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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended August 31, 2002
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Commission file number 0-28839
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AUDIOVOX CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
- ------------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Marcus Blvd., Hauppauge, New York 11788
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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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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Number of shares of each class of the registrant's Common Stock outstanding as
of the latest practicable date.
Class Outstanding at October 10, 2002
Class A Common Stock 20,621,338 Shares
Class B Common Stock 2,260,954 Shares
1
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements:
Consolidated Balance Sheets at November 30,
2001 and August 31, 2002 (unaudited) 3
Consolidated Statements of Operations for the
Three and Nine Months Ended August 31, 2001
and August 31, 2002 (unaudited) 4
Consolidated Statements of Cash Flows
for the Nine Months Ended August 31, 2001
and August 31, 2002 (unaudited) 5
Notes to Consolidated Financial Statements 6-22
ITEM 2 Management's Discussion and Analysis of
Financial Operations and Results of
Operations 23-56
ITEM 4 Controls and Procedures 57
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 57
SIGNATURES 58
Certifications 59-64
2
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
November 30, August 31,
2001 2002
--------- ---------
(unaudited)
Assets
Current assets:
Cash $ 3,025 $ 14,477
Accounts receivable, net 227,209 174,934
Inventory, net 225,662 251,452
Receivable from vendors 6,919 13,440
Prepaid expenses and other current assets 7,632 11,439
Deferred income taxes, net 11,997 13,120
--------- ---------
Total current assets 482,444 478,862
Investment securities 5,777 4,804
Equity investments 10,268 11,282
Property, plant and equipment, net 25,687 26,082
Excess cost over fair value of assets acquired and other intangible
assets, net 4,742 5,215
Deferred income taxes, net 3,148 --
Other assets 1,302 1,023
--------- ---------
$ 533,368 $ 527,268
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 57,162 $ 124,765
Accrued expenses and other current liabilities 41,854 36,905
Income taxes payable 3,035 5,776
Bank obligations 92,213 3,018
Notes payable 5,267 5,550
--------- ---------
Total current liabilities 199,531 176,014
Long-term debt -- 8,120
Capital lease obligation 6,196 6,156
Deferred compensation 3,844 3,734
Deferred income taxes -- 1,995
--------- ---------
Total liabilities 209,571 196,019
--------- ---------
Minority interest 1,851 9,243
--------- ---------
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 2,500
Common stock:
Class A; 60,000,000 authorized; 20,615,846 issued at November 30, 2001
and August 31, 2002, 19,706,309 and 19,602,409 outstanding
at November 30, 2001 and August 31, 2002, respectively 207 207
Class B convertible; 10,000,000 authorized; 2,260,954 issued and
outstanding at November 30, 2001 and August 31, 2002 22 22
Paid-in capital 250,785 249,067
Retained earnings 82,162 84,535
Accumulated other comprehensive loss (6,344) (6,227)
Treasury stock, at cost, 909,537 and 1,013,437 Class A common stock at
November 30, 2001 and August 31, 2002, respectively (7,386) (8,098)
--------- ---------
Total stockholders' equity 321,946 322,006
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 533,368 $ 527,268
========= =========
See accompanying notes to consolidated financial statements.
3
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three and Nine Months Ended August 31, 2001 and August 31, 2002
(In thousands, except share and per share data)
(unaudited)
Three Months Ended Nine Months Ended
August 31, August 31,
2001 2002 2001 2002
---------- ---------- ---------- ----------
Net sales $ 311,715 $ 291,367 $ 916,832 $ 784,567
Cost of sales 282,745 259,791 850,048 711,350
---------- ---------- ---------- ----------
Gross profit 28,970 31,576 66,784 73,217
---------- ---------- ---------- ----------
Operating expenses:
Selling 8,018 7,486 22,413 21,870
General and administrative 12,261 13,208 33,971 39,716
Warehousing and assembly 5,895 6,138 17,197 17,873
---------- ---------- ---------- ----------
Total operating expenses 26,174 26,832 73,581 79,459
---------- ---------- ---------- ----------
Operating income (loss) 2,796 4,744 (6,797) (6,242)
---------- ---------- ---------- ----------
Other income (expense):
Interest and bank charges (1,813) (752) (4,273) (2,754)
Equity in income of equity investments 601 749 3,162 1,611
Gain on issuance of subsidiary shares -- -- -- 15,825
Other, net 40 (856) 643 (868)
---------- ---------- ---------- ----------
Total other income (expense), net (1,172) (859) (468) 13,814
---------- ---------- ---------- ----------
Income (loss) before provision for (recovery of) income taxes
and cumulative effect of a change in accounting for negative
goodwill 1,624 3,885 (7,265) 7,572
Provision for (recovery of) income taxes 618 2,018 (2,573) 5,439
---------- ---------- ---------- ----------
Net income (loss) before cumulative effect of a change in
accounting for negative goodwill 1,006 1,867 (4,692) 2,133
Cumulative effect of a change in accounting for negative goodwill -- -- -- 240
---------- ---------- ---------- ----------
Net income (loss) $ 1,006 $ 1,867 $ (4,692) $ 2,373
========== ========== ========== ==========
Net income (loss) per common share (basic):
Income (loss) before cumulative effect of a change in
accounting for negative goodwill $ 0.05 $ 0.09 $ (0.21) $ 0.10
Cumulative effect of a change in accounting for negative
goodwill - - - 0.01
---------- ---------- ---------- ----------
Net income (loss) per common share (basic) $ 0.05 $ 0.09 $ (0.21) $ 0.11
========== ========== ========== ==========
Net income (loss) per common share (diluted):
Income (loss) before cumulative effect of a change in
accounting for negative goodwill $ 0.05 $ 0.08 $ (0.21) $ 0.10
Cumulative effect of a change in accounting for negative
goodwill - - - 0.01
---------- ---------- ---------- ----------
Net income (loss) per common share (diluted) $ 0.05 $ 0.08 $ (0.21) $ 0.11
========== ========== ========== ==========
Weighted average number of common shares outstanding (basic) 21,966,461 21,947,573 21,847,312 21,960,652
========== ========== ========== ==========
Weighted average number of common shares outstanding (diluted) 22,170,039 21,982,803 21,847,312 21,997,892
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended August 31, 2001 and August 31, 2002
(In thousands)
(unaudited)
August 31,
2001 2002
--------- ---------
Cash flows from operating activities:
Net income (loss) $ (4,692) $ 2,373
Adjustments to reconcile net income (loss) to net cash (used in) provided
by operating activities:
Gain on issuance of subsidiary shares -- (15,825)
Depreciation and amortization 3,229 3,563
Provision for bad debt expense 1,115 2,006
Equity in income of equity investments (3,162) (1,611)
Minority interest (493) (676)
Deferred income tax benefit 349 4,075
Gain on sale of property, plant and equipment, net (1) (12)
Cumulative effect of a change in accounting for negative goodwill -- (240)
Changes in:
Accounts receivable 90,990 51,845
Receivables from vendors 2,631 (6,521)
Inventory (88,568) (26,645)
Accounts payable, accrued expenses and other current liabilities (53,601) 70,241
Income taxes payable (5,360) 2,775
Deferred compensation 1,713 (110)
Investment securities - trading (1,713) 110
Prepaid expenses and other, net (65) (5,871)
--------- ---------
Net cash (used in) provided by operating activities (57,628) 79,477
--------- ---------
Cash flows from investing activities:
Proceeds from issuance of subsidiary shares -- 22,179
Purchase of acquired business -- (7,107)
Purchases of property, plant and equipment (2,146) (2,673)
Proceeds from the sale of property, plant and equipment 201 364
Proceeds from distribution from equity investment 1,289 572
--------- ---------
Net cash (used in) provided by investing activities (656) 13,335
--------- ---------
Cash flows from financing activities:
Borrowings of bank obligations 606,583 210,450
Repayments on bank obligations (550,288) (299,001)
Proceeds from issuance of convertible subordinated debentures -- 8,107
Payment of dividend to minority shareholder of subsidiary (1,034) --
Principal payments on capital lease obligation (21) (40)
Proceeds from exercise of stock options and warrants 2,320 --
Principal payments on subordinated debentures (486) --
Repurchase of Class A common stock (1,382) (712)
--------- ---------
Net cash provided by (used in) financing activities 55,692 (81,196)
--------- ---------
Effect of exchange rate changes on cash (15) (164)
--------- ---------
Net (decrease) increase in cash (2,607) 11,452
Cash at beginning of period 6,431 3,025
--------- ---------
Cash at end of period $ 3,824 $ 14,477
========= =========
See accompanying notes to consolidated financial statements.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended August 31, 2001 and August 31, 2002 (unaudited)
(Dollars in thousands, except share and per share data)
(1) Basis of Presentation
The accompanying consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United
States of America and include all adjustments, which include only
normal recurring adjustments, which, in the opinion of management, are
necessary to present fairly the consolidated financial position of
Audiovox Corporation and subsidiaries (the Company) as of November 30,
2001 and August 31, 2002, the consolidated statements of operations
for the three and nine month periods ended August 31, 2001 and August
31, 2002, and the consolidated statements of cash flows for the nine
month periods ended August 31, 2001 and August 31, 2002. The interim
figures are not necessarily indicative of the results for the year.
Accounting policies adopted by the Company are identified in Note 1 of
the Notes to Consolidated Financial Statements included in the
Company's 2001 Annual Report filed on Form 10-K.
In fiscal 2001, the Company adopted the provisions of Emerging Issue
Task Force Issue (EITF) 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 $361 and $1,168 for the three and nine months ended
August 31, 2001, respectively.
(2) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
Nine Months Ended
August 31,
2001 2002
------ -----
Cash paid during the period:
Interest (excluding bank charges) $2,183 $ 951
Income taxes $2,436 $ 878
6
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During the nine months ended August 31, 2001 and August 31, 2002, the
Company recorded a net unrealized holding loss relating to
available-for-sale marketable securities, net of deferred taxes, of
$(30) and $(527), respectively, as a component of accumulated other
comprehensive loss.
(3) Business Acquisition
On March 15, 2002, Code Systems, Inc., a wholly-owned subsidiary of
Audiovox Electronics Corp., purchased certain assets of Code-Alarm,
Inc., an automotive security product company. The purchase price
consisted of approximately $7,100, paid in cash at the closing, and a
debenture (CSI Debenture) whose value is linked to the future earnings
of Code Systems, Inc. The payment of any amount under the terms of the
CSI Debenture is based on performance and is scheduled to occur in the
first calendar quarter of 2006. The Company accounted for the
transaction in accordance with the purchase method of accounting. As a
result of the transaction, goodwill of $284 was recorded. The
allocation of the purchase price is pending the final determination of
certain acquired balances. Any payments made under the terms of the
CSI Debenture in the future will be reflected as a component of
goodwill. Proforma results of operations were not provided as the
amounts were deemed immaterial to the consolidated financial
statements of the Company.
(4) Co-operative Advertising Allowances, Market Development Funds and
Volume Incentive Rebates
During the quarter ended May 31, 2002, the Company adopted the
provisions of EITF Issue No. 01-9, "Accounting for Consideration Given
by a Vendor to a Customer or a Reseller of the Vendor's Products"
(EITF 01-9). As a result of adopting EITF 01-9 in 2002, the Company
has reclassified co-operative advertising, market development funds
and volume incentive rebate costs (collectively sales incentives),
which were previously included in selling expenses, to net sales as
the Company does not receive an identifiable benefit in connection
with these costs. As a result of this reclassification, net sales and
selling expenses were reduced by $2,543 and $5,113 for the three and
nine months ended August 31, 2001, respectively. The adoption of EITF
01-9 reduced net sales and selling expenses by $8,607 and $25,115 for
the three and nine months ended August 31, 2002, respectively. There
was no further impact on the Company's consolidated financial
statements for the three and nine months ended August 31, 2001 and
2002, as a result of the adoption of EITF 01-9 as the Company's
historical accounting policy with respect to the recognition and
measurement of sales incentives is consistent with EITF 01-9.
The Company records its co-operative advertising and market
development funds at the later of the date at which the related
revenue is recognized or the date at which the sales incentive is
offered. In the event the co-operative advertising and market
development funds results
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
in the loss on the sale of product, the Company makes an assessment of
whether an impairment exists on the related inventory.
The Company records its volume incentive rebates as the underlying
revenue transactions that result in progress by the customer towards
earning the rebate is recorded. If a reasonable estimate of the rebate
that a customer will ultimately earn can be made, the Company will
accrue for such amount. In the majority of the cases, the Company
accrues for the maximum potential amount of the rebate as the amount
of future rebates cannot be reasonably estimated. When the customer
does not achieve the required sales volume or it is likely that the
customer will not claim the funds, the Company reduces the balance of
the accrual for the sales incentives and increases revenue in that
period.
The accrual for sales incentives at November 30, 2001 and August 31,
2002 was $10,366 and $15,516, respectively. During the three and nine
months ended August 31, 2001, $2,523 and $10,800, respectively, and,
during the three and nine months ended August 31, 2002, $733 and
$2,268, respectively, were recorded into revenue representing
revisions to previously established sales incentive accruals. 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.
(5) Inventory
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 quarters ended February 28, 2002, May 31, 2002 and August
31, 2002, the Company recorded inventory write-downs to market of
$1,040, $2,290 and $1,982, respectively, as a result of the reduction
of selling prices primarily related to older model, digital hand-held
phones and other wireless products in anticipation of newer digital
technologies. These write-downs were made based upon open purchase
orders from customers and selling prices subsequent to the balance
sheet date as well as indications from our customers based upon
current negotiations. The Company anticipates that these products will
be sold through our normal distributor channels beginning in the
fourth quarter of 2002. It is reasonably possible that additional
write-downs to market may be required in the future, given the
continued emergence of new technologies.
At August 31, 2002, the Company had on hand 608,515 units in the
amount of $96,184, which has been recorded in inventory and accounts
payable on the accompanying consolidated balance sheet. Of this
accounts payable, $61,968 is subject to an arrangement with the
manufacturer of the phones, which provides for, among other things,
extended payment terms. The payment terms are such that the payable is
non-interest bearing, and the Company is not required to pay for the
phones until shipment has been made to the
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Company's customers. The remaining $34,216 of the $96,184 accounts
payable is payable in accordance with the terms established in the
distribution agreement, which is 30 days.
Under the above arrangement, the Company is entitled to receive price
protection in the event the selling price to its customers is less
than the purchase price from the manufacturer. The Company will record
such price protection, if necessary, at the time of the sale of the
units. Subsequent to August 31, 2002, the Company paid $42,811 to the
manufacturer of the phones, although shipment was not yet made to the
Company's customers and, therefore, payment was not yet due. The
decision to pay Toshiba prior to the due date was made in an effort to
enhance the Company's ongoing relationship with Toshiba.
9
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Net Income (Loss) Per Common Share
A reconciliation between the numerators and denominators of the basic
and diluted income (loss) per common share is as follows:
Three Months Ended Nine Months Ended
August 31, August 31,
2001 2002 2001 2002
---------- ---------- ---------- ----------
Net income (loss) (numerator for basic
income per share) $ 1,006 $ 1,867 $ (4,692) $ 2,373
Interest on 6 1/4% convertible subordinated
debentures, net of tax -- -- 5 --
---------- ---------- ---------- ----------
Adjusted net income (loss) (numerator for
diluted income per share) $ 1,006 $ 1,867 $ (4,687) $ 2,373
========== ========== ========== ==========
Weighted average common shares
(denominator for basic income per share) 21,966,461 21,947,573 21,847,312 21,960,652
Effect of dilutive securities:
Employee stock options and stock
warrants 203,578 35,230 -- 37,240
---------- ---------- ---------- ----------
Weighted average common and potential
common shares outstanding
(denominator for diluted income per
share) 22,170,039 21,982,803 21,847,312 21,997,892
========== ========== ========== ==========
Net income (loss) per common share (basic):
Income (loss) before cumulative effect of
a change in accounting for negative
goodwill $ 0.05 $ 0.09 $ (0.21) $ 0.10
Cumulative effect of a change in
accounting for negative goodwill -- -- -- 0.01
---------- ---------- ---------- ----------
Net income (loss) per common share (basic) $ 0.05 $ 0.09 $ (0.21) $ 0.11
========== ========== ========== ==========
Net income (loss) per common share (diluted):
Income (loss) before cumulative effect of
a change in accounting for negative
goodwill $ 0.05 $ 0.08 $ (0.21) $ 0.10
Cumulative effect of a change in
accounting for negative goodwill -- -- -- 0.01
---------- ---------- ---------- ----------
Net income (loss) per common share(diluted) $ 0.05 $ 0.09 $ (0.21) $ 0.11
========== ========== ========== ==========
10
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Stock options and warrants totaling 1,599,200 and 1,984,568 for the
three and nine months ended August 31, 2001, respectively, were not
included in the net income (loss) per common share calculation because
their effect would have been anti-dilutive. Stock options totaling
2,457,200 and 2,551,367 for the three and nine months ended August 31,
2002, respectively, were not included in the net income per common
share calculation because their effect would have been anti-dilutive.
(7) Comprehensive Income (Loss)
The accumulated other comprehensive loss of $6,344 and $6,227 at
November 30, 2001 and August 31, 2002, respectively, on the
accompanying consolidated balance sheets is the net accumulated
unrealized loss on the Company's available-for-sale investment
securities of $1,021 and $1,548 at November 30, 2001 and August 31,
2002, respectively, and the accumulated foreign currency translation
adjustment of $5,323 and $4,679 at November 30, 2001 and August 31,
2002, respectively.
The Company's total comprehensive income (loss) was as follows:
Three Months Ended Nine Months Ended
August 31, August 31,
2001 2002 2001 2002
------- ------- ------- -------
Net income (loss) $ 1,006 $ 1,867 $(4,692) $ 2,373
------- ------- ------- -------
Other comprehensive income (loss):
Foreign currency translation adjustments (108) 68 (57) 644
Unrealized gain (loss) on securities:
Unrealized holding loss arising during period,
net of tax (450) (113) (30) (527)
------- ------- ------- -------
Other comprehensive income (loss), net of tax (558) (45) (87) 117
------- ------- ------- -------
Total comprehensive income (loss) $ 448 $ 1,822 $(4,779) $ 2,490
======= ======= ======= =======
The change in the net unrealized gain (loss) arising during the
periods presented above are net of tax expense of $(276) and $(69) for
the three months ended August 31, 2001 and August 31, 2002,
respectively, and $(18) and $(323) for the nine months ended August
31, 2001 and August 31, 2002, respectively.
(8) Segment Information
The Company has two reportable segments which are organized by
products: Wireless and Electronics. The Wireless segment primarily
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
11
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 for the Company as a whole. The Company
allocates interest and certain shared expenses, including treasury,
legal and human resources, to the segments based upon estimated usage.
Intersegment sales are reflected at cost and have been eliminated in
consolidation. A royalty fee on the intersegment sales, which is
eliminated in consolidation, is recorded by the segments and included
in other income (expense). Certain items are maintained at the
Company's corporate headquarters (Corporate) and are not allocated to
the segments. They primarily include costs associated with accounting
and certain executive officer salaries and bonuses and certain items
including investment securities, equity investments, deferred income
taxes, certain portions of excess cost over fair value of assets
acquired, jointly-used fixed assets and debt. The jointly-used fixed
assets are the Company's management information systems, which are
used by the Wireless and Electronics segments and Corporate. A portion
of the management information systems costs, including depreciation
and amortization expense, are allocated to the segments based upon
estimates made by management. During the three and nine months ended
August 31, 2001 and August 31, 2002, certain advertising costs were
not allocated to the segments. These costs pertained to an advertising
campaign that was intended to promote overall Company awareness,
rather than individual segment products. Segment identifiable assets
are those which are directly used in or identified to segment
operations.
Elimin- Consolidated
Wireless Electronics Corporate ations Totals
Three Months Ended
August 31, 2001
Net sales $ 240,481 $ 71,234 -- - $311,715
Intersegment sales (purchases) (141) 141 -- - --
Pre-tax income (loss) 1,032 3,393 $(2,801) - 1,624
Three Months Ended
August 31, 2002
Net sales $ 186,838 $104,529 -- - $291,367
Intersegment sales (purchases) (284) 284 -- - --
Pre-tax income (loss) (591) 7,406 $(2,930) - 3,885
12
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Elimin- Consolidated
Wireless Electronics Corporate ations Totals
Nine Months Ended
August 31, 2001
Net sales $ 706,159 $210,673 -- -- $ 916,832
Intersegment sales (purchases) (354) 354 -- -- --
Pre-tax income (loss) (11,413) 8,900 $ (4,752) -- (7,265)
Total assets 315,607 118,738 358,640 $(297,217) 495,768
Goodwill, net -- 384 4,434 -- 4,818
Nine Months Ended
August 31, 2002
Net sales $ 518,487 $266,080 -- -- $ 784,567
Intersegment sales (purchases) (268) 268 -- -- --
Pre-tax income (loss) (15,367) 14,726 8,213 -- 7,572
Total assets 283,499 175,879 270,967 (203,077) 527,268
Goodwill, net -- 618 4,597 -- 5,215
In accordance with SFAS No. 142, Corporate wrote-off its unamortized
negative goodwill of $240 as of the date of adoption, which has been
reflected in the consolidated statements of operations as a cumulative
effect of a change in accounting principle for the nine months ended
August 31, 2002. The implementation of SFAS No. 142 was immaterial to
the segments.
Goodwill in the amount of $284 was acquired in March 2002 in
connection with the purchase of certain assets of Code-Alarm, Inc. by
Code Systems, Inc., a wholly-owned subsidiary of Audiovox Electronics
Corp. (Note 3).
(9) Transactions With a Major Supplier
(a) Audiovox Communications Corp. Dividend
In February 2001, the board of directors of Audiovox Communications
Corp. (ACC), declared a dividend payable to its shareholders, Audiovox
Corporation, a then 95% shareholder, and Toshiba Corporation
(Toshiba), a then 5% shareholder for their respective share of net
income for the previous fiscal years. ACC paid Toshiba its share of
the dividend, which approximated $1,034 in the first quarter of 2001.
There were no dividends declared during the nine months ended August
31, 2002, due to the net loss of ACC during 2001.
13
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) Issuance of Subsidiary Shares
On May 29, 2002, Toshiba purchased an additional 20% of ACC,
approximately 31 shares at approximately $774,000 per share, for
approximately $23,900 in cash, bringing Toshiba's total ownership
interest in ACC to 25%. In addition, Toshiba paid $8,100 in exchange
for an $8,100 convertible subordinated note (the Note). The Note bears
interest at a per annum rate equal to 1 3/4% and interest is payable
annually on May 31st of each year, commencing May 31, 2003. The unpaid
principle amount shall be due and payable, together with all unpaid
interest, on May 31, 2007 and automatically renews for an additional
five years. In accordance with the provisions of the Note, Toshiba may
convert the balance of the Note into additional shares of ACC in order
to maintain a 25% interest in ACC, but under no circumstances can
Toshiba convert the Note to exceed a 25% interest in ACC.
In connection with the transaction, the Company, ACC and Toshiba
entered into a stockholders agreement. The stockholders agreement
provides for the composition of the board of directors of ACC and
identifies certain items, other than in the ordinary course of
business, that ACC cannot do without prior approval from Toshiba. The
agreement does not require or preclude ACC from paying dividends on a
pro-rata basis. The agreement may be terminated upon the mutual
written agreement of the parties, if the distribution agreement is
terminated or if either party commences a bankruptcy or similar
proceeding.
The Company has historically been the exclusive distributor for
Toshiba in the United States and Canada. In connection with the
transaction, ACC and Toshiba formalized this distribution arrangement
whereby ACC is Toshiba's exclusive distributor for the sale of Toshiba
products in the United States, Canada, Mexico, and all countries in
the Caribbean and Central and South America through May 29, 2007. The
distribution agreement provides for 30-day payment terms. Also, in
accordance with the terms of the stockholders agreement, upon the
termination of the distribution agreement in accordance with certain
terms of the distribution agreement, Toshiba maintains a put right and
Audiovox Corp. a call right, to repurchase all of the shares held by
the other party for a price equal to the fair market value of the
shares as calculated in accordance with the agreement. Audiovox's call
right is only exercisable if Toshiba elects to terminate the
distribution agreement after its initial five (5) year term.
Additionally, ACC entered into an employment agreement with the
President and Chief Executive Officer (the Executive) of ACC through
May 29, 2007. Under the agreement, ACC is required to pay the
Executive an annual base salary of $500 in addition to an annual bonus
equal to 2% of ACC's annual earnings before income
14
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
taxes. Audiovox Corp., under the employment agreement, was required to
establish and pay a bonus of $3,200 to key employees of ACC, including
the Executive, to be allocated by the Executive. The bonus was for
services previously rendered, and, accordingly, the bonus has been
included in general and administrative expenses in the accompanying
statements of operations for the nine months ended August 31, 2002.
The Executive was required to utilize all or a portion of the bonus
allocated to him to repay the remaining outstanding principal and
accrued interest owed by the Executive to the Company pursuant to the
unsecured promissory note in favor of Audiovox Corp. During the
quarter ended August 31, 2002, the Executive was paid $1,800 less an
amount outstanding under a promissory note of $651.
As a result of the issuance of ACC's shares, the Company recognized a
gain of $15,825 ($9,811 after provision for deferred taxes) during the
quarter ended May 31, 2002. The gain represents the excess of the sale
price per share over the carrying amount per share multiplied by the
number of shares issued to Toshiba. The gain on the issuance of the
subsidiary's shares has been recognized in the accompanying
consolidated statements of operations for the nine months ended August
31, 2002 in accordance with the Company's policy on the recognition of
such transactions, which is an allowable method under Staff Accounting
Bulleting Topic 5.H.
Toshiba's minority interest income (expense) in ACC for the three and
nine months ended August 31, 2001 was $(61) and $360, respectively,
and $90 and $532 for the three and nine months ended August 31, 2002,
respectively, which has been included in other, net on the
accompanying consolidated statements of operations.
(10) Business Combinations and Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
that purchase method of accounting be used for all future business
combinations and specifies criteria intangible assets acquired in a
business combination must meet to be recognized and reported apart from
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of".
The Company early adopted the provisions of SFAS No. 141 and SFAS No. 142
as of December 1, 2001. As a result of adopting the provisions of SFAS No.
141 and 142, the
15
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Company did not record amortization expense relating to its goodwill during
the three and nine month period ended August 31, 2002, which approximated
$16 and $247 during the prior three and nine months ended August 31, 2001,
respectively. The Company was not required under SFAS No. 142 to assess the
useful life and residual value of its goodwill as the Company's goodwill,
at the time of adoption of SFAS No. 142, was equity method goodwill, and,
as such, will continue to be evaluated for impairment under Accounting
Pronouncement Board No. 18, "The Equity Method of Accounting for
Investments in Common Stock", as amended..
As required by the adoption of SFAS No. 142, the Company reassessed the
useful lives and residual values of all acquired intangible assets to make
any necessary amortization period adjustments. Based upon that assessment,
no adjustments were made to the amortization period of residual values of
other intangible assets.
As of November 30, 2001 and August 31, 2002, the Company had intangible
assets subject to amortization of $711 and $711, respectively, and related
accumulated amortization of $692 and $711, respectively, which pertained to
trademarks and patents. Amortization expense for intangible assets subject
to amortization amounted to $15 and $45 for the three and nine months ended
August 31, 2001, respectively. Amortization expense for intangible assets
subject to amortization amounted to $0 and $19 for the three and nine
months ended August 31, 2002, respectively. As of August 31, 2002, all
intangible assets subject to amortization have been fully amortized.
Accordingly, the estimated aggregate amortization expense for each of the
five succeeding years ending August 31, 2007 amounts to $0. Had SFAS No.
142 been applied retrospectively to the three and nine months ended August
31, 2001, there would be no impact to reported net income or loss per
share, respectively.
As of November 30, 2001 and August 31, 2002, the Company had unamortized
goodwill in the amount of $4,731 and $5,215, respectively. In accordance
with SFAS No. 142, the Company wrote-off its unamortized negative goodwill
of $240 as of the date of adoption, which has been reflected in the
consolidated statements of operations as a cumulative effect of a change in
accounting principle for the nine months ended August 31, 2002. During the
three and nine months ended August 31, 2001, the Company recorded $4 and
$12, respectively, for the amortization of negative goodwill. Goodwill in
the amount of $284 was acquired in March 2002 in connection with the
purchase of certain assets of Code-Alarm, Inc. by Code Systems, Inc., a
wholly-owned subsidiary of Audiovox Electronics Corp. (Note 3).
(11) Product Return
Subsequent to being approved by a customer, the Company sold approximately
129,000 units of a tri-mode phone to the customer. The customer claimed
that the units did not meet the required product specifications as
previously tested in the approved samples. The Company
16
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
investigated the situation with the customer and, upon confirmation of the
non-conforming product specifications, accepted return of the product. The
customer then returned and Wireless refunded approximately $21,000 during
the quarter ended February 28, 2001, for the return of approximately 97,000
of these tri-mode phones. During January 2001, Wireless also purchased
93,600 of the same model of tri-mode phone for a cost of $12.4 million. As
a result of changes in the marketplace for wireless products, the selling
price of the phones has been reduced below the original cost. The Company
did not record a write-down on these phones as they expected to receive a
full refund or partial credit from the manufacturer of the phones during
the second quarter of 2001. In April 2001, the Company received a credit
from the manufacturer of $12.4 million. The credit was applied against the
carrying value of the phones on hand which approximated 190,600 phones,
which are appropriately recorded at the lower of cost or market. All of
these phones were subsequently sold. No gain or loss was recorded in
connection with the sale of the phones.
(12) Sales/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.
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 sheets as of
November 30, 2001 and August 31, 2002. Changes arising from the
fluctuations in the Yen exchange rate have been reflected as a component of
accumulated other comprehensive loss on the accompanying consolidated
balance sheets. Vitec is a major supplier to Shintom, and Pearl is an
affiliate of Vitec. The loans bear interest at 5% per annum, and principle
was 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.
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
17
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
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 2001, Shintom extended its
option to repurchase the Property and AX Japan delayed its repayment of the
loans for an additional six months.
18
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In March 2002, 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.
(13) Debt Covenants
The Company maintains a revolving credit agreement with various financial
institutions. 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. During the year ended November 30, 2001, the Company was not
in compliance with certain of its pre-tax income covenants and had not
received a waiver. Accordingly, the Company recorded its bank obligations
in current liabilities at November 30, 2001. The Company subsequently
obtained a waiver for such violations. During the quarter ended February
28, 2002, the Company was not in compliance with certain of its pre-tax
income covenants and obtained a waiver for the quarter ended February 28,
2002 which also deleted reference to the pre-tax income covenant for the
two consecutive quarters ended May 31, 2002. The Company was in compliance
with all other covenants as of and for the quarter ended May 31, 2002. In
addition, the Company was in compliance with its debt covenants as of and
for the quarter ended August 31, 2002.
(14) Income Taxes
Quarterly tax provisions are generally based upon an estimated annual
effective tax rate per taxable entity including evaluations of possible
future events and transactions and are subject to subsequent refinement or
revision. When the Company is unable to estimate a part of its income or
loss, or the related tax expense or benefit, the tax expense or benefit
applicable to that item is reported in the interim period in which the
income or loss occurs. During the quarter and nine months ended August 31,
2002, the tax benefit from certain expenses arising during these periods
could not be reasonably estimated and additional valuation allowances were
recorded for continuing losses in certain states relating to the Wireless
segment, which resulted in an increase in the Company's annual effective
tax rate for these periods.
19
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to the reported provision for (recovery of) income taxes is
as follows:
Three Months Ended Nine Months Ended
August 31, August 31,
2001 2002 2001 2002
-------------- ------------- ------------------- ------------------
Tax provision at Federal
statutory rate $ 568 35.0% $ 1,360 35.0% $(2,543) (35.0%) $ 2,650 35.0%
State income taxes, net of
Federal benefit 33 2.1 48 1.2 190 2.6 658 8.7
Increase (decrease) in
beginning-of-the-year
balance of the valuation
allowance for deferred
tax assets (343) (21.1) 100 2.6 (178) (2.4) 498 6.6
Foreign tax rate
differential 309 19.0 671 18.2 219 3.0 828 10.9
Non-deductible items 75 4.6 53 1.4 251 3.4 1,279 16.9
Other, net (24) (1.5) (214) (6.5) (512) (7.0) (474) (6.3)
----- -------- -------- ------- -------- ------- -------- -----
$ 618 38.1% $ 2,018 51.9% $(2,573) (35.4%) $ 5,439 71.8%
===== ======== ======== ======= ======= ======= ======== =====
Other is a combination of various factors for the three and nine months
ended August 31, 2002, including changes in the taxable income or loss
between various tax entities with differing effective tax rates, changes in
the allocation and apportionment factors between taxable jurisdictions with
differing tax rates of each tax entity, changes in tax rates and other
legislation in the various jurisdictions, and other items.
The net changes in the total valuation allowance for the three and nine
months ended August 31, 2002 were increases of $100 and $498, respectively.
A valuation allowance is provided when it is more likely than not that some
portion, or all, of the deferred tax assets will not be realized. The
Company has established valuation allowances 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 August 31, 2002
(15) Share Repurchase Program
During the second quarter of 1999, the Company's Board of Directors
approved the repurchase of an additional 563,000 shares of the Company's
Class A Common Stock in the open market under a share repurchase program
(the Program). As a result, the Company has
20
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
the authority to repurchase 1,563,000 shares in the open market. During the
quarter ended August 31, 2002, 103,900 shares were repurchased under the
Program at an average price of $6.85 per share for an aggregate amount of
$712.
(16) 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 consolidated financial position, results of operations or
liquidity in a particular reporting period is not known.
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. It is possible that the
Company may incur a loss in connection with these lawsuits. However, an
estimate of the possible loss or range of loss cannot be made. In
accordance with SFAS No. 5, "Accounting for Contingencies", the Company has
not recorded a liability in connection with these lawsuits.
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.
(17) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). SFAS 143 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 is required to adopt the
provisions of SFAS 143 effective December 1, 2002. The Company does not
expect the adoption of SFAS 143 to have a significant effect on the
Company's results of operations or its financial position.
In August 2001, the FASB issued SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting
21
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
for the impairment or disposal of long-lived assets and supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". However, SFAS 144 retains the fundamental
provisions of SFAS 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS 144 supersedes the
accounting and reporting provisions of APB Opinion 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business. However, SFAS
144 retains the requirement of Opinion 30 to report discontinued operations
separately from continuing operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, by
abandonment, or in distribution to owners) or is classified as held for
sale. SFAS 144 also amends ARB No. 51, "Consolidated Financial Statements",
to eliminate the exception to consolidation for a temporarily controlled
subsidiary. The Company is required to adopt SFAS 144 effective December 1,
2002. The Company has not determined the effect, if any, that the adoption
of SFAS 144 will have on the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements
No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections".
SFAS 145 updates, clarifies and simplifies existing accounting
pronouncements by rescinding Statement 4, which required all gains and
losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in Opinion 30 will now be used to classify those gains
and losses. Additionally, the Statement requires that certain lease
modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. The Company is required to adopt the provisions of SFAS No.
145 effective December 1, 2002. The Company does not expect the adoption of
SFAS No. 145 to have a significant effect on its results of operations or
its financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 will spread out the
reporting of expenses related to restructurings initiated after 2002,
because commitment to a plan to exit an activity or dispose of long-lived
assets will no longer be enough to record a liability for the anticipated
costs. Instead, companies will record exit and disposal costs when they are
"incurred" and can be measured at fair value, and they will subsequently
adjust the recorded liability for changes in estimated cash flows. The
provisions of SFAS 146 are effective for exit and disposal activities that
are initiated after December 31, 2002. The Company does not believe that
the adoption of this statement will have any impact on the Company's
consolidated financial statements as no planned restructuring charges
currently exist.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company markets its products under the Audiovox brand name as well as
private labels through a large and diverse distribution network both
domestically and internationally. The Company operates through two marketing
groups: Wireless and Electronics. Wireless consists of Audiovox Communications
Corp. (ACC), a 75%-owned subsidiary of Audiovox, and Quintex, which is a
wholly-owned subsidiary of ACC. ACC markets wireless handsets and accessories
primarily on a wholesale basis to wireless carriers in the United States and to
carriers overseas. Quintex is a small operation for the direct sale of handsets,
accessories and wireless telephone service. Quintex also receives residual fees
and activation commissions from the carriers. Residuals are paid by the carriers
based upon a percentage of usage of customers activated by Quintex for a period
of time (1-5 years). Quintex also sells a small volume of electronics products
not related to wireless which are categorized as "other".
The Electronics Group consists of three wholly-owned subsidiaries, Audiovox
Electronics Corp. (AEC), American Radio Corp. and Code Systems, Inc. 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 players 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. American Radio Corp. is also involved
on a limited basis in the wireless marketplace. Wireless related sales are
categorized as "other".
23
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 included in the Company's 2001 Annual Report filed on Form 10- K
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.
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.
Critical Accounting Policies
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:
24
Revenue Recognition
The Company recognizes revenue from product sales at the time of passage of
title and risk of loss to the customer either at FOB Shipping Point or FOB
Destination, based upon terms established with the customer. Any customer
acceptance provisions are satisfied prior to revenue recognition. There are no
further obligations on the part of the Company subsequent to revenue recognition
except for returns of defective product from the Company's customers. The
Company does not earn revenue from fulfillment services provided to its
customers. Product sales are not subject to the right of return, however, the
Company records an estimate of returns of defective products returned by its
customers. 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 the first quarter of
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 is 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.
25
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 August 31, 2002
was $8,188. 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.
Trade and Promotional Allowances
The Company offers trade and promotional co-operative advertising
allowances, market development funds and volume incentive rebates (collectively
sales incentives) 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. The
Company records the sales incentives as a reduction to net sales as the Company
does not receive an identifiable benefit in connection with these costs. The
Company records its co-operative advertising and market development funds at the
26
later of the date at which the related revenue is recognized or the date at
which the sales incentive is offered. In the event the co-operative advertising
and market development funds results in the loss on the sale of product, the
Company makes an assessment of whether an impairment exists on the related
inventory.
The Company records its volume incentive rebates as the underlying revenue
transactions that result in progress by the customer towards earning the rebate
is recorded. If a reasonable estimate of the rebate that a customer will
ultimately earn can be made, the Company will accrue for such amount. In the
majority of the cases, the Company accrues for the maximum potential amount of
the rebate as the amount of future rebates cannot be reasonably estimated. When
the customer does not achieve the required sales volume or it is likely that the
customer will not claim the funds, the Company reduces the balance of the
accrual for the sales incentives and increases revenue in that period.
The accrual for sales incentives at November 30, 2001 and August 31, 2002
was $10,366 and $15,516, respectively. During the three and nine months ended
August 31, 2001, $2,523 and $10,800, respectively, and, during the three and
nine months ended August 31, 2002, $733 and $2,268, respectively, were recorded
into revenue representing revisions to previously established sales incentive
accruals. 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. 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
27
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. Since price
protection reduces the cost of inventory, as the Company sells the inventory for
which it has received price protection, the amount is reflected as a reduction
to cost of sales. There can be no assurances that the Company will be successful
in negotiating such price protection from its vendors in the future. The Company
has, on occasion, performed upgrades on certain inventory on behalf of its
vendors.
28
The reimbursements the Company receives to perform these upgrades are reflected
as a reduction to the cost of inventory and is recognized as a reduction to cost
of sales as the related inventory is sold. Additionally, the Company's estimates
of future product 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. During the quarters ended February
28, 2002, May 31, 2002 and August 31, 2002, the Company recorded inventory
write-downs to market of $1,040, $2,290 and $1,982, respectively, as a result of
the recent reduction of selling prices primarily related to digital hand-held
phones and other wireless products in anticipation and the introduction of new
digital technologies as well as the overall decrease in demand for wireless
products. 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. As of
August 31, 2002, 47,000 of these units remained in inventory, which, after an
additional write-down during the second quarter of 2002, was valued at $6,083.
It is reasonably possible that additional write-downs to market may be required
in the future, given the continued emergence of new technologies.
29
Warranties
The Company offers warranties of various lengths depending upon the
specific product. The Company's standard warranties require the Company to
repair or replace defective product returned to the Company by both end users
and its customers during such warranty period at no cost to the end users or
customers. The Company records an estimate for warranty related costs 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 $8,938 at August 31, 2002, 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
Three Months Nine Months
Ended Ended
August 31, August 31,
2001 2002 2001 2002
Net sales:
Wireless
Wireless products 74.7% 61.7% 74.5% 63.3%
Activation commissions 2.0 2.1 2.2 2.5
Residual fees 0.3 0.1 0.2 0.2
Other 0.1 0.1 0.1 0.1
----- ----- ----- -----
Total Wireless 77.1 64.0 77.0 66.1
----- ----- ----- -----
Electronics
Mobile electronics 13.1 23.7 12.1 21.2
Consumer electronics 3.9 7.2 5.5 7.1
Sound 5.7 5.1 5.2 5.5
Ohter 0.2 -- 0.2 0.1
----- ----- ----- -----
Total Electronics 22.9 36.0 23.0 33.9
----- ----- ----- -----
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 90.7 89.2 92.7 90.7
----- ----- ----- -----
Gross profit 9.3 10.8 7.3 9.3
Selling 2.6 2.6 2.4 2.8
General and administrative 3.9 4.5 3.7 5.0
Warehousing and assembly 1.9 2.1 1.9 2.3
----- ----- ----- -----
Total operating expenses 8.4 9.2 8.0 10.1
----- ----- ----- -----
Operating income (loss) 0.9 1.6 (0.7) (0.8)
Interest and bank charges (0.6) (0.3) (0.5) (0.3)
Equity in income of equity investments 0.2 0.3 0.3 0.2
Gain on issuance of subsidiary shares -- -- -- 2.0
Other, net -- (0.3) 0.1 (0.1)
----- ----- ----- -----
Income (loss) before provision for (recovery of) income
taxes 0.5 1.3 (0.8) 1.0
Provision for (recovery of) income taxes 0.2 0.7 (0.3) 0.7
Cumulative effect of a change in accounting for
negative goodwill -- -- -- --
----- ----- ----- -----
Net income (loss) 0.3% 0.6% (0.5%) 0.3%
===== ===== ===== =====
31
Consolidated Results
Three months ended August 31, 2001 compared to three months ended August 31,
2002
The net sales and percentage of net sales by marketing group and product
line for the three months ended August 31, 2001 and August 31, 2002 are
reflected in the following table:
Three Months Ended
August 31, 2001 August 31, 2002
--------------- ---------------
Net sales:
Wireless
Wireless products $233,112 74.7% $179,902 61.7%
Activation commissions 6,230 2.0 6,206 2.1
Residual fees 954 0.3 352 0.1
Other 185 0.1 378 0.1
-------- ----- -------- -----
Total Wireless 240,481 77.1 186,838 64.0
-------- ----- -------- -----
Electronics
Mobile electronics 40,919 13.1 68,929 23.7
Consumer electronics 12,122 3.9 20,820 7.2
Sound 17,695 5.7 14,780 5.1
Other 498 0.2 -- --
-------- ----- -------- -----
Total Electronics 71,234 22.9 104,529 36.0
-------- ----- -------- -----
Total $311,715 100.0% $291,367 100.0%
======== ====== ======== ======
Net sales for the third quarter of 2002 were $291,367, a decrease of
$20,348, or 6.5%, from 2001. The decrease in net sales was primarily in Wireless
(22.3% decline) which was partially offset by an increase in Electronics of
46.7%. Sales from our international subsidiaries decreased from 2001 by
approximately $2,494 or 32.6%. Gross margins were 10.8% in 2002 compared to 9.3%
in 2001. The increase in gross margins was primarily due to a change in the
overall mix of sales for wireless products to electronics products which have a
higher gross margin. Operating expenses increased to $26,832 from $26,174,
respectively, an increase of $658 (2.5%) which was primarily an
32
increase in general and administrative expenses of $947. Included in operating
expenses was $1,354 of expenses from Code Systems, Inc., a wholly-owned
subsidiary of Audiovox Electronics Corp. that purchased certain assets of
Code-Alarm, Inc. during the second quarter of 2002 (Note 3). As a percentage of
sales, operating expenses increased to 9.2% in 2002 from 8.4% in 2001. Operating
income for 2002 was $4,744 compared to $2,796 in 2001. Pre-tax profit was $3,885
during 2002 compared to $1,624 in 2001.
Nine months ended August 31, 2001 compared to nine months ended August 31, 2002
The net sales and percentage of net sales by marketing group and product
line for the nine months ended August 31, 2001 and August 31, 2002 are reflected
in the following table:
Nine Months Ended
August 31, 2001 August 31, 2002
--------------- ---------------
Net sales:
Wireless
Wireless products $683,482 74.5% $496,963 63.3%
Activation commissions 20,347 2.2 19,674 2.5
Residual fees 1,855 0.2 1,492 0.2
Other 475 0.1 358 0.1
-------- ----- -------- -----
Total Wireless 706,159 77.0 518,487 66.1
-------- ----- -------- -----
Electronics
Mobile electronics 111,152 12.1 166,100 21.2
Consumer electronics 50,460 5.5 55,825 7.1
Sound 47,293 5.2 43,512 5.5
Other 1,768 0.2 643 0.1
-------- ----- -------- -----
Total Electronics 210,673 23.0 266,080 33.9
-------- ----- -------- -----
Total $916,832 100.0% $784,567 100.0%
======== ===== ======== =====
33
Net sales for the nine months ended August 31, 2002 were $784,567, a
decrease of $132,265, or 14.4%, from 2001. The decrease in net sales was
primarily in Wireless (26.6% decrease) which was partially offset by an increase
in the Electronics Group. Sales from our international subsidiaries decreased
from 2001 by approximately $3,092 or 15.5%. Gross margins were 9.3% in 2002
compared to 7.3% in 2001. The increase in gross margins was primarily due to a
wireless inventory write-down for the nine months ended August 31, 2001 of
$13,500 versus the write-down of $5,312 for the nine months ended August 31,
2002, reimbursement for software upgrades of $4,741 and a change in the overall
mix of sales for wireless products to electronics products, which have a higher
gross margin. Operating expenses increased to $79,459 from $73,581,
respectively, an 8.0% increase primarily due to bonuses of $3,200 paid to ACC
personnel (See Note 9(b)) and the inclusion of operating expenses of $2,243 for
Code Systems, Inc. (Note 3) a wholly-owned subsidiary of Audiovox Electronics
Corp. that purchased certain assets of Code-Alarm, Inc. during the second
quarter of 2002. As a percentage of sales, operating expenses increased to 10.1%
in 2002 from 8.0% in 2001. Operating loss for 2002 was $6,242 compared to
operating loss of $6,797 in 2001. Pre-tax income was $7,572 during 2002 compared
to a pre-tax loss of $7,265 in 2001.
During the second quarter of 2002, Toshiba, a major supplier of wireless
products, purchased an additional 20% of the Company's subsidiary, ACC. ACC
issued the additional shares and an $8,100 1 3/4% convertible subordinated note
to Toshiba for $32,000. As a result of the transaction, the Company recognized a
gain of $15,825 ($9,811 after provision for deferred taxes) (See Note 9(b)).
34
Wireless Results
Three months ended August 31, 2001 compared to three months ended August 31,
2002
The following table sets forth for the periods indicated certain statements
of operations data for the Wireless Group as expressed as a percentage of net
sales:
Three Months Ended
August 31, 2001 August 31, 2002
--------------- ---------------
Net sales:
Wireless products $ 233,112 96.9% $ 179,902 96.3%
Activation commissions 6,230 2.6 6,206 3.3
Residual fees 954 0.4 352 0.2
Other 185 0.1 378 0.2
--------- ----- --------- -----
240,481 100.0% 186,838 100.0%
Gross profit 14,245 5.9 10,442 5.6
Total operating expenses 10,697 4.4 10,696 5.7
--------- ----- --------- -----
Operating income (loss) 3,548 1.5 (254) (0.1)
Other expense (2,516) (1.0) (337) (0.2)
--------- ----- --------- -----
Pre-tax income (loss) $ 1,032 0.5% $ (591) (0.3)%
========= ===== ========= =====
Net sales were $186,838 in the third quarter of 2002, a decrease of
$53,643, or 22.3%, from last year. Unit sales of wireless handsets decreased by
896,000 units in 2002, or 42.0%, to approximately 1,236,000 units from 2,132,000
units in 2001. This decrease was primarily due to reduced sales of TDMA and
analog phones and the overall decrease in demand for wireless products,
partially offset by sales of CDMA 1X phones which contain new digital
technology. The average selling price of handsets increased to $148 per unit in
2002 from $105 per unit in 2001. This increase was primarily due to the
introduction and sales of new digital technologies and decreased sales of older
analog and digital products. Gross profit margins decreased to 5.6% in 2002 from
5.9% in 2001, primarily due to a decrease in wireless accessory sales, which
carry a higher gross margin than phones, and a digital inventory write-down of
$1,982 in the third quarter of 2002. This write-down was made based upon open
purchase orders from customers and selling prices subsequent to the
35
balance sheet date as well as indications from our customers based upon current
negotiations. During the three months ended August 31, 2002, the Company
recorded approximately $16,200 of price protection from a vendor for certain
inventory, of which $6,200 was recorded as a reduction to cost of sales as the
related inventory was sold. Without this price protection, gross profit margins
for the three months ended August 31, 2002 would have been lower by 3.3
percentage points. The other $10,000 in price protection has been reflected as a
reduction to the remaining inventory cost. The Company has an agreement with its
vendor for additional future price protection with respect to specific inventory
items, if needed. Operating expenses remained essentially unchanged $10,696
versus $10,697. Selling expenses decreased $911 from last year, primarily from a
$1,026 decrease in commissions. Commissions decreased as a percentage of sales
for the three months ended August 31, 2002 compared to the three months ended
August 31, 2001 because, during the three months ended August 31, 2001, larger
commissions were paid on sales of analog phone models to customers in Mexico.
The decrease was partially offset by a $154 increase in advertising. Advertising
expense increased as a result of a special advertising campaign at a major
sporting event. General and administrative expenses increased $1,104 from 2001,
primarily an increase in professional fees of $244 due to increased legal fees,
bad debt expense of $453 and insurance expense of $182. Warehousing and assembly
expenses decreased $194 during 2002 from last year, primarily a decrease in
direct labor of $627 due to lower sales volume compared to last year. This
decrease was offset by an increase of $465 in research and development, due to a
credit of $450 received from a vendor in 2001 that did not recur in 2002
pertaining to a research and development program that was not fulfilled and was
terminated. Operating loss for 2002 was $254 compared to last year's operating
income of $3,548.
36
Nine months ended August 31, 2001 compared to nine months ended August 31, 2002
The following table sets forth for the periods indicated certain statements
of operations data for the Wireless Group as expressed as a percentage of net
sales:
Nine Months Ended
August 31, 2001 August 31, 2002
--------------- ---------------
Net sales:
Wireless products $ 683,482 96.7% $ 496,963 95.8%
Activation commissions 20,347 2.9 19,674 3.8
Residual fees 1,855 0.3 1,492 0.3
Other 475 0.1 358 0.1
--------- ----- --------- -----
706,159 100.0% 518,487 100.0%
Gross profit 25,194 3.6 21,630 4.2
Total operating expenses 31,323 4.5 34,093 6.6
--------- ----- --------- -----
Operating loss (6,129) (0.9) (12,463) (2.4)
Other expense (5,284) (0.7) (2,904) (0.6)
--------- ----- --------- -----
Pre-tax loss $ (11,413) (1.6%) $ (15,367) (3.0%)
========= ===== ========= =====
Net sales were $518,487 during the nine months ended August 31, 2002, a
decrease of $187,672, or 26.6%, from last year. Unit sales of wireless handsets
decreased by 1,685,000 units in 2002, or 32.0%, to approximately 3,581,000 units
from 5,266,000 units in 2001. This decrease was primarily due to a delay in
carrier approvals of the new 1X phones during the first quarter of 2002 which
started to sell in the latter part of the second quarter and the overall
decrease in demand for wireless products. The average selling price of handsets
increased to $136 per unit in 2002 from $124 per unit in 2001. This increase was
primarily due to sales of 1X phones which contain new digital technology and
began shipping in the latter part of the second quarter of 2002. Gross profit
margins increased to 4.2% in 2002 from 3.6% in 2001, primarily due to the sales
of new, higher margin products and an inventory write-down of $13,500 in 2001
compared to $5,312 in 2002. This
37
write-down was made based upon open purchase orders from customers and selling
prices subsequent to the balance sheet date as well as indications from our
customers based upon current negotiations. In addition, gross profit margin
dollars were favorably impacted as a result of $4,741 charged to a vendor for
reimbursement for software upgrades performed on inventory sold during the nine
months ended August 31, 2002 by the Company. Without this reimbursement, gross
profit margins for the nine months ended August 31, 2002 would have been lower
by 0.9 percentage points. During the nine months ended August 31, 2002, the
Company received approximately $27,200 of price protection from a vendor for
certain inventory, of which $17,200 was recorded as a reduction to cost of sales
as the related inventory was sold. Without this price protection, gross profit
margins for the nine months ended August 31, 2002 would have been lower by 3.3
percentage points. The other $10,000 in price protection has been reflected as a
reduction to the remaining inventory cost. The Company has an agreement with its
vendor for additional future price protection with respect to specific inventory
items, if needed. Operating expenses increased to $34,093 from $31,323. Selling
expenses decreased $1,707 from last year, primarily a decrease in commissions of
$1,882, a decrease in travel and entertainment of $208 and a decrease in
salesmen salaries of $123. Commissions decreased as a percentage of sales for
the nine months ended August 31, 2002 compared to the nine months ended August
31, 2001 because, during the nine months ended August 31, 2001, larger
commissions were paid on sales of analog phone models to customers in Mexico.
This decrease was partially offset by a $637 increase in advertising. General
and administrative expenses increased $4,774 from 2001, primarily due to bonuses
of $3,200 paid to ACC personnel (See Note 9(b)), an increase in bad debt expense
of $1,066, an increase of $430 in insurance expense, and increase of $356 for
professional fees and an increase in depreciation expense of $186. The increase
was partially offset by a decrease of $419 in licenses due to a non-recurring
licensing fee. Warehousing and
38
assembly expenses decreased $297 during 2002 from last year, primarily a
decrease in direct labor of $482, due to lower sales volume and an increase in
payroll benefits of $128 due to fewer employees. This decrease was partially
offset by an increase in field warehouse expense of $211 due to increased
inventory storage costs and a decrease in research and development of $130, due
to a credit received from a vendor in 2001 of $450 that did not recur in 2002
pertaining to a research and development program that was not fulfilled and was
terminated. Operating loss for 2002 was $12,463 compared to last year's $6,129.
Management believes that the wireless industry will continue to be
extremely competitive in both price and technology. As the growth in the
wireless marketplace has slowed, carrier customer purchasing practices have
changed and pricing pressures have intensified. During the quarters ended
February 28, 2002, May 31, 2002 and August 31, 2002, the Company recorded
inventory write- downs to market of $1,040, $2,290 and $1,982, respectively, as
a result of the recent reduction of selling prices primarily related to digital
hand-held phones and other wireless products in anticipation of new digital
technologies. It is possible that additional write-downs to market may be
required in the future, given the continued emergence of new technologies. This
has and could continue to affect gross margins and the carrying value of
inventories in the future. As the market for digital products becomes more
competitive, the Company may be required to further adjust the carrying value of
its inventory in the future. Industry and financial market forecasts call for
slower growth in the global handset market. Currently, there is a global surplus
of handsets, both at manufacturer and carrier levels. The over-supply situation
is abating, but may continue to impact the Company in the future. There is also
the potential for shortages in the availability of certain wireless components
and parts which may affect our vendors' ability to provide handsets to us on a
timely basis, which may result in delayed shipments to our customers and
decreased sales.
39
Electronics Results
Three months ended August 31, 2001 compared to three months ended August 31,
2002
The following table sets forth for the periods indicated certain statements
of income data and percentage of net sales by product line for the Electronics
Group:
Three Months Ended
August 31, 2001 August 31, 2002
--------------- ---------------
Net sales:
Mobile electronics $40,919 57.5% $ 68,929 66.0%
Consumer electronics 12,122 17.0 20,820 19.9
Sound 17,695 24.8 14,780 14.1
Other 498 0.7 -- --
------- ----- --------- -----
Total net sales 71,234 100.0 104,529 100.0
Gross profit 14,726 20.7 21,172 20.3
Total operating expenses 11,746 16.5 13,546 13.0
------- ----- --------- -----
Operating income 2,980 4.2 7,626 7.3
Other income (expense) 413 0.6 (220) (0.2)
------- ----- --------- -----
Pre-tax income $ 3,393 4.8% $ 7,406 7.1%
======= ===== ========= =====
Net sales increased $33,295 to $104,529 compared to last year's $71,234, an
increase of 46.7%. Mobile electronics sales increased 68.5% compared to last
year to $68,929, primarily due to increases in mobile video. Consumer
electronics sales increased 71.8% from last year, primarily in sales of
video-in-a-bag and portable DVD players. Sound sales decreased 16.5% from last
year to $14,780. Given changes in the marketplace, the sound sales have declined
because fully-featured sound systems are being incorporated into new vehicles at
the factory, rather than being sold aftermarket. This declining trend in sound
systems is expected to continue. Net sales in the Company's Malaysian subsidiary
decreased from last year by approximately 1.3%. The Company's Venezuelan
subsidiary experienced a decrease of 53.6% in sales from last year primarily
from OEM and the impact of economic and political instability. Gross margins of
the Electronics Group were
40
20.3% in 2002 and 20.7% in 2001. Operating expenses increased $1,800 from last
year to $13,546, of which $1,354 pertains to Code Systems, Inc. (see Note 3), a
wholly-owned subsidiary of the Electronics Group that purchased certain assets
of Code-Alarm, Inc. during the second quarter of 2002. As a percentage of sales,
operating expenses decreased to 13.0% from 16.5%. Selling expenses increased
$734 from last year, primarily an increase in commissions of $487 due to higher
sales and an increase in salaries of $222. Of the $734 increase, $369 was
attributable to the operations of Code Systems, Inc. General and administrative
expenses increased $619 from 2001, primarily an increase in salaries of $415 due
to higher bonus accruals due to increased sales volume and increased personnel
and an increase of $624 due to the operations of Code Systems, Inc. This
increase was offset by a decrease in bad debt of $453 related to improved
receivable quality in 2002. Warehousing and assembly expenses increased $446
from 2001, primarily in warehousing and assembly expenses of $213, payroll
benefits of $76 and Code Systems, Inc. operations of $62. Operating income was
$7,626 compared to last year's $2,980.
41
Nine months ended August 31, 2001 compared to nine months ended August 31, 2002
The following table sets forth for the periods indicated certain statements
of income data and percentage of net sales by product line for the Electronics
Group:
Nine Months Ended
August 31, 2001 August 31, 2002
Net sales:
Mobile electronics $ 111,152 52.8% $ 166,100 62.4%
Consumer electronics 50,460 23.9 55,825 21.0
Sound 47,293 22.5 43,512 16.4
Other 1,768 0.8 643 0.2
--------- ----- --------- -----
Total net sales 210,673 100.0 266,080 100.0
Gross profit 41,581 19.7 51,637 19.4
Total operating expenses 32,420 15.4 36,897 13.9
--------- ----- --------- -----
Operating income 9,161 4.3 14,740 5.5
Other expense (261) (0.1) (14) --
--------- ----- --------- -----
Pre-tax income $ 8,900 4.2% $ 14,726 5.5%
========= ===== ========= =====
Net sales increased $55,407 to $266,080 compared to last year's $210,673 an
increase of 26.3%. Mobile electronics sales increased 49.4% compared to last
year to $166,100 primarily due to increases in mobile video. Consumer
electronics sales increased 10.6% from last year, primarily due to increased
sales of video-in-a-bag and portable DVD players. Sound sales decreased 8.0%
from last year to $43,512. Net sales in the Company's Malaysian subsidiary
decreased from last year by approximately 2.4%. The Company's Venezuelan
subsidiary experienced a decrease of 26.6% in sales from last year primarily
from OEM and the impact of economic and political instability. Gross margins of
the Electronics Group were 19.4% in 2002 and 19.7% in 2001. Operating expenses
increased $4,477 from last year to $36,897, of which $2,243 pertains to Code
Systems, Inc. (see Note 3), a wholly-owned subsidiary of the Electronics Group
that purchased certain assets of Code-Alarm, Inc. during the second quarter of
2002. As a percentage of sales, operating expenses decreased to 13.9% from
15.4%. Selling expenses increased $1,280 from last year, primarily an increase
in
42
commissions of $970 from increased sales and salaries an increase of $296 in
salaries and an increase of $200 in trade shows. This increase has been offset
by a decrease in advertising of $352. Of the $1,280 increase, $669 was
attributable to the operations of Code Systems, Inc. General and administrative
expenses increased $2,106 from 2001, primarily an increase in salaries of
$1,198, an increase of $228 in depreciation and an increase of $221 in
insurance. The remaining increase was small fluctuations within the general and
administrative category. Of the $2,106 increase, $1,120 was attributable to the
operations of Code Systems, Inc. Warehousing and assembly expenses increased
$1,091 from 2001, due to engineering consulting for the Ford aftermarket program
and $411 due to an increase in direct labor. Operating income was $14,740
compared to last year's $9,161.
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. As the Company moves further into the Consumer Electronics
market, it may become susceptible to changes in overall economic conditions and
the need to continually introduce new products. The Electronic Group's products
are subject to price fluctuations, mainly in the consumer electronics category,
which could significantly affect the carrying value of inventories and gross
margins in the future. The Electronics Group may also experience additional
competition in the mobile video category as more distributors and manufacturers
enter the market and from increased competition in the Malaysian and Venezuelan
markets and the impact of economic and political instability. Global economic
uncertainty could also affect the markets for our products.
Other Income and Expense
Interest expense and bank charges decreased by $1,061 and $1,519 for the
three and nine months ended August 31, 2002, respectively, compared to the same
periods last year. The decrease
43
was due to lower levels of interest-bearing debt, in addition to lower interest
rates. Equity in income of equity investments increased $148 and decreased
$1,551 for the three and nine months ended August 31, 2002, respectively, as
compared to the same periods last year. For the three and nine months ended
August 31, 2001 and 2002, Audiovox Specialty Applications, LLC represented the
majority of equity in income of equity investments. The decrease during the nine
months was primarily due to a sales program with one customer that did not renew
in 2002. During the second quarter, Toshiba purchased an additional 20% of the
Company's subsidiary, ACC, a supplier of wireless products. The Company
recognized a gain of $15,825 ($9,811 after provision for deferred taxes) in
connection with the issuance of 20% of ACC's shares to Toshiba (See Note 9(b)).
Minority interest income increased by $89 and $143 for the three and nine months
ended August 31, 2002, respectively, as the percentage of minority interest
ownership if ACC increased from 5% to 25% as well as an increase in the net loss
of ACC during the periods.
Provision for Income Taxes
The effective tax (recovery) rate for the three and nine months ended
August 31, 2002 was 51.9% and 71.8% compared to last year's 38.1% and (35.4%),
respectively, for the comparable periods. During the quarter and nine months
ended August 31, 2002, the tax benefit from certain expenses arising during
these periods could not be reasonably estimated and additional valuation
allowances were recorded for continuing losses in certain states relating to the
Wireless segment which resulted in an increase in the Company's annual effective
tax rate for these periods.
44
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 August 31, 2002, the Company had working capital
(defined as current assets less current liabilities) of $302,848 which included
cash of $14,477 compared with working capital of $282,913 at November 30, 2001,
which included cash of $3,025. Operating activities provided approximately
$79,477, primarily from increases in accounts payable, accrued expenses and
other current liabilities and collections of accounts receivable, partially
offset by increases in inventory and receivables from vendors. Inventory
increased approximately $37,065 primarily in the Electronics Group, as product
is being brought in in anticipation of fourth quarter 2002 seasonal sales and to
support overall higher sales levels. This was partially offset by a $11,290
decline in Wireless inventory. Investing activities provided approximately
$13,335, primarily from the proceeds from the issuance of subsidiary shares,
offset by the purchase of certain assets of Code-Alarm, Inc. by Code Systems,
Inc. during the second quarter of 2002. Financing activities used approximately
$81,196, primarily from net repayments of bank obligations.
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 and inventory. The
45
Company's ability to borrow under its credit facility 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.
The credit agreement also allows for commitments up to $50,000 in forward
exchange contracts. In addition, the Company guarantees the borrowings of one of
its equity investees at a maximum of $300.
The credit agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net worth.
Additionally, the agreement includes restrictions and limitations on payments of
dividends, stock repurchases and capital expenditures.
At November 30, 2001 and the first quarter ended February 28, 2002, the
Company was not in compliance with certain of its pre-tax income covenants. The
Company obtained a waiver for the February 28, 2002 violation, which also
deleted reference to the pre-tax income covenant for the two consecutive
quarters ended May 31, 2002, however, as of the date the Company filed its Form
10-K, the Company had not yet received a waiver for the November 30, 2001
violation related to pre-tax income. Accordingly, bank obligations of $86,525
were classified as a current liability on the accompanying consolidated balance
sheet as of November 30, 2001. The Company obtained a waiver on March 22, 2002
for the November 30, 2001 violation. The Company was in compliance with all
other covenants as of and for the quarter ended May 31, 2002. In addition, the
Company was in compliance with its debt covenants as of and for the quarter
ended August 31, 2002. Based upon the anticipated sales of both the Wireless and
Electronics Groups, the Company believes that it will not violate its covenants
throughout the next year. However, there can be no assurances that the covenants
will be met as they are dependent upon the timing of customer acceptance and
shipments. 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
46
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 and Brazil to
finance additional working capital needs. The Malaysian credit facility is
partially secured by the Company under three standby letters of credit and are
payable upon demand or upon expiration of the standby letters of credit. The
obligations of the Company under the Malaysian credit facilities are secured by
the property and building in Malaysia owned by Audiovox Communications Sdn. Bhd.
The Brazilian credit facilities are secured by the Company under standby letters
of credit and are payable upon demand or upon expiration of the standby letter
of credit. There are no covenants under these credit facilities.
The Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At August 31,
2002, 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 $14,345 $ 554 $1,665 $ 1,152 $10,974
Operating leases 7,393 2,183 3,703 1,051 456
Long-term debt 8,120 -- -- 8,120 --
Notes payable 5,550 5,550 -- -- --
------- ------ ------ ------- -------
Total contractual cash
obligations $35,408 $8,287 $5,368 $10,323 $11,430
======= ====== ====== ======= =======
47
Amount of Commitment
Expiration per period
-------------------------------------------------------
Other Total
Commercial Amounts Less than Over
Commitments Committed 1 Year 1-3 Years 4-5 Years 5 years
----------- --------- -------- --------- --------- -------
Lines of credit $ 3,018 $ 3,018 -- -- --
Standby letters
of credit 7,934 7,934 -- -- --
Guarantees 300 300 -- -- --
Commercial
letters of
credit 7,527 7,527 -- -- --
------- ------- ----- ----- -----
Total commercial
commitments $18,779 $18,779 -- -- --
======= ======= ===== ===== =====
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 may require the use of cash. The Company believes
that its cash, other liquid assets, operating cash flows, credit arrangements
and access to equity capital markets, taken together, provide adequate resources
to fund ongoing operating expenditures, including any future capital
expenditures planned. 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.
48
Related Party Transactions
The Company has entered into several related party transactions which are
described below.
Leasing Transactions
During 1998, the Company entered into a 30-year capital lease for a
building with its principal stockholder and chief executive officer, which is
the headquarters of the Wireless operation. Payments on the lease were based
upon the construction costs of the building and the then-current interest rates.
The effective interest rate on the capital lease obligation is 8.0%. In
connection with the capital lease, the Company paid certain costs on behalf of
its principal stockholder and chief executive officer in the amount of $1,301.
The advance does not have a specified due date or interest rate. As of August
31, 2002, $800 has been repaid to the Company. Subsequent to August 31, 2002,
the remaining balance of $501 was fully repaid by the principal stockholder.
During 1998, the Company entered into a sale/leaseback transaction with its
principal stockholder and chief executive officer for $2,100 of equipment, which
has been classified as an operating lease. The lease is a five-year lease with
monthly payments of $34. No gain or loss was recorded on the transaction as the
book value of the equipment equaled the fair market value.
The Company also leases certain facilities from its principal stockholder.
Rentals for such leases are considered by management of the Company to
approximately prevailing market rates. Total lease payments required under the
leases aggregate $3,592 and extend to March 31, 2009.
Amounts Due from Officers
On December 1, 2000, the Company obtained an unsecured note in the amount
of $620 for an advance to an officer/director of the Company. The note, which
bears interest at the LIBOR rate,
49
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 and repaid during June 2002. In addition,
the Company has outstanding notes due from various officers of the Company
aggregating $235 as of November 30, 2001 and August 31, 2002, 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. In accordance with the Sarbanes-Oxley Act of 2002, the Company
will not alter the terms of the notes and all amounts will be repaid in full on
July 1, 2003. In addition, no new notes with officers or directors of the
Company will be entered into.
Transactions with Shintom and TALK
The Company engages in transactions with Shintom and TALK Corporation
(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. At November 30, 2001 and August 31, 2002,
the Company had recorded a receivable from TALK in the amount of $265 and $248,
respectively, a portion of which is payable with interest, which is reflected in
receivable from vendors on the accompanying consolidated financial statements.
50
Transactions with Toshiba
On March 31, 1999, Toshiba purchased 5% of the Company's subsidiary, ACC, a
supplier of wireless products for $5,000 in cash. The Company then owned 95% of
ACC; prior to the transaction ACC was a wholly-owned subsidiary. In February
2001, the Board of Directors of ACC, declared a dividend payable to its
shareholders, Audiovox Corporation, a then 95% shareholder, and Toshiba, a then
5% shareholder. ACC paid Toshiba its share of the dividend, which approximated
$1,034 in the first quarter of 2001. The dividend equaled 5.0% of ACC's prior
year net income. There were no dividends declared during 2002, due to the net
loss of ACC during 2001. During the second quarter of 2002, Toshiba purchased an
additional 20% ACC. Under the terms of the transaction, Toshiba acquired, in
exchange for $23,900 cash, the additional shares of ACC. In addition, Toshiba
paid $8,100 in exchange for an $8,100 convertible subordinated note (the Note)
due from ACC. The Note bears interest at a per annum rate equal to 1 3/4% and
interest is payable annually on May 31st of each year, commencing May 31, 2003.
The unpaid principle amount shall be due and payable, together with all unpaid
interest on May 31, 2007 which will automatically renew for an additional five
years. In accordance with the provisions of the Note, Toshiba may, at any time,
convert the balance of the Note into additional shares of ACC in order to
maintain a 25% maximum interest in ACC. The cost per share of the note is equal
to the per share cost for the $23,900 cash payment of 20% of ACC's shares.
In connection with the transaction, ACC and Toshiba entered into a
distribution agreement whereby ACC will be Toshiba's exclusive distributor for
the sale of Toshiba products in the United States, Canada, Mexico, and all
countries in the Caribbean and Central and South America through May 29, 2007.
Also, in accordance with the terms of the stockholders agreement, upon the
termination of the distribution agreement in accordance with certain terms of
the distribution
51
agreement, Toshiba maintains a put right and Audiovox Corp. a call right, to
repurchase all of the shares held by the other party for a price equal to the
fair market value of the shares as calculated in accordance with the agreement.
Audiovox's call right is only exercisable if Toshiba elects to terminate the
distribution agreement after its initial five (5) year term.
Additionally in connection with the transaction, ACC entered into an
employment agreement with the President and Chief Executive Officer (the
Executive) of ACC through May 29, 2007. Under the agreement, ACC is required to
pay the Executive an annual base salary of $500 in addition to an annual bonus
equal to 2% of ACC's annual earnings before income taxes. Audiovox Corp., under
the employment agreement, was required to establish and pay a bonus of $3,200 to
key employees of ACC, including the Executive, to be allocated by the Executive.
The bonus was for services previously rendered in connection with the Toshiba
purchase of additional shares of ACC, and, accordingly, the bonus has been
included in general and administrative expenses in the accompanying statements
of operations for the nine months ended August 31, 2002. The Executive was
required to utilize all or a portion of the bonus allocated to him to repay the
remaining outstanding principal and accrued interest owed by the Executive to
the Company pursuant to the unsecured promissory note in favor of Audiovox Corp.
During the quarter ended August 31, 2002, the Executive was paid $1,800 less the
amount outstanding under the promissory note of $651.
As a result of the issuance of ACC's shares, the Company recognized a gain
of $15,825 ($9,811 after provision for deferred taxes). The gain on the issuance
of the subsidiary's shares has been recognized in the accompanying consolidated
statements of operations.
Inventory on hand at November 30, 2001 and August 31, 2002 purchased from
Toshiba approximated $99,816 and $113,169, respectively. During the quarter
ended November 30, 2001, the Company recorded a receivable in the amount of
$4,550 from Toshiba for upgrades that were
52
performed by the Company in 2001 on certain models which Toshiba manufactured.
The amount was received in full during the first quarter of 2002. During the
three and nine months ended August 31, 2002, the Company recorded receivables
from Toshiba aggregating approximately $16,200 and $31,900, respectively, for
price protection and software upgrades. As of August 31, 2002, approximately
$21,900 was paid.
At August 31, 2002, the Company had on hand 608,515 units in the amount of
$96,184, which were purchased from Toshiba and have been recorded in inventory
and accounts payable on the accompanying consolidated balance sheet. Of this
accounts payable $61,968 is subject to an arrangement with Toshiba, which
provides for, among other things, extended payment terms. The payment terms are
such that the payable is non-interest bearing, and the Company is not required
to pay for the phones until shipment has been made to the Company's customers.
The remaining $34,216 of the $96,184 accounts payable is payable in accordance
with the terms established in the distribution agreement, which is 30 days.
Under the above arrangement, the Company is entitled to receive price
protection in the event the selling price to its customers is less than the
purchase price from Toshiba. The Company will record such price protection, if
necessary, at the time of the sale of the units. Subsequent to August 31, 2002,
the Company paid $42,811 to Toshiba, although shipment was not yet made to the
Company's customers and, therefore, payment was not yet due. The decision to pay
Toshiba prior to the due date was made in an effort to enhance its ongoing
relationship with Toshiba.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS
53
143"). SFAS 143 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 is required to
adopt the provisions of SFAS 143 effective December 1, 2002. The Company does
not expect the adoption of SFAS 143 to have a significant effect on the
Company's results of operations or its financial position.
In August 2001, the FASB issued SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of". However, SFAS 144 retains the
fundamental provisions of SFAS 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS 144 supersedes the accounting
and reporting provisions of APB Opinion 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for
the disposal of a segment of a business. However, SFAS 144 retains the
requirement of Opinion 30 to report discontinued operations separately from
continuing operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, by abandonment, or in distribution to
owners) or is classified as held for sale. SFAS 144 also amends ARB No. 51,
"Consolidated Financial Statements", to eliminate the exception to consolidation
for a temporarily controlled subsidiary. The Company is required to adopt SFAS
144 effective December 1, 2002. The Company has not determined the effect, if
any, that the adoption of SFAS 144 will have on the Company's consolidated
financial statements.
54
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements
No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections". SFAS 145
updates, clarifies and simplifies existing accounting pronouncements by
rescinding Statement 4, which required all gains and losses from extinguishments
of debt to be aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. As a result, the criteria in Opinion 30 will
now be used to classify those gains and losses. Additionally, the Statement
requires that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The Company is required to adopt the provisions of
SFAS No. 145 effective December 1, 2002. The Company does not expect the
adoption of SFAS No. 145 to have a significant effect on its results of
operations or its financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 will spread out the
reporting of expenses related to restructurings initiated after 2002, because
commitment to a plan to exit an activity or dispose of long-lived assets will no
longer be enough to record a liability for the anticipated costs. Instead,
companies will record exit and disposal costs when they are "incurred" and can
be measured at fair value, and they will subsequently adjust the recorded
liability for changes in estimated cash flows. The provisions of SFAS 146 are
effective for exit and disposal activities that are initiated after December 31,
2002. The Company does not believe that the adoption of this statement will have
any impact on the Company's consolidated financial statements as no planned
restructuring charges currently exist.
Forward-Looking Statements
Except for historical information contained herein, statements made in this
release that would constitute forward-looking statements may involve certain
risks such as our ability to keep pace with
55
technological advances, significant competition in the wireless, mobile and
consumer electronics businesses, quality and consumer acceptance of
newly-introduced products, our relationships with key suppliers and customers,
market volatility, non-availability of product, excess inventory, price and
product competition, new product introductions, the uncertain economic and
political climate in the United States and throughout the rest of the world and
the potential that such climate may deteriorate further and other risks detailed
in the Company's Form 10-K for the fiscal year ended November 30, 2001 and the
Form 10-Q for the first quarter ended February 28, 2002. These factors, among
others, may cause actual results to differ materially from the results suggested
in the forward-looking statements. Forward-looking statements include statements
relating to, among other things:
o growth trends in the wireless, automotive and consumer electronic
businesses
o technological and market developments in the wireless, automotive and
consumer electronics businesses
o liquidity
o availability of key employees
o expansion into international markets
o the availability of new consumer electronic products
These forward-looking statements are subject to numerous risks,
uncertainties and assumptions about the Company including, among other things:
o the ability to keep pace with technological advances
o significant competition in the wireless, automotive and consumer
electronics businesses
o quality and consumer acceptance of newly introduced products
o the relationships with key suppliers
o the relationships with key customers
o possible increases in warranty expense
o the loss of key employees
o foreign currency risks
o political instability
o changes in U.S. federal, state and local and foreign laws
o changes in regulations and tariffs
o seasonality and cyclicality
o inventory obsolescence, availability and price volatility due to
market conditions
56
ITEM 4. CONTROLS AND PROCEDURES.
The Company's Chief Executive Officer and its Chief Financial Officer have
evaluated the Company's disclosure controls and procedures within 90 days of the
filing of this report and have concluded that there are no significant
deficiencies or material weaknesses. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
For the third quarter of fiscal 2002, the Company filed one report on Form
8-K dated May 29, 2002 and filed June 6, 2002. This report stated that Toshiba
Corporation had increased its minority interest in the Company's wireless
subsidiary, Audiovox Communications Corp., to 25% in consideration of $23.9
million in cash and an $8.1 million Subordinated Convertible Note. In addition,
the Company reported that it had entered into the Sixth Amendment and Consent to
the Fourth Amended and Restated Credit Agreement. Annexed to the Form 8-K as
exhibits were the following documents: a press release dated May 29, 2002; a
Securities Purchase Agreement; a Distribution Agreement; a Non-Negotiable
Subordinated Convertible Promissory Note; an Employment Agreement; a Trademark
License Agreement; a Non-Negotiable Demand Note; an Amended and Restated
Certificate of Incorporation of Audiovox Communications Corp.; and the Sixth
Amendment and Consent to the Fourth Amended and Restated Credit Agreement.
57
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUDIOVOX CORPORATION
By:s/John J. Shalam
--------------------------------
John J. Shalam
President and Chief
Executive Officer
Dated: October 21, 2002
By:s/Charles M. Stoehr
--------------------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
58
CERTIFICATION
In connection with the Quarterly Report on Form 10-Q for the period ended
August 31, 2002 (the "Report") of Audiovox Corporation (the "Company"), as filed
with the Securities and Exchange Commission on the date hereof, I, John J.
Shalam, the Chief Executive Officer of the Company certify, to the best of my
knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
s/John J. Shalam
- ---------------------------------------
John J. Shalam
President and Chief Executive Officer
October 21, 2002
59
CERTIFICATION
In connection with the Quarterly Report on Form 10-Q for the period ended
August 31, 2002 (the "Report") of Audiovox Corporation (the "Company"), as filed
with the Securities and Exchange Commission on the date hereof, I, Charles M.
Stoehr, the Chief Financial Officer of the Company certify, to the best of my
knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
s/Charles M. Stoehr
- ---------------------------------------
Charles M. Stoehr
Chief Financial Officer
October 21, 2002
60
CERTIFICATION
I, John J. Shalam, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Audiovox Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and,
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial date and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
61
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 21, 2002
s/John J. Shalam
- ------------------------------------
John J. Shalam,
Chief Executive Officer
62
CERTIFICATION
I, Charles M. Stoehr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Audiovox Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and,
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial date and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
63
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 21, 2002
s/Charles M. Stoehr
- ---------------------------------------
Charles M. Stoehr
Chief Financial Officer
64