisable no later than ten years after the
date of grant. The vesting requirements are determined by the Board
of Directors at the time of grant.
Compensation expense is recorded with respect to the options based
upon the quoted market value of the shares and the exercise
provisions at the date of grant. The Company recorded $31 in
compensation expense for the year ended November 30, 1999. No
compensation expense was recorded for the years ended November 30,
2000 and 2001.
Information regarding the Company's stock options is summarized
below:
Weighted
Average
Number Exercise
of Shares Price
Outstanding at November 30, 1998 1,693,750 7.33
Granted 1,542,500 14.98
Exercised (364,550) 7.64
Canceled (500) 13.00
---------- -----
Outstanding at November 30, 1999 2,871,200 11.41
Granted -- --
Exercised (121,300) 6.84
Canceled -- --
---------- -----
Outstanding at November 30, 2000 2,749,900 11.61
Granted -- --
Exercised (10,000) 7.69
Canceled -- --
---------- -----
Outstanding at November 30, 2001 2,739,900 11.62
========== =====
Options exercisable at November 30, 2001 2,153,900 10.68
========== =====
At November 30, 2000 and 2001, 206,753 shares were available
for future grants under the terms of these plans.
The per share weighted average fair value of stock options
granted during 1999 was $9.83 on the date of grant using the
Black-Scholes option-pricing model with the following weighted
average assumptions: risk free interest rate of 5.9%, expected
dividend yield of 0.0%, expected stock volatility of 60% and
an expected option life of 10 years. There were no options
granted during 2000 and 2001.
(Continued)
84
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company applies APB No. 25 in accounting for its stock
option grants and, accordingly, no compensation cost has been
recognized in the financial statements for its stock options
which have an exercise price equal to or greater than the fair
value of the stock on the date of the grant. Had the Company
determined compensation cost based on the fair value at the
grant date for its stock options under Statement 123, the
Company's net income (loss) and net income (loss) per common
share would have been reduced to the pro-forma amounts
indicated below:
1999 2000 2001
---- ---- ----
Net income (loss):
As reported $ 27,246 $ 27,229 $ (8,209)
Pro-forma 25,494 22,795 (10,496)
Net income (loss) per common share (basic):
As reported $ 1.43$ 1.27$ (0.38)
Pro-forma 1.33 1.07 (0.48)
Net income (loss) per common share (diluted):
As reported $ 1.39$ 1.21$ (0.38)
Pro-forma 1.30 1.01 (0.48)
Pro-forma net income (loss) reflect only options granted after
November 30, 1995. Therefore, the full impact of calculating
compensation cost for stock options under Statement 123 is not
reflected in the pro-forma net income (loss) amounts presented
above because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior
to December 1, 1995 was not considered. Therefore, the
pro-forma net income (loss) may not be representative of the
effects on reported net income (loss) for future years.
Summarized information about stock options outstanding as of
November 30, 2001 is as follows:
Outstanding Exercisable
Weighted Weighted
Average Average Weighted
Exercise Exercise Life Average
Price Number Price Remaining Number Price
Range of Shares of Shares In Years of Shares of Shares
------- --------- ----------- --------- --------- ----------
$4.63 - $8.00 1,140,700 $ 7.21 5.21 1,140,700 $ 7.21
$8.01 - $13.00 109,200 $11.63 3.33 109,200 $11.63
$13.01 - $15.00 1,490,000 $15.00 7.78 894,000 $15.00
(Continued)
85
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) Restricted Stock Plan
The Company has restricted stock plans under which key
employees and directors may be awarded restricted stock. Total
restricted stock outstanding, granted under these plans, at
November 30, 1999 was 13,750. There were no restricted stock
outstanding at November 30, 2000. Awards under the restricted
stock plan may be performance- accelerated shares or
performance-restricted shares. During fiscal 1999, 32,222
performance-accelerated shares and 12,103
performance-restricted shares were granted. During fiscal
2000, 6,825 performance-accelerated shares and 4,846
performance- restricted shares were granted. During fiscal
2000, 1,979 performance-restricted shares lapsed. There were
no performance-restricted accelerated shares or
performance-restricted shares granted in 2001.
Compensation expense for the performance-accelerated shares is
recorded based upon the quoted market value of the shares on
the date of grant. Compensation expense for the
performance-restricted shares is recorded based upon the
quoted market value of the shares on the balance sheet date.
Compensation expense (income) for these grants for the years
ended November 30, 1999 and 2000 were $127 and $40,
respectively.
(c) Employee Stock Purchase Plan
In April 2000, the stockholders approved the 2000 Employee
Stock Purchase Plan. The stock purchase plan provides eligible
employees an opportunity to purchase shares of the Company's
Class A common stock through payroll deductions at a minimum
of 2% and a maximum of 15% of base salary compensation.
Amounts withheld are used to purchase Class A common stock on
the open market. The cost to the employee for the shares is
equal to 85% of the fair market value of the shares on or
about the quarterly purchase date (December 31, March 31, June
30 or September 30). The Company bears the cost of the
remaining 15% of the fair market value of the shares as well
as any broker fees. This Plan provides for purchases of up to
1,000,000 shares.
(d) Stock Warrants
In December 1993, the Company granted warrants to purchase
50,000 shares of Class A Common Stock at a purchase price of
$14.375 per share as part of the acquisition of H & H Eastern
Distributors, Inc. During fiscal 1999, the warrants were
surrendered for cancellation, and the holder agreed to waive
registration rights in exchange for $5.
On May 9, 1995, the Company issued 1,668,875 warrants in a
private placement, each convertible into one share of Class A
common stock at $7 1/8, subject to adjustment under certain
circumstances. The warrants were issued to the beneficial
holders as of June 3, 1994, of approximately $57,600 of the
Company's subordinated debentures
(Continued)
86
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
in exchange for a release of any claims such holders may have
against the Company, its agents, directors and employees in
connection with their investment in the subordinated
debentures. As a result, the Company incurred a warrant
expense in 1995 of $2,900 and recorded a corresponding
increase to paid-in capital. The warrants are not exercisable
after March 15, 2001, unless sooner terminated under certain
circumstances. John J. Shalam, Chief Executive Officer of the
Company, has granted the Company an option to purchase
1,668,875 shares of Class A common stock from his personal
holdings. The exercise price of this option is $7 1/8, plus
the tax impact, if any, should the exercise of this option be
treated as dividend income rather than capital gains to Mr.
Shalam. During 1998, the Company purchased approximately
1,324,075 of these warrants at a price of $1.30 per warrant,
pursuant to the terms of a self-tender offer. In connection
with this purchase, the option to purchase 1,324,075 shares
from John J. Shalam's personal holdings was canceled. During
2001, 314,800 warrants were exercised and converted into
314,800 shares of common stock. The remaining 30,000 warrants
expired in 2001.
During fiscal 1997, the Company granted warrants to purchase
100,000 shares of Class A Common Stock, which have been
reserved, at $6.75 per share. The warrants, which are
exercisable in whole or in part at the discretion of the
holder, expire on January 29, 2002. During the year ended
November 30, 1999, all of the warrants were exercised.
(e) Profit Sharing Plans
The Company has established two non-contributory employee
profit sharing plans for the benefit of its eligible employees
in the United States and Canada. The plans are administered by
trustees appointed by the Company. Accruals for contributions
of $800, $1,000 and $300 were recorded by the Company for the
United States plan in fiscal 1999, 2000 and 2001,
respectively. Contributions required by law to be made for
eligible employees in Canada were not material.
(f) Deferred Compensation Plan
Effective December 1, 1999, the Company adopted a Deferred
Compensation Plan (the Plan) for a select group of management.
The Plan is intended to provide certain executives with
supplemental retirement benefits as well as to permit the
deferral of more of their compensation than they are permitted
to defer under the Profit Sharing and 401(k) Plan. The Plan
provides for a matching contribution equal to 25% of the
employee deferrals up to $20. The Plan is not intended to be a
qualified plan under the provisions of the Internal Revenue
Code. All compensation deferred under the Plan is held by the
Company in an investment trust which is considered an asset of
the Company. The investments, which amounted to $3,844 at
November 30, 2001, have been classified as trading securities
and are included in investment securities on the accompanying
consolidated balance sheet as of November 30, 2001. The return
on
(Continued)
87
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
these underlying investments will determine the amount of
earnings credited to the employees. The Company has the option
of amending or terminating the Plan at any time. The deferred
compensation liability is reflected as a long-term liability
on the accompanying consolidated balance sheet as of November
30, 2001.
(17) Accumulated Other Comprehensive Income (Loss)
The change in net unrealized gain (loss) on marketable securities of
$5,775, $(10,119) and $(831) for the years ended November 30, 1999,
2000 and 2001 is net of tax of $3,540, $(6,202) and $(509),
respectively. Reclassification adjustments of $2,171 and $1,480 are
included in the net unrealized gain (loss) on marketable securities for
the years ended November 30, 1999 and 2000, respectively. There were no
reclassification adjustments for the year ended November 30, 2001.
The currency translation adjustments are not adjusted for income taxes
as they relate to indefinite investments in non-U.S. subsidiaries and
equity investments.
(18) Net Income (Loss) Per Common Share
A reconciliation between the numerators and denominators of the basic
and diluted earnings (loss) per common share is as follows:
For the Years Ended
November 30,
-----------------------------------------------
1999 2000 2001
---- ---- ----
Net income (loss) (numerator for net income per
common share, basic) $ 27,246 $ 27,229 $ (8,209)
Interest on 6 1/4% convertible subordinated debentures, 8
net of tax 84 2 5
----------- ----------- ------------
Adjusted net income (loss) (numerator for net income
per common share, diluted) $ 27,330 $ 27,257 $ (8,204)
=========== =========== ============
Weighted average common shares (denominator for net
income (loss) per common share, basic) 19,100,047 21,393,566 21,877,100
Effect of dilutive securities:
Employee stock options and stock warrants 430,560 1,129,896 --
Employee stock grants 62,175 -- --
Convertible debentures 110,551 42,344 --
----------- ----------- ------------
Weighted average common and potential common
shares outstanding (denominator for net income
(loss) per common share, diluted) 19,703,333 22,565,806 21,877,100
=========== =========== ============
Net income (loss) per common share before
extraordinary item:
Basic $ 1.43 $ 1.17 $ (0.38)
=========== =========== ============
Diluted $ 1.39 $ 1.11 $ (0.38)
=========== =========== ============
Net income (loss) per common share:
Basic $ 1.43 $ 1.27 $ (0.38)
=========== =========== ============
Diluted $ 1.39 $ 1.21 $ (0.38)
=========== =========== ============
(continued)
88
Employee stock options and stock warrants totaling 1,565,000 and
2,173,351 for the years ended November 30, 2000 and 2001, respectively,
were not included in the net income (loss) per common share calculation
because their effect would have been anti-dilutive. There were no
anti-dilutive stock options and stock warrants for the years ended
November 30, 1999.
Dilutive net loss per common share for fiscal 2001 is the same as basic
net loss per common share due to the anti-dilutive effect of the
assumed conversion of preferred shares and exercise of stock options.
(19) Lease Obligations
During 1998, the Company entered into a 30-year lease for a building
with its principal stockholder and chief executive officer. A
significant portion of the lease payments, as required under the lease
agreement, consists of the debt service payments required to be made by
the principal stockholder in connection with the financing of the
construction of the building. For financial reporting purposes, the
lease has been classified as a capital lease, and, accordingly, a
building and the related obligation of approximately $6,340 was
recorded (Note 8). The effective interest rate on the capital lease
obligation is 8.0%
In connection with the capital lease, the Company paid certain
construction costs on behalf of its principal stockholder and chief
executive officer in the amount of $1,301 which, at November 30, 1999,
was included in prepaid and other current assets on the accompanying
consolidated financial statements. During 2000 and 2001, $740 and $60
was repaid to the Company, respectively. At November 30, 2001, $100 has
been included in prepaid and other current assets and $400 has been
included in non-current other assets on the accompanying consolidated
financial statements.
During 1998, the Company entered into a sale/lease back transaction
with its principal stockholder and chief executive officer for $2,100
of equipment. No gain or loss on the transaction was recorded as the
book value of the equipment equaled the fair market value. The lease is
for five years with monthly rental payments of $34. The lease has been
classified as an operating lease.
(Continued)
89
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At November 30, 2001, the Company was obligated under non-cancelable
capital and operating leases for equipment and warehouse facilities for
minimum annual rental payments as follows:
Capital Operating
Lease Leases
2002 $ 553 $ 2,045
2003 554 1,606
2004 553 800
2005 552 669
2006 560 177
Thereafter 11,986 -
------- ----------
Total minimum lease payments 14,758 $ 5,297
=======
Less: amount representing interest 8,508
--------
Present value of net minimum lease payments 6,250
Less: current installments included in accrued
expenses and other current liabilities 54
----------
Long-term obligation $ 6,196
=======
Rental expense for the above-mentioned operating lease agreements and
other leases on a month- to-month basis approximated $2,552, $2,642 and
$2,958 for the years ended November 30, 1999, 2000 and 2001,
respectively.
Minimum future rentals on a one-year operating lease in which the
Company acts as a lessor is approximately 21,245,000 yen ($197) for
fiscal 2001 (Note 4(a)).
The Company leases certain facilities and equipment from its principal
stockholder and several officers. Rentals for such leases are
considered by management of the Company to approximate prevailing
market rates. At November 30, 2001, minimum annual rental payments on
these related party leases, in addition to the capital lease payments,
which are included in the above table, are as follows:
2001 $1,221
2002 960
2003 307
2004 322
2005 109
(Continued)
90
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(20) Financial Instruments
(a) Derivative Financial Instruments
(1) Forward Exchange Contracts
At November 30, 2000, the Company had a contract to
exchange foreign currencies in the form of a forward
exchange contract in the amount of $4,230. This
contract matured on February 28, 2001. At November
30, 1999 and 2001, the Company had no contracts to
exchange foreign currencies in the form of forward
exchange contracts. For the years ended November 30,
1999, 2000 and 2001, gains and losses on foreign
currency transactions which were not hedged were not
material. For the years ended November 30, 1999, 2000
and 2001, there were no gains or losses as a result
of terminating hedges prior to the transaction date.
(2) Equity Collar
The Company entered into an equity collar on
September 26, 1997 to hedge some of the unrealized
gains associated with its investment in CellStar
(Note 7). The equity collar provided that on
September 26, 1998, the Company can put 100,000
shares of CellStar to the counter party to the equity
collar (the bank) at $38 per share in exchange for
the bank being able to call the 100,000 shares of
CellStar at $51 per share. The Company designated
this equity collar as a hedge of 100,000 of its
shares in CellStar being that it provided the Company
with protection against the market value of CellStar
shares falling below $38. Given the high correlation
of the changes in the market value of the item being
hedged to the item underlying the equity collar, the
Company applied hedge accounting for this equity
collar. The equity collar was recorded on the balance
sheet at fair value with gains and losses on the
equity collar reflected as a separate component of
equity. During 1998, the Company sold its equity
collar for $1,499. The transaction resulted in a net
gain on hedge of available-for-sale securities of
$929 which was reflected as a separate component of
stockholders' equity. Also during 1998, the CellStar
stock split two-for-one, resulting in the equity
collar hedging 200,000 shares of CellStar stock.
During 2000, the Company sold 200,000 shares of
CellStar common stock and in connection with the sale
of the shares, recognized $1,499 ($929 net of taxes)
representing the net gain on the hedge of the
available-for-sale securities (Note 1(h)(2)).
The Company is exposed to credit losses in the event of nonperformance by
the counter parties to its forward exchange contracts. The Company
anticipates, however, that counter parties will be able to fully satisfy
their obligations under the contracts. The
(Continued)
91
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Company does not obtain collateral to support financial
instruments, but monitors the credit standing of the counter
parties.
(b) Off-Balance Sheet Risk
Commercial letters of credit are issued by the Company during
the ordinary course of business through major domestic banks
as requested by certain suppliers. The Company also issues
standby letters of credit principally to secure certain bank
obligations of Audiovox Communications Sdn. Bhd. and Audiovox
Venezuela (Note 11(a)). The Company had open commercial
letters of credit of approximately $65,820 and $37,635, of
which $45,569 and $16,834 were accrued for purchases incurred
as of November 30, 2000 and 2001, respectively. The terms of
these letters of credit are all less than one year. No
material loss is anticipated due to nonperformance by the
counter parties to these agreements. The fair value of these
open commercial and standby letters of credit is estimated to
be the same as the contract values based on the nature of the
fee arrangements with the issuing banks.
The Company is a party to joint and several guarantees on
behalf of G.L.M. which aggregate $300. There is no market for
these guarantees and they were issued without explicit cost.
Therefore, it is not practicable to establish its fair value.
(c) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company
to concentrations of credit risk, consist principally of trade
receivables. The Company's customers are located principally
in the United States and Canada and consist of, among others,
wireless carriers and service providers, distributors, agents,
mass merchandisers, warehouse clubs and independent retailers.
At November 30, 2000 and 2001, one customer, a wireless
carrier and service provider, accounted for approximately 47%
and 28% of accounts receivable, respectively.
During the year ended November 30, 1999, three customers
accounted for approximately 19.6%, 14.9% and 12.7%,
respectively, of the Company's 1999 sales. During the year
ended November 30, 2000, one customer accounted for
approximately 50.5% of the Company's 2000 sales. During the
year ended November 30, 2001, one customer accounted for
approximately 35% of the Company's 2001 sales.
The Company generally grants credit based upon analyses of its
customers' financial position and previously established
buying and payment patterns. The Company establishes
collateral rights in accounts receivable and inventory and
obtains personal guarantees from certain customers based upon
management's credit evaluation.
(Continued)
92
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A portion of the Company's customer base may be susceptible to
downturns in the retail economy, particularly in the consumer
electronics industry. Additionally, customers specializing in
certain automotive sound, security and accessory products may
be impacted by fluctuations in automotive sales.
(d) Fair Value
The carrying value of all financial instruments classified as
a current asset or liability is deemed to approximate fair
value because of the short maturity of these instruments. The
estimated fair value of the Company's financial instruments
are as follows:
November 30, 2000 November 30, 2001
------------------------------ ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Investment securities $ 5,484 $ 5,484 $ 5,777 $ 5,777
Long-term obligations $15,000 $15,000 $86,525 $86,525
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate that value:
Investment Securities
The carrying amount represents fair value, which is based upon
quoted market prices and conversion features at the reporting
date (Note 7).
Long-Term Obligations
The carrying amount of bank debt under the Company's revolving
credit agreement approximates fair value because the interest
rate on the bank debt is reset every quarter to reflect
current market rates.
Limitations
Fair value estimates are made at a specific point in time,
based on relevant market information and information about the
financial instrument. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
(Continued)
93
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(21) 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, power retailers,
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. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies (Note 1). The Company allocates interest and
certain shared expenses, including treasury, legal and human resources,
to the segments based upon estimated usage. Intersegment sales are
reflected at cost and have been eliminated in consolidation. A royalty
fee on the intersegment sales, which is eliminated in consolidation, is
recorded by the segments and included in other income (expense).
Certain items are maintained at the Company's corporate headquarters
(Corporate) and are not allocated to the segments. They primarily
include costs associated with accounting and certain executive officer
salaries and bonuses and certain items including investment securities,
equity investments, deferred income taxes, certain portions of excess
cost over fair value of assets acquired, jointly-used fixed assets and
debt. The jointly-used fixed assets are the Company's management
information systems, which is jointly used by the Wireless and
Electronics segments and Corporate. A portion of the management
information systems costs, including depreciation and amortization
expense, are allocated to the segments based upon estimates made by
management. Segment identifiable assets are those which are directly
used in or identified to segment operations.
During the year ended November 30, 1999, three customers of the
Wireless segment accounted for approximately 19.6%, 14.9% and 12.7% of
the Company's 1999 sales. During the year ended November 30, 2000, one
customer of the Wireless segment accounted for approximately 50.5% of
the Company's 2000 sales. During the year ended November 30, 2001, one
customer of the Wireless segment accounted for approximately 35% of the
Company's 2001 sales. No customers in the Electronics segment exceeded
10% of consolidated sales in fiscal 1999, 2000 or 2001.
(Continued)
94
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Effective December 1, 1999, a non-Quintex retail operation, previously
reported in the Wireless segment, has been included in the Electronics
segment.
Consolidated
Wireless Electronics Corporate Totals
1999
Net sales 918,678 242,855 -- 1,161,533
Intersegment sales
(purchases), net (1,149) 1,149 -- --
Interest income 64 80 794 938
Interest expense 6,034 3,332 (5,307) 4,059
Depreciation and amortization 712 1,023 1,553 3,288
Income (loss) before provision
for income tax 31,255 11,358 110 42,723
Total assets 267,435 125,117 82,794 475,346
Non-cash items:
Provision for bad debt
expense 1,892 727 636 3,255
Deferred income tax
benefit -- -- 565 565
Minority interest -- -- 3,327 3,327
Capital expenditures 1,747 1,211 1,864 4,822
2000
Net sales 1,426,195 278,264 -- 1,704,459
Intersegment sales
(purchases), net 302 (302) -- --
Interest income 198 104 1,314 1,616
Interest expense 7,752 2,551 (4,729) 5,574
Depreciation and amortization 789 1,285 2,054 4,128
Income (loss) before provision
for income tax and
extraordinary item 30,997 14,769 (5,801) 39,965
Extraordinary item -- -- 2,189 2,189
Total assets 301,671 134,051 66,165 501,887
Non-cash items:
Provision for bad debt
expense 1,946 758 (185) 2,519
Deferred income tax
benefit -- -- 6,034 6,034
Minority interest -- -- 3,555 3,555
Capital expenditures 1,241 1,091 9,715 12,047
(Continued)
95
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Consolidated
Wireless Electronics Corporate Totals
2001
Net sales 966,701 301,045 -- 1,267,746
Interest income 138 91 441 670
Interest expense 7,711 2,039 (4,575) 5,175
Depreciation and amortization 878 1,408 2,190 4,476
Income (loss) before provision
for (recovery of) income
tax and extraordinary item (17,732) 12,556 (6,970) (12,146)
Total assets 342,290 132,720 58,358 533,368
Non-cash items:
Provision for bad debt
expense 629 1,091 216 1,936
Deferred income tax
benefit -- -- 3,364 3,364
Minority interest -- -- 1,851 1,851
Capital expenditures 941 840 827 2,608
Net sales and long-lived assets by location for the years ended November 30,
1999, 2000 and 2001 were as follows.
Net Sales Long-Lived Assets
------------------------------------------------- ------------------------------------------------
1999 2000 2001 1999 2000 2001
---- ---- ---- ---- ---- ----
United States $1,061,532 $1,458,245 $1,053,008 $68,126 $50,928 $41,365
Canada 23,146 68,004 85,796 - - -
Argentina 22,831 17,888 2,684 - - -
Peru 9,913 - 4,148 - - -
Portugal - 7,679 - - - -
Malaysia 7,780 15,294 12,570 1,275 849 1,220
Venezuela 22,853 15,264 22,422 1,387 644 8,339
Mexico, Central
America and
Caribbean 10,568 100,599 77,134 - - -
Chile - 15,794 1,077 - - -
Other foreign
countries 2,910 5,692 8,907 - - -
-------------- -------------- -------------- ------------ ------------ -----------
Total $1,161,533 $1,704,459 $1,267,746 $70,788 $52,421 $50,924
========== ========== ========== ======= ======= =======
(22) Related Party Transactions
During 2000, the Company advanced $620 to an officer/director of the
Company which has been included in prepaid expenses and other current
assets on the accompanying consolidated balance sheet. On December 1,
2000, the Company obtained an unsecured note in the amount of $620 for
the advance. The note, which bears interest at the LIBOR rate, to be
adjusted
(Continued)
97
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
quarterly, plus 1.25% per annum, is due, principle and interest, on
November 30, 2001. In addition, the Company has outstanding notes due
from various officers of the Company aggregating $235 as of November
30, 2001, which have been included in other assets on the accompanying
consolidated balance sheet. The notes bear interest at the LIBOR rate
plus 0.5% per annum. Principle and interest are payable in equal annual
installments beginning July 1, 1999 through July 1, 2003.
The Company also leases certain facilities and equipment from its
principal stockholder and several officers (Note 19).
In April 2000, the Company entered into a sale/leaseback transaction
with Shintom (Note 4(a)).
Toshiba is a 5% stockholder in ACC (Note 2). During the years ended
November 30, 1999, 2000 and 2001, 39%, 48% and 34% of the Company's
purchases, respectively, were from Toshiba (Note 4(c)). During the
quarter ended November 30, 2001, the Company recorded a receivable in
the amount of $4,550 from Toshiba for upgrades that were performed by
the Company in 2001 on certain models which Toshiba manufactured.
Subsequent to November 30, 2001, the amount was received in full.
The Company engages in transactions with Shintom and TALK (Note 4(b)).
(23) Contingencies
The Company is a defendant in litigation arising from the normal
conduct of its affairs. The impact of the final resolution of these
matters on the Company's results of operations or liquidity in a
particular reporting period is not known. Management is of the opinion,
however, that the litigation in which the Company is a defendant is
either subject to product liability insurance coverage or, to the
extent not covered by such insurance, will not have a material adverse
effect on the Company's consolidated financial position.
During 2001, the Company, along with other suppliers, manufacturers and
distributors of hand-held wireless telephones, was named as a defendant
in five class action lawsuits alleging damages relating to exposure to
radio frequency radiation from hand-held wireless telephones. These
class actions have been consolidated and transferred to a
Multi-District Litigation Panel before the United States District Court
of the District of Maryland. There are various procedural motions
pending and no discovery has been conducted to date. The Company has
asserted indemnification claims against the manufacturers of the
hand-held wireless telephones. The Company is vigorously defending
these class action lawsuits. The Company does not expect the outcome of
any pending litigation to have a material adverse effect on its
consolidated financial position.
(Continued)
97
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company has guaranteed a $300 line of credit with a financial
institution on behalf of one of its equity investments and has established
standby letters of credit to guarantee the bank obligations of Audiovox
Communications Sdn. Bhd. and Audiovox Venezuela (Note 11(a)).
98
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10 - Directors and Executive Officers of the Registrant
Information regarding this item is set forth under the captions
"Election of Directors" and Compliance with Section 16(a) of the Exchange Act"
of the Company's Proxy Statement to be dated March 28, 2002, which will be filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the Proxy
Statement) and is incorporated herein by reference. Information with regard to
Executive Officers is set forth in Item 1 of this Form 10-K.
Item 11 - Executive Compensation
The information regarding this item is set forth under the caption
"Executive Compensation" of the Proxy Statement and is incorporated herein by
reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information regarding this item is set forth under the caption
"Beneficial Ownership of Common Stock" of the Proxy Statement and is
incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
Information regarding this item is set forth under the caption "Certain
Relationships and Related Party Transactions" of the Proxy Statement.
PART IV
Item 14 - Exhibits, Consolidated Financial Statement Schedules, and Reports on
Form 8-K
(a) (1)
The following are included in Item 8 of this Report:
Independent Auditors' Report
Consolidated Balance Sheets of Audiovox Corporation and Subsidiaries as of
November 30, 2000 and 2001.
Consolidated Statements of Operations of Audiovox Corporation and Subsidiaries
for the Years Ended November 30, 1999, 2000 and 2001.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
of Audiovox Corporation and Subsidiaries for the Years Ended November 30, 1999,
2000 and 2001.
95
Consolidated Statements of Cash Flows of Audiovox Corporation and Subsidiaries
for the Years Ended November 30, 1999, 2000 and 2001.
Notes to Consolidated Financial Statements.
(a) (2)
Financial Statement Schedules of the Registrant for the Years Ended November 30,
1999, 2000 and 2001.
Independent Auditors' Report on Financial Statement Schedules
Schedule Page
Number Description Number
------ ----------- ------
Valuation and Qualifying Accounts 105
II
All other financial statement schedules not listed are omitted because they are
either not required or the information is otherwise included.
100
Independent Auditors' Report
The Board of Directors and Stockholders
Audiovox Corporation:
Under the date of March 15, 2002 we reported on the consolidated balance sheets
of Audiovox Corporation and subsidiaries as of November 30, 2000 and 2001, and
the related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for each of the years in the
three-year period ended November 30, 2001, which are included in the Company's
2001 annual report on Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule in the 2001 annual report on Form
10-K. This consolidated financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
s/KPMG LLP
-----------
KPMG LLP
Melville, New York
March 15, 2002
101
(3) Exhibits
See Item 14(c) for Index of Exhibits.
(b) Reports on Form 8-K
During the fourth quarter, the Company filed one report on Form 8-K,
dated September 26, 2001 and filed on October 1, 2001. The Form 8-K
reported on September 26, 2001 the Company that announced preliminary
results for its fiscal third quarter ended August 31, 2001. Annexed to
the Form 8-K, as Exhibits 1 and 2, respectively, were the Company's
Press Release dated September 26, 2001 and a transcript of the
conference call held on September 26, 2001.
(c) Exhibits
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company (incorporated by reference
to the Company's Registration Statement on Form S-1; No. 33-107, filed
May 4, 1987).
3.1a Amendment to Certificate of Incorporation (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
November 30, 1993).
3.1b Amendment to Certificate of Incorporation (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
November 30, 2000).
3.2 By-laws of the Company (incorporated by reference to the Company's
Registration Statement on Form S-1; No. 33-10726, filed May 4, 1987).
10.1 The Fourth Amended and Restated Credit Agreement among the Registrant
and the several banks and financial institutions dated as of July 28,
1999 (incorporated by reference to the Company's Form 8-K filed via
EDGAR on October 27, 1999).
10.2 First Amendment, dated as of October 13, 1999, to the Fourth Amended
and Restated Credit Agreement among the Registrant and the several
banks and financial institutions (incorporated by reference to the
Company's Form 8-K filed via EDGAR on October 27, 1999).
10.3 Second Amendment, dated as of December 20, 1999, to the Fourth Amended
and Restated Credit Agreement among the Registrant and the several
banks and financial institutions (incorporated by reference to the
Company's Form 8-K filed via EDGAR on January 13, 2000).
21 Subsidiaries of the Registrant (filed herewith).
23 Independent Auditors' Consent (filed herewith).
(d) All other schedules are omitted because the required information is
shown in the financial statements or notes thereto or because they are
not applicable.
102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AUDIOVOX CORPORATION
March 15, 2002 BY:s/John J. Shalam
-----------------------------
John J. Shalam, President
and Chief Executive Officer
99
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
President;
Chief Executive Officer
s/John J. Shalam (Principal Executive Officer March 15, 2002
- ----------------
John J. Shalam and Director
Executive Vice President and
s/Philip Christopher Director March 15, 2002
- --------------------
Philip Christopher
Senior Vice President,
Chief Financial Officer (Principal
s/Charles M. Stoehr Financial and Accounting March 15, 2002
- -------------------
Charles M. Stoehr Officer) and Director
s/Patrick M. Lavelle Director March 15, 2002
- --------------------
Patrick M. Lavelle
s/Ann Boutcher Director March 15, 2002
- --------------
Ann Boutcher
s/Richard A. Maddia Director March 15, 2002
- -------------------
Richard A. Maddia
s/Paul C. Kreuch, Jr. Director March 15, 2002
- ---------------------
Paul C. Kreuch, Jr.
s/Dennis McManus Director March 15, 2002
- -----------------
Dennis McManus
s/Irving Halevy Director March 15, 2002
- ---------------
Irving Halevy
104
Schedule II
AUDIOVOX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended November 30, 1999, 2000 and 2001
(In thousands)
Column A Column B Column C Column D Column E
-------- ---------
------------------- --------------
Balance at Charged to Charged Balance
Beginning Costs and to Other At End
Description Of Year Expenses Accounts Deductions Of Year
----------- --------- ---------- --------- ---------- --------
1999
Allowance for doubtful accounts $ 2,944 $ 3,342 -- $ 641 $ 5,645
Cash discount allowances 170 49 -- -- 219
Co-op advertising and volume
rebate allowances 8,137 12,122 -- 9,122* 11,137
Allowance for cellular deactivations 875 386 -- -- 1,261
Reserve for warranties and product
repair costs 4,085 4,486 -- 800 7,771
------- ------- ------- -------- -------
$16,211 $20,385 -- $ 10,563 $26,033
======= ======= ======= ======== =======
2000
Allowance for doubtful accounts $ 5,645 $ 2,794 -- $ 1,518 $ 6,921
Cash discount allowances 219 -- -- 24 195
Co-op advertising and volume
rebate allowances 11,137 16,885 -- 11,930* 16,092
Allowance for cellular deactivations 1,261 -- -- 7 1,254
Reserve for warranties and product
repair costs 7,771 8,326 -- 4,169 11,928
------- ------- ------- -------- -------
$26,033 $28,005 -- $ 17,648 $36,390
======= ======= ======= ======== =======
2001
Allowance for doubtful accounts $ 6,921 $ 2,309 -- $ 3,614 $ 5,616
Cash discount allowances 195 -- -- 13 182
Co-op advertising and volume
rebate allowances 16,092 11,112 -- 16,838* 10,366
Allowance for cellular deactivations 1,254 -- -- (781) 2,035
Reserve for warranties and product
repair costs 11,928 11,319 -- 10,181 13,066
------- ------- ------- -------- -------
$36,390 $24,740 -- $ 29,865 $31,265
======= ======= ======= ======== =======
*Includes $4,095, $8,265 and $12,820 recorded into income during the years ended
November 30, 1999, 2000 and 2001, respectively, due to revisions of previously
established co-operative advertising allowances, market development funds and
volume incentive rebate accruals.
105