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 February 29, 2004
Commission file number 0-28839
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 231-7750
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 126 of the Exchange Act)
Yes X No
------ ------
1
Number of shares of each class of the registrant's Common Stock outstanding
as of the latest practicable date.
[GRAPHIC OMITTED]
Class Outstanding at April 9, 2004
Class A Common Stock 20,773,338 Shares
Class B Common Stock 2,260,954 Shares
2
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I - FINANCIAL INFORMATION 4
ITEM 1 FINANCIAL STATEMENTS 4
Consolidated Balance Sheets at November 30,
2003 and February 29, 2004 (unaudited) 4
Consolidated Statements of Operations (unaudited) for the Three
Months Ended February 28, 2003 and February 29, 2004 5
Consolidated Statements of Cash Flows (unaudited) for the Three
Months Ended February 28, 2003 and February 29, 2004 6
Notes to Consolidated Financial Statements 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 24
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 41
ITEM 4 CONTROLS AND PROCEDURES 42
PART II - OTHER INFORMATION 43
ITEM 1 LEGAL PROCEEDINGS 43
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 44
SIGNATURES 45
3
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
November 30, February 29,
2003 2004
----------- ------------
(unaudited)
Assets
Current assets:
Cash $ 4,702 $ 4,981
Accounts receivable, net 266,421 183,782
Inventory, net 219,664 265,917
Receivables from vendors 7,830 14,018
Prepaid expenses and other current assets 12,371 15,412
Deferred income taxes 9,531 8,437
--------- ---------
Total current assets 520,519 492,547
Investment securities 9,512 9,977
Equity investments 13,142 11,613
Property, plant and equipment, net 20,242 20,069
Excess cost over fair value of assets acquired 7,532 7,022
Intangible assets 8,043 8,043
Other assets 713 650
--------- ---------
$ 579,703 $ 549,921
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 94,864 $ 80,011
Accrued expenses and other current liabilities 42,816 40,230
Accrued sales incentives 21,894 10,481
Income taxes payable 13,218 10,872
Bank obligations 39,940 40,599
Current portion of long-term debt 3,433 2,555
--------- ---------
Total current liabilities 216,165 184,748
Long-term debt 18,289 17,236
Capital lease obligation 6,070 6,054
Deferred income taxes 3,178 2,360
Deferred compensation 5,280 6,096
--------- ---------
Total liabilities 248,982 216,494
--------- ---------
Minority interest 4,993 5,378
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $50 par value; 50,000 shares authorized and outstanding, liquidation
preference of $2,500 per share 2,500 2,500
Series preferred stock $.01 par value, 1,500,000 shares authorized; no shares issued or
outstanding -- --
Common stock:
Class A $.01 par value; 60,000,000 shares authorized; 20,728,382 and
20,735,846 shares issued at November 30, 2003 and February 29, 2004,
respectively; and 19,655,645 and 19,664,889 shares outstanding at
November 30, 2003 and February 29, 2004,
respectively 207 207
Class B $.01 par value convertible; 10,000,000 shares authorized; 2,260,954 shares issued
and outstanding 22 22
Paid-in capital 252,104 252,203
Retained earnings 80,635 82,505
Accumulated other comprehensive loss (1,229) (891)
Treasury stock, at cost, 1,072,737 and 1,070,957 shares of Class A common stock at
November 30, 2003 and February 29, 2004, respectively (8,511) (8,497)
--------- ---------
Total stockholders' equity 325,728 328,049
--------- ---------
Total liabilities and stockholders' equity $ 579,703 $ 549,921
========= =========
See accompanying notes to consolidated financial statements.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months Ended February 28, 2003 and February 29, 2004
(In thousands, except share and per share data)
(unaudited)
Three Months Ended
----------------------------
February 28, February 29,
2003 2004
------------ ------------
Net sales $ 296,818 $ 376,884
Cost of sales 271,350 345,518
------------ ------------
Gross profit 25,468 31,366
------------ ------------
Operating expenses:
Selling 7,303 9,920
General and administrative 12,305 17,106
Warehousing and technical support 1,399 1,703
------------ ------------
Total operating expenses 21,007 28,729
------------ ------------
Operating income 4,461 2,637
------------ ------------
Other income (expense):
Interest and bank charges (1,105) (1,435)
Equity in income of equity investees 371 1,003
Other, net (1,099) 851
------------ ------------
Total other income (expense), net (1,833) 419
------------ ------------
Income before provision for income taxes and minority interest 2,628 3,056
Provision for income taxes 1,040 800
Minority interest expense (380) (386)
------------ ------------
Net income $ 1,208 $ 1,870
============ ============
Net income per common share (basic) $ 0.06 $ 0.09
============ ============
Net income per common share (diluted) $ 0.05 $ 0.08
============ ============
Weighted average number of common shares outstanding (basic) 21,830,480 21,922,100
============ ============
Weighted average number of common shares outstanding (diluted) 22,021,548 22,254,488
============ ============
See accompanying notes to consolidated financial statements.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended February 28, 2003 and February 29, 2004
(In thousands)
(unaudited)
Three Months Ended
------------------------------
February 28, February 29,
2003 2004
------------ -----------
Cash flows from operating activities:
Net income $ 1,208 $ 1,870
Adjustments to reconcile net income to net cash flows provided by operating activities
Depreciation and amortization 1,030 1,086
Provision for bad debt expense 48 58
Equity in income of equity investees (371) (1,003)
Minority interest 380 386
Deferred income tax expense, net 79 440
Loss on disposal of property, plant and equipment, net 116 --
Tax benefit on stock options exercised -- 21
Non-cash stock compensation -- 268
Changes in operating assets and liabilities
Accounts receivable 81,337 82,753
Inventory 76,436 (46,225)
Receivables from vendors 12,252 (6,187)
Prepaid expenses and other assets (6,087) (1,740)
Investment securities-trading (65) (815)
Accounts payable, accrued expenses and other current liabilities and accrued sales
incentives (93,551) (28,446)
Income taxes payable 4,369 (2,326)
--------- ---------
Net cash provided by operating activities 77,181 140
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (90) (909)
Proceeds from sale of property, plant and equipment 183 18
Proceeds from distribution from an equity investee 70 2,526
Proceeds from reduction of purchase price of acquired business -- 510
--------- ---------
Net cash provided by investing activities 163 2,145
--------- ---------
Cash flows from financing activities:
Borrowings from bank obligations 149,546 253,098
Repayments on bank obligations (186,495) (252,638)
Principal payments on capital lease obligation (15) (16)
Proceeds from exercise of stock options and warrants -- 71
Principal payments on debt -- (2,697)
--------- ---------
Net cash used in financing activities (36,964) (2,182)
--------- ---------
Effect of exchange rate changes on cash (5) 176
--------- ---------
Net increase in cash 40,375 279
Cash at beginning of period 2,758 4,702
--------- ---------
Cash at end of period $ 43,133 $ 4,981
========= =========
See accompanying notes to consolidated financial statements.
6
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
(1) Basis of Presentation
The accompanying consolidated financial statements of Audiovox Corporation
and subsidiaries (the Company) were prepared in accordance with accounting
principles generally accepted in the United States of America and include
all adjustments (consisting of normal recurring adjustments), which, in the
opinion of management, are necessary to present fairly the consolidated
financial position, results of operations and cash flows for all periods
presented. The results of operations are not necessarily indicative of the
results to be expected for the full fiscal year.
These consolidated financial statements do not include all disclosures
associated with consolidated financial statements prepared in accordance
with accounting principles generally accepted in the United States of
America. Accordingly, these statements should be read in conjunction with
the Company's consolidated financial statements and notes thereto contained
in the Company's Form 10-K for the year ended November 30, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts of
assets, liabilities, revenues and expenses reported in those financial
statements as well as the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements. These judgments can
be subjective and complex, and consequently actual results could differ
from those estimates and assumptions. Significant estimates made by the
Company include the allowance for doubtful accounts, allowance for cellular
deactivations, inventory valuation, recoverability of deferred tax assets,
valuation of long-lived assets, accrued sales incentives and warranty
reserves.
A summary of the Company's significant accounting policies is identified in
Note 1 of the Notes to Consolidated Financial Statements included in the
Company's 2003 Annual Report filed on Form 10-K. There have been no changes
to the Company's significant accounting policies subsequent to November 30,
2003.
(2) Net Income Per Common Share
Basic net income per common share is based upon the weighted average number
of common shares outstanding during the period. Diluted net income per
common share reflects the potential dilution that would occur if securities
or other contracts to issue common stock were exercised or converted into
common stock.
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
A reconciliation between the numerators and denominators of the basic and
diluted income per common share is as follows:
Three Months Ended
----------------------------------
February 28, February 29,
2003 2004
----------- -----------
Net income (numerator) $ 1,208 $ 1,870
=========== ===========
Weighted average number of common shares outstanding (denominator
for net income per common share, basic) 21,830,480 21,922,100
Effect of dilutive securities:
Stock options and warrants 191,068 332,388
----------- -----------
Weighted average number of common shares and potential common
shares outstanding (denominator for net income per common share,
diluted) 22,021,548 22,254,488
=========== ===========
Net income per common share (basic) $ 0.06 $ 0.09
=========== ===========
Net income per common share (diluted) $ 0.05 $ 0.08
=========== ===========
Stock options and warrants totaling 1,588,200 and 1,465,000 for the three
months ended February 28, 2003 and February 29, 2004, respectively, were
not included in the net income per common share calculation because their
effect would have been anti-dilutive.
(3) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss of $1,229 and $891 at November 30,
2003 and February 29, 2004, respectively, on the accompanying consolidated
balance sheets includes the net accumulated unrealized gain on the
Company's available-for-sale investment securities of $1,135 and $928 at
November 30, 2003 and February 29, 2004, respectively, offset by foreign
currency translation adjustments of $(2,364) and $(1,819) at November 30,
2003 and February 29, 2004, respectively.
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
The Company's total comprehensive income was as follows:
Three Months Ended
----------------------------
February 28, February 29,
2003 2004
------------ ------------
Net income $ 1,208 $ 1,870
Other comprehensive income:
Foreign currency translation adjustments 685 545
Unrealized holding gain (loss) on available-for-sale investment
securities arising during period, net of tax 122 (207)
------- -------
Other comprehensive income, net of tax 807 338
------- -------
Total comprehensive income $ 2,015 $ 2,208
======= =======
The change in the net unrealized gain (loss) on marketable securities
arising during the periods presented above are net of a tax provision
(benefit) of $75 and $(127) for the three months ended February 28, 2003
and February 29, 2004, respectively.
(4) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
Three Months Ended
----------------------------
February 28, February 29,
2003 2004
------------ ------------
Cash paid during the period:
Interest (excluding bank charges) $ 682 $1,000
Income taxes (net of refunds) $2,408 $3,030
During the three months ended February 29, 2004, 7,464 stock options were
exercised into shares of Class A Common Stock aggregating proceeds of $71
to the Company.
Non-Cash Transactions
During the three months ended February 28, 2003 and February 29, 2004, the
Company recorded an unrealized holding gain (loss) relating to
available-for-sale marketable investment securities, net of deferred taxes,
9
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
of $122 and $(207), respectively, as a component of accumulated other
comprehensive loss.
During the three months ended February 29, 2004, the Company recorded a
non-cash stock compensation charge of $268 related to the rights under the
call/put options previously granted to employees of Audiovox German
Holdings GmbH (Audiovox Germany) (Note 5).
As a result of stock option exercises, the Company recorded a tax benefit
of $20 during the three months ended February 29, 2004 which is included in
paid-in capital in the accompanying consolidated financial statements.
(5) Business Acquisitions
Code-Alarm, Inc.
On March 15, 2002, Code Systems, Inc. (Code), a wholly-owned subsidiary of
Audiovox Electronics Corp. (AEC), a wholly-owned subsidiary of the Company,
purchased certain assets of Code-Alarm, Inc., an automotive security
product company. The purpose of this acquisition was to expand brand
recognition and improve OEM production with manufacturers. The results of
operations of Code-Alarm, Inc. are included in the accompanying
consolidated financial statements from the date of purchase. The purchase
price consisted of approximately $7,100, paid in cash at the closing, and a
debenture (CSI Debenture) whose value is linked to the future earnings of
Code. The payment of any amount under the terms of the CSI Debenture is
based on performance and is scheduled to occur in the first calendar
quarter of 2006.
The Company accounted for the transaction in accordance with the purchase
method of accounting. An adjustment to the allocation of the purchase price
was made to certain acquired assets resulting in an increase to goodwill of
$706 during the year ended November 30, 2003. During the quarter ended
February 29, 2004, an adjustment to the purchase price was made due to the
collection of monies held in escrow at the time of closing, resulting in a
$510 decrease to goodwill. As a result of the acquisition, goodwill, as
adjusted, of $2,050 was recorded.
Simultaneous with this business acquisition, the Company entered into a
purchase and supply agreement with a third party. Under the terms of this
agreement, the third party will purchase or direct its suppliers to
purchase certain products from the Company. In exchange for entering into
this agreement, the Company issued 50 warrants in its subsidiary, Code,
which vest immediately. These warrants were deemed to have minimal value
10
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
based upon the then current value of Code. Furthermore, the agreement calls
for the issuance of additional warrants based upon the future operating
performance of Code.
Based upon the contingent nature of the debenture and warrants, no
recognition was given to the CSI debenture or warrants as the related
contingencies were not considered probable and such warrants had not vested
at November 30, 2003 or February 29, 2004.
Recoton Audio Group
On July 8, 2003, the Company, through a newly-formed, wholly-owned
subsidiary, acquired in cash (i) certain accounts receivable, inventory and
trademarks from the U.S. audio operations of Recoton Corporation (the "U.S.
audio business") or (Recoton) and (ii) the outstanding capital stock of
Recoton German Holdings GmbH (the "international audio business"), the
parent holding company of Recoton Corporation's Italian, German and
Japanese subsidiaries, for $40,046, net of cash acquired, including
transaction costs of $1.9 million. The primary reason for this transaction
was to expand the product offerings of AEC and to obtain certain
long-standing trademarks such as Jensen(R), Acoustic Research(R) and
others. The Company also acquired an obligation with a German financial
institution as a result of the purchase of the common stock of Recoton
German Holdings GmbH. This obligation is secured by the acquired company's
accounts receivable and inventory.
The results of operations of this acquisition have been included in the
consolidated financial statements from the date of acquisition (July 8,
2003).
The following unaudited pro-forma financial information for the three
months ended February 28, 2003 represents the combined results of the
Company's operations and the Recoton acquisition as if the Recoton
acquisition had occurred at the beginning of the year of acquisition
(December 1, 2002). The unaudited pro-forma financial information does not
necessarily reflect the results of operations that would have occurred had
the Company constituted a single entity during such period.
Three Months Ended
February 28, 2003
-------------------
Revenue $ 316,224
Net loss $ (4,873)
Net loss per share-basic and diluted $ (0.22)
11
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
On August 29, 2003, the Company entered into a call/put option agreement
with certain employees of Audiovox Germany, whereby these employees can
acquire up to a maximum of 20% of the Company's stated share capital in
Audiovox Germany at a call price equal to the same proportion of the actual
price paid by the Company for Audiovox Germany. The put options cannot be
exercised until the later of (i) November 30, 2008 or (ii) the full
repayment (including interest) of an inter-company loan granted to Audiovox
Germany in the amount of 5.3 million Euros. Notwithstanding the lapse of
these time periods, the put options become immediately exercisable upon (i)
the sale of Audiovox Germany or (ii) the termination of employment or death
of the employee. The put price to be paid to the employee upon exercise
will be the then net asset value per share of Audiovox Germany.
Accordingly, the Company recognizes compensation expense based on 20% of
the increase in Audiovox Germany's net assets representing the incremental
change of the put price over the call option price. Compensation expense
for these options amounted to $268 for the three months ended February 29,
2004.
(6) Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill is as follow:
Net beginning balance at November 30, 2003 $ 7,532
Escrow monies collected in connection with Code-Alarm (Note 5) (510)
-------
Net ending balance at February 29, 2004 $ 7,022
=======
At November 30, 2003 and February 29, 2004, intangible assets consisted of
the following:
November 30, 2003
and February 29, 2004
----------------------------------------
Gross
Carrying Accumulated Total Net
Value Amortization Book Value
-------- ------------ ----------
Patents subject to amortization $ 677 $ 677 --
Trademarks subject to amortization 34 34 --
Trademarks not subject to amortization 8,043 -- $8,043
------ ------ ------
Total $8,754 $ 711 $8,043
====== ====== ======
12
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
At February 29, 2004, all intangible assets subject to amortization have
been fully amortized.
(7) Segment Information
The Company has two reportable segments which are organized by products:
Wireless and Electronics. The Wireless Segment markets wireless handsets
and accessories through domestic and international wireless carriers and
their agents, independent distributors and retailers. The Electronics
Segment sells autosound, mobile electronics and consumer electronics,
primarily to mass merchants, specialty retailers, new car dealers, original
equipment manufacturers (OEM), independent installers of automotive
accessories and the U.S. military.
The Company's chief decision maker evaluates performance of the segments
based upon income before provision for income taxes and minority interest.
The accounting policies of the segments are the same as those for the
Company as a whole. The Company allocates interest and certain shared
expenses, including treasury, legal and human resources, to the segments
based upon estimated usage. 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. Such items primarily include costs associated with accounting and
certain executive officer salaries and bonuses and certain items including
investment securities, equity investments, deferred income taxes,
jointly-used fixed assets and debt. The jointly-used fixed assets are the
Company's management information systems, which are used by the Wireless
and Electronics Segments and Corporate. A portion of the management
information systems costs, including depreciation and amortization expense,
are allocated to the segments based upon estimates made by management.
During the three months ended February 28, 2003 and February 29, 2004,
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. During the
three months ended February 29, 2004, the corporate allocation to the
Electronics Segment was reduced by $618 in order to offset costs incurred
13
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
in the Company's Venezuelan subsidiary that were considered to be a
consolidated cost of the Company. Segment identifiable assets are those
which are directly used in or identified to segment operations.
Consolidated
Wireless Electronics Corporate Totals
-------- ----------- --------- ------------
Three Months Ended
February 28, 2003
- --------------------------------
Net sales $216,562 $ 80,256 $ -- $296,818
Income before provision for income
taxes and minority interest 3,250 2,490 (3,112) 2,628
Total assets 177,693 170,817 77,112 425,622
Goodwill, net -- 2,786 4,602 7,388
Three Months Ended
February 29, 2004
- --------------------------------
Net sales $240,335 $136,549 $ -- $376,884
Income before provision for income
taxes and minority interest 1,520 5,154 (3,618) 3,056
Total assets 220,266 286,484 43,171 549,921
Goodwill, net -- 2,420 4,602 7,022
(8) Equity Investments
As of November 30, 2003 and February 29, 2004, the Company's 72% owned
subsidiary, Audiovox Communications Sdn. Bhd., had a 29% ownership interest
in Avx Posse (Malaysia) Sdn. Bhd. (Posse) which monitors car security
commands through a satellite based system in Malaysia. In addition, the
Company had a 20% ownership interest in Bliss- tel which distributes
cellular telephones and accessories in Thailand, and the Company had 50%
non-controlling ownership interests in two other entities: Audiovox
Specialized Applications, Inc. (ASA) which acts as a distributor to
specialized markets for specialized vehicles, such as RV's and van
conversions, of televisions and other automotive sound, security and
accessory products; and G.L.M. Wireless Communications, Inc. (G.L.M.) which
is in the cellular telephone, pager and communications business in the New
York metropolitan area.
The following presents summary financial information for ASA. Such summary
financial information has been provided herein based upon the individual
significance of this unconsolidated equity investment to the consolidated
financial information of the Company. Furthermore, based upon the lack of
significance to the consolidated financial information of the Company no
14
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
summary financial information for the Company's other equity investments
has been provided herein:
November 30, February 29,
2003 2004
------------------ --------------------
Current assets $22,518 $19,397
Non-current assets 4,803 4,626
Current liabilities 4,640 4,398
Members' equity 22,681 19,625
Three Months Ended
--------------------------------------
February 28, February 29,
2003 2004
------------------- -----------------
Net sales $10,025 $13,966
Gross profit 2,811 4,432
Operating income 392 1,537
Net income 728 1,994
The Company's share of income from this unconsolidated equity investment
for the three months ended February 28, 2003 and February 29, 2004 was $364
and $997, respectively.
(9) Income Taxes
Quarterly tax provisions are generally based upon an estimated annual
effective tax rate per taxable entity, including evaluations of possible
future events and transactions, and are subject to subsequent refinement or
revision. When the Company is unable to estimate a part of its annual
income or loss, or the related tax expense or benefit, the tax expense or
benefit applicable to that item is reported in the interim period in which
the income or loss occurs.
15
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to the reported provision for income taxes is as follows:
Three Months Ended
------------------------------------------
February 28, February 29,
2003 2004
---------------------- -------------------
Tax provision at Federal statutory rate $ 920 35.0% $ 1,070 35.0%
State income taxes, net of Federal benefit 219 8.3 144 4.7
Decrease in beginning-of-the-year balance of the
valuation allowance for deferred tax assets (439) (16.7) (529) (17.3)
Foreign tax rate differential 467 17.8 (105) (3.4)
Non-deductible, changes in rates and other, net (127) (4.8) 220 7.2
-------- ------ -------- ------
$ 1,040 39.6% $ 800 26.2%
======== ====== ======== =======
Other is a combination of various factors, including changes in the taxable
income or loss between various tax entities with differing effective tax
rates, changes in the allocation and apportionment factors between taxable
jurisdictions with differing tax rates of each tax entity, changes in tax
rates and other legislation in the various jurisdictions, and other items.
The effective tax rate for the three months ended February 29, 2004, was
26.2% compared to last year's 39.6% for the comparable period.
The net change in the total valuation allowance for the three months ended
February 29, 2004, was a decrease of $529. A valuation allowance is
provided when it is more likely than not that some portion, or all, of the
deferred tax assets will not be realized. The Company has established
valuation allowances for net operating loss carryforwards as well as other
deferred tax assets of the Wireless Segment. Based on the Electronics
Segment's ability to carry back future reversals of deductible temporary
differences to taxes paid in current and prior years and the Electronics
Segment's historical taxable income record, adjusted for unusual items,
management believes it is more likely than not that the Electronics Segment
will realize the benefit of the net deferred tax assets existing at
February 29, 2004.
16
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
(10) Accrued Sales Incentives
A summary of the activity with respect to sales incentives for the three
months ended February 28, 2003 and February 29, 2004, respectively, on a
segment and consolidated basis is provided below:
For the three months ended February 28, 2003
Wireless Electronics Total
Opening balance $ 7,525 $ 4,626 $ 12,151
Accruals 5,552 1,965 7,517
Payments (4,273) (1,299) (5,572)
Reversals for unclaimed sales incentives (163) (731) (894)
-------- -------- --------
Ending balance $ 8,641 $ 4,561 $ 13,202
======== ======== ========
For the three months ended February 29, 2004
Wireless Electronics Total
Opening Balance $ 7,289 $ 14,605 $ 21,894
Accruals 3,623 2,967 6,590
Payments (6,581) (8,322) (14,903)
Reversals for unearned sales incentives (658) (1,370) (2,028)
Reversals for unclaimed sales incentives (18) (1,054) (1,072)
-------- -------- --------
Ending balance $ 3,655 $ 6,826 $ 10,481
======== ======== ========
The majority of the reversals of previously established sales incentive
liabilities pertain to sales recorded in prior periods.
17
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
(11) Product Warranties and Product Repair Costs
The following table provides a summary of the activity with respect to the
Company's product warranties and product repair costs:
Three Months Ended
-------------------------------
February 28, February 29,
2003 2004
---------- ------------
Opening balance $ 15,410 $ 18,512
Liabilities accrued for warranties issued during the
period 1,958 2,934
Warranty claims paid during the period (1,088) (1,755)
-------- --------
Ending balance $ 16,280 $ 19,691
======== ========
(12) Financing Arrangements
(a) Bank Obligations
The Company's principal source of liquidity is its revolving credit
agreement which expires July 27, 2004. The Company is currently
negotiating with the bank to extend this agreement for an additional
three years, of which no assurance can be given. At November 30, 2003
and February 29, 2004, the credit agreement provided for $150,000 of
available credit, including $10,000 for foreign currency borrowings.
Under the credit agreement, the Company may obtain credit through
direct borrowings and letters of credit. The obligations of the
Company under the credit agreement are guaranteed by certain of the
Company's subsidiaries and are secured by accounts receivable,
inventory and the Company's shares of ACC common stock. The credit
agreement also allows for commitments up to $50,000 in forward
exchange contracts.
18
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
Outstanding domestic obligations under the credit agreement at
November 30, 2003 and February 29, 2004 were as follows:
November 30, February 29,
2003 2004
------------ ------------
Revolving Credit Notes $11,709 $22,226
Eurodollar Notes 20,000 10,000
------- -------
$31,709 $32,226
======= =======
The Company's ability to borrow under its credit facility is a maximum
aggregate amount of $150,000, subject to certain conditions, based
upon a formula taking into account the amount and quality of its
accounts receivable and inventory. The credit agreement contains
several covenants requiring, among other things, minimum levels of
pre-tax income and minimum levels of net worth. Additionally, the
agreement includes restrictions and limitations on payments of
dividends, stock repurchases and capital expenditures.
The Company was in compliance with its bank covenants at November 30,
2003 and February 29, 2004. While the Company has historically been
able to obtain waivers for compliance violations, there can be no
assurance that future negotiations with its lenders would be
successful or that the Company will not violate covenants in the
future, therefore, resulting in amounts outstanding to be payable upon
demand. This credit agreement has no cross covenants with other credit
facilities.
The Company also has revolving credit facilities in Malaysia
(Malaysian Credit Agreement) to finance additional working capital
needs. The credit facilities are partially secured by two standby
letters which approximate $800 each and expire in July 2004. In
addition, the obligations of the Company are also secured by the
property and building owned by Audiovox Communications Sdn. Bhd.
Outstanding obligations under the Malaysian Credit Agreement at
November 30, 2003 and February 29, 2004 were approximately $2,721 and
$2,671, respectively.
At February 29, 2004, the Company had additional outstanding standby
letters of credit aggregating $694 which expire on various dates from
May to July 2004.
19
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
(b) Debt/Loan Agreement
On September 2, 2003, the Company's subsidiary, Audiovox German
Holdings GmbH, (Audiovox Germany) borrowed 12 million Euros under a
new term loan agreement. This agreement was for a 5-year term loan
with a financial institution consisting of two tranches. Tranche A is
for 9 million Euros and Tranche B is for 3 million Euros. The term
loan matures on August 30, 2008. Payments are due in 60 monthly
installments and interest accrues at (i) 2.75% over the Euribor rate
for Tranche A and (ii) 3.5% over the three months Euribor rate for
Tranche B. Any amount repaid may not be reborrowed. The term loan
becomes immediately due and payable if a change of control occurs
without permission of the financial institution.
Audiovox Corporation guarantees 3 million Euros of this term loan. The
term loan is secured by the pledge of the stock of Audiovox German
Holdings GmbH and on all brands and trademarks of the Audiovox German
Holdings Group. The term loan requires the maintenance of certain
yearly financial covenants that are calculated according to German
Accounting Standards for Audiovox German Holdings. Should any of the
financial covenants not be met, the financial institution may charge a
higher interest rate on any outstanding borrowings. The short and long
term amounts outstanding under this agreement were $3,226 and $9,736,
respectively, at November 30, 2003 and $2,555 and $8,411,
respectively, at February 29, 2004, and have been included in the
accompanying consolidated balance sheet.
(c) Factoring / Working Capital Arrangements
The Company has available a 16,000 Euro factoring arrangement and
5,000 Euro working capital arrangement with a German financial
institution for its German operations. Selected accounts receivable
are purchased from the Company on a non- recourse basis at 80% of face
value and payment of the remaining 20% upon receipt from the customer
of the balance of the receivable purchased. The rate of interest is
Euribor plus 2.5%, and the Company pays 0.4% of its gross sales as a
fee for this arrangement. The amount outstanding under the working
capital agreement was $5,510 and $5,702 at November 30, 2003 and
February 29, 2004, respectively, and has been included in bank
obligations in the accompanying consolidated balance sheet.
20
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
(13) Commitments and Contingencies
(a) Contingencies
The Company is currently, and has in the past been, a party to routine
litigation incidental to its business. From time to time, the Company
receives notification of alleged violations of registered patent
holders' rights. The Company has either been indemnified by its
manufacturers in these matters, obtained the benefit of a patent
license or has decided to vigorously defend such claims.
The Company and Audiovox Communications Corp. (ACC), along with other
manufacturers of wireless phones and cellular service providers, were
named as defendants in two class action lawsuits alleging
non-compliance with FCC ordered emergency 911 call processing
capabilities. These lawsuits were consolidated and transferred to the
United States District Court for the Northern District of Illinois,
which in turn referred the cases to the Federal Communications
Commission ("FCC") to determine if the manufacturers and service
providers are in compliance with the FCC's order on emergency 911 call
processing capabilities. The Company and ACC intend to vigorously
defend this matter. However, no assurances regarding the outcome of
this matter can be given at this point in the litigation.
During 2001, the Company, along with other suppliers, manufacturers
and distributors of hand-held wireless telephones, was named as a
defendant in five class action lawsuits alleging damages relating to
exposure to radio frequency radiation from hand-held wireless
telephones. These class actions have been consolidated and transferred
to a Multi-District Litigation Panel before the United States District
Court of the District of Maryland. On March 5, 2003, Judge Catherine
C. Blake of the United States District Court for the District of
Maryland granted the defendants' consolidated motion to dismiss these
complaints. Plaintiffs have appealed to the United States Circuit
Court of Appeals, Fourth Circuit. The appeal pending before the United
States Circuit Court of Appeals, Fourth Circuit in the consolidated
class action lawsuits (Pinney, Farina, Gilliam, Gimpelson and Naquin)
against ACC and other suppliers, manufacturers and distributors as
well as wireless carriers of hand- held wireless telephones alleging
damages relating to risk of exposure to radio frequency radiation from
the wireless telephones has not yet been heard. It is anticipated that
the appeal will be heard in June 2004.
During the third quarter of fiscal 2003, a certain Venezuelan
employee, who is also a minority shareholder in Audiovox Venezuela,
21
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
submitted a claim to the Venezuela Labor Court for severance
compensation of approximately $560. The Court approved the claim and
it was paid and expensed by Audiovox Venezuela in the third quarter of
fiscal 2003. The Company is challenging the payment of this claim and
will seek reimbursement from the Venezuelan shareholder or the
Company's insurance carrier.
The Company does not expect the outcome of any pending litigation,
separately and in the aggregate, to have a material adverse effect on
its business, consolidated financial position or results of
operations.
(b) Commitments
During the year ended November 30, 2003, the Company adopted FIN 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantors,
Including Guarantees of Indebtedness of Others" (FIN 45). The Company
has guaranteed the borrowings of one of its 50%-owned equity investees
(G.L.M.) at a maximum of $300. The Company guaranteed the debt of
G.L.M. beginning in December 1996. The Company has not modified this
guarantee after December 31, 2002. No liability has been recorded for
this guarantee in the accompanying consolidated balance sheet. The
Company does not have any contractual recourse provisions that would
enable the Company to recover any amounts paid under the guarantee. No
assets are held by the Company as collateral that the Company could
obtain and liquidate to recover all or a portion of the amounts paid
under the guarantee.
(14) New Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51", which addresses consolidation by business enterprises of variable
interest entities (VIEs) either: (1) that do not have sufficient equity
investment at risk to permit the entity to finance its activities without
additional subordinated financial support, or (2) in which the equity
investors lack an essential characteristic of a controlling financial
interest. In December 2003, the FASB completed deliberations of proposed
modifications to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date of the
VIE. The adoption of FIN 46 did not have an impact on the Company's
consolidated financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
"Revenue Recognition" (SAB No. 104), which codifies, revises and rescinds
22
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended February 28, 2003 and February 29, 2004
(Dollars in thousands, except share and per share data)
certain sections of SAB No. 101, "Revenue Recognition", in order to make
this interpretive guidance consistent with current authoritative accounting
and auditing guidance and SEC rules and regulations. The changes noted in
SAB No. 104 did not have a material effect on our consolidated results of
operations, consolidated financial position or consolidated cash flows.
(15) Potential Sale of ACC
On February 19, 2004, the Company announced that it had signed a
non-binding letter of intent to sell a controlling interest in its Wireless
subsidiary, ACC, to Curitel Communications, Inc., a leading South Korean
mobile phone maker (Curitel). As announced on that date, Audiovox
Corporation must also consider all proposals submitted.
The transaction is subject to a number of contingencies, including
satisfactory completion of due diligence, negotiation and signing of
definitive agreements and requisite approvals from the Board of Directors
and Shareholders. The terms of the transaction have not been finalized. The
Company must also consider all proposals submitted and there can be no
assurances that this, or any other transaction, will be completed or as to
any terms that may be negotiated.
23
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company markets its products under the Audiovox(R) brand name and other
brand names, such as Jensen(R), Magnate(R), Mac Audio(R), Heco(R), Acoustic
Research(R) and Advent(R), as well as private labels through a large and diverse
distribution network both domestically and internationally. The Company operates
through two primary marketing groups: Wireless and Electronics.
Wireless consists of Audiovox Communications Corp. (ACC), a 75%-owned
subsidiary of Audiovox Corporation, and Quintex Mobile Communications Corp.
(Quintex), which is a wholly- owned subsidiary of ACC. ACC markets wireless
handsets and accessories primarily on a wholesale basis to wireless carriers in
the United States and carriers overseas primarily in the CDMA (Code Division
Multiple Access) market. Quintex is a small operation for the direct sale of
handsets, accessories and wireless telephone service. Quintex also receives
customer service awards (residual fees) and activation commissions from the
carriers. Residuals are paid by the carriers based upon the pricing plan of
customers activated by Quintex for a period of time (1-3 years). Quintex also
sells a small volume of electronics products not related to wireless which are
categorized as "other sales".
The Electronics Group consists of four wholly-owned subsidiaries: Audiovox
Electronics Corporation (AEC), American Radio Corp., Code Systems, Inc. (Code)
and Audiovox German Holdings GmbH (Audiovox Germany) and three majority-owned
subsidiaries: Audiovox Communications (Malaysia) Sdn. Bhd., Audiovox Holdings
(M) Sdn. Bhd. and Audiovox Venezuela, C.A. The Electronics Group markets, both
domestically and internationally, automotive sound and security systems,
electronic car accessories, home and portable sound products, two-way radios,
in-vehicle video systems, flat-screen televisions, DVD players and navigation
systems. Sales are made through an extensive distribution network of mass
merchandisers and others. In addition, the Company sells some of its products
directly to automobile manufacturers on an OEM basis. American Radio Corp. is
also involved on a limited basis in the wireless marketplace and these sales are
categorized as "other sales".
The Company allocates interest and certain shared expenses, including
treasury, legal, human resources and information systems, to the marketing
groups based upon both actual and estimated usage. General expenses and other
income items that are not readily allocable are not included in the results of
the two marketing groups.
Critical Accounting Policies
As disclosed in the annual report on Form 10-K for the fiscal year ended
November 30, 2003, the discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in conformity with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses reported in those financial
statements. These judgments can be subjective and complex, and consequently,
actual results could differ from those estimates. Our most critical accounting
policies relate to revenue recognition; sales incentives; accounts receivable;
inventory; goodwill and other intangible assets; warranties and income taxes.
24
Since November 30, 2003, there have been no changes in our critical accounting
policies and no other significant changes to the assumptions and estimates
related to them.
Results of Operations
The following table sets forth, for the periods indicated, certain
statement of operations data for the Company expressed as a percentage of net
sales:
Three Months Ended
---------------------------
February 28, February 29,
2003 2004
----------- ------------
Net sales:
Wireless
Wireless products 70.9% 62.2%
Activation commissions 1.8 1.4
Residual fees 0.2 0.2
Other 0.1 --
------- -------
Total Wireless 73.0 63.8
------- -------
Electronics
Mobile electronics 17.2 13.1
Consumer electronics 5.6 13.4
Sound 4.2 9.7
Other -- --
------- -------
Total Electronics 27.0 36.2
------- -------
Total net sales 100.0 100.0
------- -------
Cost of sales 91.4 91.7
------- -------
Gross profit 8.6 8.3
Selling 2.5 2.6
General and administrative 4.1 4.5
Warehousing and technical support 0.5 0.5
------- -------
Total operating expenses 7.1 7.6
------- -------
Operating income 1.5 0.7
Interest and bank charges (0.3) (0.4)
Equity in income in equity investees 0.1 0.3
Other, net (0.4) 0.2
------- -------
Income before provision for income taxes 0.9 0.8
Provision for income taxes 0.4 0.2
Minority interest expense (0.1) (0.1)
------- -------
Net income 0.4% 0.5%
======= =======
25
Management Key Indicators
Management reviews the following financial and non-financial indicators to
assess the performance of the Company's operating results:
o Net sales by product class - Management reviews this indicator in
order to determine sales trends for certain product classes as this
indicator is directly impacted by unit sales and new product
introductions.
o Gross profit margin - This indicator allows management to assess the
effectiveness of product introductions, timing of product acceptances
and significance of inventory write-downs.
o Operating expenses as a percentage of net sales - This indicator is
reviewed to determine the efficiency of operating expenses in relation
to the Company's operations and identify significant fluctuations or
possible future trends.
o Inventory and accounts receivable turnover - Inventory purchases and
accounts receivable collections are two significant liquidity factors
that determine the Company's ability to fund current operations and
determine if additional borrowings may be necessary for future capital
outlays.
o Major acquisitions and transactions- Management consistently monitors
the aforementioned key indicators as well as economic and industry
conditions during consideration of major acquisitions and
transactions.
26
Consolidated Results
Three months ended February 28, 2003 compared to three months ended February 29,
2004
The net sales and percentage of net sales by marketing group and product
line for the three months ended February 28, 2003 and February 29, 2004 are
reflected in the following table:
Three Months Ended
---------------------------------------------
February 28, 2003 February 29, 2004
-------------------- ----------------------
Net sales:
Wireless
Wireless products $210,574 70.9% $234,410 62.2%
Activation commissions 5,228 1.8 5,315 1.4
Residual fees 540 0.2 610 0.2
Other 220 0.1 -- --
-------- ------ -------- ------
Total Wireless 216,562 73.0 240,335 63.8
-------- ------ -------- ------
Electronics
Mobile electronics 51,090 17.2 49,549 13.1
Consumer electronics 16,495 5.6 36,470 9.7
Sound 12,544 4.2 50,530 13.4
Other 127 -- -- --
-------- ------ -------- ------
Total Electronics 80,256 27.0 136,549 36.2
-------- ------ -------- ------
Total $296,818 100.0% $376,884 100.0%
======== ====== ======== ======
Net Sales
Net sales for the three months ended February 29, 2004 increased $80,066,
or 27.0% to $376,884 as compared with $296,818 in 2003.
Wireless Group sales were $240,335 for the three months ended February 29,
2004 , an 11.0% increase from sales of $216,562 in 2003. Unit sales of wireless
handsets increased 5.6% to approximately 1,258,000 units for the three months
ended February 29, 2004 from approximately 1,191,000 units in 2003. This
increase was primarily due to new product introductions of camera phones with
CDMA 1x technology. The average selling price of the Company's handsets
increased to $179 per unit for the three months ended February 29, 2004 from
$171 per unit in 2003 due to higher selling prices of new product introductions.
Electronics Group sales increased in all product lines, except mobile
electronics, as sales for the three months ended February 29, 2004, were
$136,549, a 70.1% increase from sales of $80,256 in 2003. This increase was
largely due to increased sales in the sound and consumer electronics product
lines as a result of new product introductions. Furthermore, this increase was
also due to the addition of $15,733 in sales by Audiovox Germany, which was
formed in July 2003 as a result of the acquisition of Recoton. (See Note 5 to
the consolidated financial statements.) Excluding Audiovox Germany, sales by the
27
Company's international subsidiaries decreased $381 or 15.9% during the three
months ended February 29, 2004, primarily due to a $951 decrease in Malaysia as
a result of lower OEM sales. This decrease was offset by a $682 increase in
Venezuela due to the temporary shut-down of operations during the first quarter
of fiscal 2003 attributable to political and economic instability. This
situation did not recur for the three months ended February 29, 2004.
Sales were also impacted by a $3,133 decrease in sales incentive expense as
both the Wireless Group and Electronics Group experienced a decline. Trends will
be discussed in further detail in each individual marketing group MD&A
discussion.
Gross Profit
Both the Wireless Group and the Electronics Group experienced a decline in
margins, as the consolidated gross profit margin for the three months ended
February 29, 2004 was 8.3%, compared to 8.6% in 2003. Margins in the Wireless
Group were 4.2% compared to 5.5% in 2003. Margins in the Electronics Group were
15.6% compared to 16.9% in 2003. Even though margins are down in both Groups,
the change in the mix of sales between Wireless and Electronics has affected the
consolidated margins in a favorable way. The Electronics Group represented a
larger percentage of sales in 2004 then 2003 and, since Electronics' products
carry higher margins, it offset the decline in Wireless. Trends will be
discussed in further detail in each individual marketing group MD&A discussion.
Operating Expenses
Operating expenses increased $7,722 to $28,729 for the three months ended
February 29, 2004, as compared to $21,007 in 2003. As a percentage of net sales,
operating expenses increased to 7.6% for the three months ended February 29,
2004 from 7.1% in 2003. Major components of the increase in operating expenses
were in commissions, advertising, executive and office salaries and professional
fees, primarily in the Electronics Group as a result of recent acquisitions and
general growth in business. Trends will be discussed in further detail in each
individual marketing group MD&A discussion.
Operating income for the three months ended February 29, 2004 was $2,637
compared to $4,461 for the prior year.
Other Income and Expense
Interest expense and bank charges increased $330 during the three months
ended February 29, 2004, primarily due to interest incurred on German debt
acquired as a result of the Recoton acquisition, and increased average
borrowings from the Company's primary credit facility during the first quarter
of fiscal 2004 as compared to the first quarter of fiscal 2003.
Equity in income of equity investees increased $632 for the three months
ended February 29, 2004 as compared to the three months ended February 28, 2003.
The increase in equity in income of equity investees was due to an increase in
the equity income of ASA as a result of increased sales and improvement in gross
margins.
28
Other income increased $1,950 during the first quarter of 2004 as compared
to 2003. Increased royalty income of $720 during fiscal 2004 contributed to the
increase in other income as a result of royalty rights received during the
Recoton acquisition. In addition, the appreciation in the fair market value of
investment securities under the Company's deferred compensation plan resulted in
a $513 increase to other income, which is offset by a corresponding increase to
general and administrative expenses. Furthermore, other expense decreased $319
as a result of foreign exchange translation in our Venezuelan subsidiary due to
the decreased devaluation of the Venezuela currency against the U.S. Dollar as
compared to fiscal 2003. During the three months ended February 28, 2003, other
expense was impacted by a $795 loss on foreign exchange translation due to
devaluation of the Venezuela currency and a $283 reduction in the fair market
value of investment securities.
Minority interest expense remained fairly consistent for the three months
ended February 29, 2004 compared to the three months ended February 28, 2003,
primarily due to the decreased earnings of ACC offset by the increased earnings
of Venezuela.
Provision for Income Taxes
The effective tax rate for the three months ended February 29, 2004 was
26.2% compared to last year's 39.6% for the comparable period. The decrease in
the effective tax rate was primarily due to the reduction of the Wireless
Segment's valuation allowance and the Company's mix of foreign and domestic
earnings.
Net Income
As a result of strong sales in both divisions and increased other income
offset by decreased gross margins and increased operating expenses, net income
for the three months ended February 29, 2004 was $1,870 compared to $1,208 in
2003. Earnings per share for the three months ended February 29, 2004 was $0.09
(basic) and $0.08 (diluted) as compared to $0.06 (basic) and $0.05 (diluted) for
2003.
29
Wireless Results
Three months ended February 28, 2003 compared to three months ended February 29,
2004
The following table sets forth for the periods indicated certain statements
of operations data for Wireless expressed as a percentage of net sales:
Three Months Ended
------------------------------------------------
February 28, 2003 February 29, 2004
--------------------- ---------------------
Net sales:
Wireless products $ 210,574 97.3% $ 234,410 97.5%
Activation commissions 5,228 2.4 5,315 2.2
Residual fees 540 0.2 610 0.3
Other 220 0.1 -- --
--------- ------ ---------- ------
Total net sales 216,562 100.0 240,335 100.0
Gross profit 11,818 5.5 10,041 4.2
Operating expenses
Selling 2,663 1.2 2,708 1.1
General and administrative 4,330 2.0 4,496 1.9
Warehousing and technical support 714 0.3 734 0.3
--------- ------ ---------- ------
Total operating expenses 7,707 3.6 7,938 3.3
--------- ------ ---------- ------
Operating income 4,111 1.9 2,103 0.9
Other expense (861) (0.4) (583) (0.2)
--------- ------ ---------- ------
Pre-tax income $ 3,250 1.5% $ 1,520 0.7%
========= ====== ========= ======
Wireless is comprised of ACC and Quintex, both subsidiaries of the Company.
Net Sales
Net sales increased $23,773, or 11.0% to $240,335 for the three months
ended February 29, 2004, from 2003. Unit sales of wireless handsets increased by
approximately 67,000 units for the three months ended February 29, 2004, or
5.6%, to approximately 1,258,000 units from 1,191,000 units in 2003. This
increase was primarily due to new product introductions of camera phones with
CDMA 1x technology. The average selling price of the Company's handsets
increased to $179 per unit for the three months ended February 29, 2004 from
$171 per unit in 2003. This increase was due to higher selling prices of
newly-introduced models, such as the camera phone. The Company expects selling
prices for digital phones to increase as enhancements in digital technology
expand digital capabilities.
Net sales were also impacted by a decrease in sales incentives expense of
$2,442, net of reversals of $676. This decrease was primarily due to a decline
in sales incentive programs with large wireless carriers as compared to the
prior year. Sales incentive programs are expected to continue as the Company
introduces new technology and products. The Company expects, due to market
conditions, customer consolidation and planned introductions of new products, it
could experience higher sales incentives expense in the future.
30
Gross Profit
Gross profit margins decreased to 4.2% for the three months ended February
29, 2004 from 5.5% in 2003, primarily due to a decline in margins of older phone
models. As a result of increased price competition within the Wireless industry,
older phone models are sold at lower prices due to short product life cycles and
are negatively impacted by introductions of new phones with enhanced technology.
The declining margins achieved on older phone models was offset by margins
achieved on new product introductions with enhanced technologies, such as the
camera phone. In addition, the decline in gross margin was offset by a $2,442
decrease in sales incentive expense, net of reversals of $676.
No inventory write-downs were recorded by the Company during the first
quarter of 2004 or 2003. At February 29, 2004, the Company had on hand
approximately 15,500 units of previously written-down inventory which, after
write-down, had an approximate extended value of $900. The Company plans to sell
these items to its existing customers during the year. The Company expects that
as new products are introduced, existing models on hand are effected by price
competition from our competitors and demand by our customers, it could
experience write-downs in the future.
Gross margins included reimbursements from a vendor for software upgrades
on sold inventory of $49 and $812 for the three months ended February 28, 2003
and February 29, 2004, respectively. The increase in upgrade reimbursements is
due to the timing of product enhancements, and these reimbursements could
fluctuate in the future depending on the amount of technology upgraded into each
product. Without these reimbursements, gross margins would have been lower by
0.02% and 0.34% for the three months ended February 28, 2003 and February 29,
2004, respectively. On occasion, the Company negotiates to receive price
protection in the event the selling price to its customers is less than the
purchase price from the vendor. No such price protection was recorded by the
Company during the first quarter of fiscal 2003 or 2004.
Operating Expenses
Operating expenses increased $231 for the three months ended February 29,
2004 as compared to 2003. However, as a percentage of net sales, operating
expenses decreased to 3.3% during three months ended February 29, 2004, compared
to 3.6% in 2003.
Selling expenses increased $45 for the three months ended February 29, 2004
compared to 2003, primarily as a result of:
o $126 increase in advertising as a result of administrative costs for
rebate programs which have increased as compared to the prior year. In
addition, mailings and advertising print materials have increased due
to new product introductions.
o The above increase was partially offset by a $74 decrease in salesmen
salaries due to restructuring of commission deals with salesmen, as
compensation for salesman has focused on commissionable sales.
31
General and administrative expenses increased $166 for the three months
ended February 29, 2004 compared to 2003 primarily as a result of:
o Corporate allocations which increased $140 due to additional corporate
services as a result of increased MIS costs for the Company's
web-site.
o $82 increase in employee benefits as a result of increased costs under
the employee health care plan.
o Numerous insurance policy premiums paid by the Company are calculated
based on sales and inventory positions. As such, the increase in sales
activity and increased inventory on hand caused insurance expense to
increase $46.
o The above increases were offset by a $72 decline in office salaries
due to a reduction in Quintex employees, as a result of a closed
Quintex branch.
o In addition, bad debt expense decreased $80 due to the recovery of a
previously reserved bad debt. The Company does not consider this
decrease in bad debt expense to be a trend in the overall accounts
receivable.
Warehousing and technical support expense remained consistent for the three
months ended February 29, 2004 as compared to the similar period in the prior
year. The minimal increase in warehouse and technical support expense of $20 was
primarily due to an increase in direct labor as a result of a rise in employee
wages.
Pre-Tax Income
As a result of the decline in gross margins partially offset by increased
sales and improved operating expense efficiency, pre-tax income for the three
months ended February 29, 2004 was $1,520, compared to $3,250 for 2003.
Management believes that the wireless industry is extremely competitive and
that this competition could affect gross margins and the carrying value of
inventories in the future as new competitors enter the marketplace. The Company
competes against suppliers with significantly greater financial resources and
who are able to offer more extensive advertising and greater promotions than the
Company does. This pressure from increased competition is further enhanced by
the consolidation of many of Wireless' customers into a smaller group, dominated
by only a few, large customers. Also, timely delivery and carrier acceptance of
new product could affect our quarterly performance. Our suppliers have to
continually add new products in order for Wireless to improve its margins and
gain market share. These new products require extensive testing and software
development which could delay entry into the market and affect our sales in the
future. In addition, given the anticipated emergence of new technologies in the
wireless industry, the Company will need to sell existing inventory quantities
of current technologies to avoid further write-downs to market.
32
Electronics Results
Three months ended February 28, 2003 compared to three months ended February 29,
2004
The following table sets forth for the periods indicated certain statements
of income data for the Electronics Group expressed as a percentage of net sales:
Three Months Ended
---------------------------------------------
February 28, 2003 February 29, 2004
------------------- -------------------
Net sales:
Mobile electronics $ 51,090 63.7% $ 49,549 36.3%
Consumer electronics 16,495 20.6 36,470 26.7
Sound 12,544 15.6 50,530 37.0
Other 127 0.1 -- --
--------- ------ --------- ------
Total net sales 80,256 100.0 136,549 100.0
Gross profit 13,599 16.9 21,320 15.6
Operating expenses
Selling 3,800 4.7 6,187 4.5
General and administrative 5,795 7.2 9,807 7.2
Warehousing and technical support 642 0.8 905 0.7
--------- ------ --------- ------
Total operating expenses 10,237 12.7 16,899 12.4
--------- ------ --------- ------
Operating income 3,362 4.2 4,421 3.2
Other income (expense) (872) (1.1) 733 0.5
--------- ------ --------- ------
Pre-tax income $ 2,490 3.1% $ 5,154 3.8%
========= ====== ======== ======
Net Sales
Net sales increased $56,293, or 70.1%, to $136,549 for the three months
ended February 29, 2004, from net sales of $80,256 in 2003. Sales of Audiovox
Germany accounted for $15,733, or 27.9%, of this increase as a result of the
Recoton acquisition in July 2003. Sales for Consumer electronics increased
$19,975 (121%) for the three months ended February 29, 2004 from 2003, primarily
from sales of DVD players and flat panel TV's. These products were introduced
during fiscal 2003 and strong customer demand has caused sales activity to
increase during fiscal 2004. Sound sales increased $37,986 (303%) as a result of
the Jensen(R), Magnate(R), Mac Audio(R), Heco(R), Acoustic Research(R) and
Advent(R), trademarks which usage right was acquired during the Recoton
acquisition. In addition, sound sales were positively impacted by increased
sales in the satellite radio product line. Mobile electronics sales decreased
$1,541 (3%) for the three months ended February 29, 2004 from 2003. The decline
in mobile video is due to a decrease in post holiday sales of video's in a bag
as compared to the prior year. The Company does not expect the decrease in
mobile video sales to be a future trend.
Net sales of the Company's Malaysian subsidiary decreased from last year by
approximately $951 primarily from a shift in the Malaysia business environment.
33
Specifically, the OEM market in Malaysia has declined as more automakers are
incorporating electronic products into vehicles at the factory rather than being
sold in the aftermarket. In addition, importing of foreign products has become
more prevalent, therefore reducing domestic distribution within Malaysia. This
decrease was offset by a $682 increase in the Company's Venezuela subsidiary due
to the temporary shut- down of operations during the first quarter of fiscal
2003 attributable to political and economic instability. The operations in
Venezuela were re-opened subsequent to the first quarter of fiscal 2003 and the
political and economic environment has since improved, resulting in fiscal 2004
sales to increase.
Sales incentives expense decreased $691, net of reversals of $2,424, to
$543, due to increased reversals offset by higher sales volume. Specifically,
reversals for unearned sales incentives for the three months ended February 29,
2004 increased $1,370 as compared to 2003 due to customers not purchasing the
minimum quantities of product required during the program time period as a
result of lower than expected post holiday sales. In addition, reversals for
unclaimed sales incentives for 2004 increased $323 to $1,054 as compared to
2003. The Company believes that the reversal of earned but unclaimed sales
incentives upon the expiration of the claim period is a disciplined, rational,
consistent and systematic method of reversing unclaimed sales incentives. The
majority of sales incentive programs are calendar-year programs. Accordingly,
the program ends on the month following the fiscal year end and the claim period
expires one year from the end of the program. The above reversals were partially
offset by an increase in sales as many sales incentive programs are based on a
percentage of sales. These sales incentive programs are expected to continue and
will either increase or decrease based upon competition and customer demands.
Gross Profit
Gross profit margins decreased to 15.6% for the three months ended February
29, 2004 compared to 16.9% in 2003. This decrease was due to an increase in
consumer electronic products sold through consumer channels, which carry a lower
gross margin as opposed to other product lines. Specifically, gross margins were
adversely impacted by the sale of older DVD players, flat panel TV's and FRS
radios as the selling price for these older items has declined as a result of
new product introductions within these categories. This decrease was offset by
margins achieved in Audiovox Germany from Jensen(R), Magnate(R), Mac Audio(R),
Heco(R), Acoustic Research(R) and Advent(R) products as well as an increase in
Code-Alarm margins due to a decline in production and warranty costs. In
addition, there was a $691 decrease in sales incentive expense, net of reversals
of $2,424, primarily due to increased reversals.
Operating Expenses
Operating expenses increased $6,662 for the three months ended February 29,
2004 from 2003, a 65.1% increase compared to 2003. The AEC group (Audiovox
Electronics, Code-Alarm and American Radio) accounted for $2,626 or 39.4% of the
2004 increase. The international group (Audiovox Germany, Malaysia and
Venezuela) accounted for $4,036 or 60.6% of the 2004 increase which was
primarily due to the operations of Audiovox Germany, which commenced as a result
of the Recoton acquisition. As a percentage of net sales, operating expenses
decreased to 12.4% for the three months ended February 29, 2004 compared to
12.7% in 2003.
34
Selling expenses increased $2,387 during the first quarter of 2004 of which
$1,111 (46.5%) and $1,276 (53.5%) was attributable to the AEC group and
international group, respectively.
o The increase for the AEC group was primarily due to increases of $422
in commissions due to an increase in commissionable sales and salesmen
salaries, payroll taxes and benefits of $356 as a result of higher
employee wages and the hiring of additional employees. In addition,
advertising expense increased $197 as a result of an increased product
line and increased promotions during the annual consumer electronics
show as compared to the prior year.
o The increase for the international group was due to approximately
$1,302 of Audiovox Germany expenses offset by a $26 decrease in
Malaysia and Venezuela. Due to the operations of Recoton, which was
acquired during the third quarter of fiscal 2003, Audiovox Germany
expenses were primarily comprised of $566 in commissions, $114 of
salesman salaries and $552 of advertising. Advertising costs consisted
primarily of product brochures and informative advertising materials
regarding the Company's product line.
General and administrative expenses increased $4,012 of which $1,273
(31.7%) and $2,739 (68.3%) was attributable to the AEC group and international
group, respectively.
o The increase for the AEC group was primarily attributable to an
increase of $328 in professional fees due to the increasing complexity
of patent validity and rights as a result of product complexity. The
Company expects, as technology for electronic products become more
complex, the Company will have to expend more resources on defending
patent rights and obtaining patents on new products. In addition,
corporate allocations, office expenses and salaries/payroll taxes
increased $298, $114 and $185, respectively, as compared to the prior
year. These increases were due to the hiring of additional employees,
increased wages and MIS costs as a result of the additional resources
necessary to support the increased product lines and sales activity.
o The increase for the international group was due to $2,830 of Audiovox
Germany expenses offset by a $91 decline in Malaysia and Venezuela
expenses. As a result of the Recoton acquisition, Audiovox Germany
expenses were primarily comprised of $1,314 in salaries and related
payroll taxes, $211 of professional fees, $196 of office expenses,
$511 of occupancy costs and $229 of depreciation. The decline in
Malaysia and Venezuela expenses was primarily due to a decrease in
Venezuela's employee benefits because of a 2003 payment made to
certain Venezuela employees, as a result of restructuring actions
which did not recur in fiscal 2004.
Warehousing and technical support increased $263, or 41.0%. This increase
was primarily due to a $226 increase in direct labor and payroll taxes due to
the hiring of additional employees and includes $73 of Audiovox Germany
expenses. In addition, the increase in warehouse and technical support is due to
the hiring of additional engineers as the increase in sales volume and product
complexity has resulted in the Company providing added customer service.
35
Pre-Tax Income
As a result of increased sales due to new product introductions and the
Recoton acquisition, improved operating expense efficiency and increased other
income due to royalties received for the Jensen trademarks offset by a decline
in gross margins, pre-tax income for the three months ended February 29, 2004
was $5,154 compared to $2,490 for 2003. During the three months ended February
29, 2004, the corporate allocation to the Electronics Segment was reduced by
$618 in order to offset costs incurred in the Company's Venezuelan subsidiary
that were considered to be a consolidated cost of the Company.
The Company believes that the Electronics Group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales and general economic conditions. Also, all of its products are
subject to price fluctuations which could affect the carrying value of
inventories and gross margins in the future.
Liquidity and Capital Resources
Cash Flows, Commitments and Obligations
The Company has historically financed its operations primarily through a
combination of available borrowings under bank lines of credit and debt and
equity offerings. The amount of financing is dependent primarily on the
collection of accounts receivable and purchase of inventory. As of February 29,
2004, the Company had working capital of $307,799 which includes cash of $4,981
as compared with working capital of $304,354 and cash of $4,702 at November 30,
2003.
Operating activities provided cash of $140 for the three months ended
February 29, 2004 compared to $77,181 in 2003. The decrease in cash provided by
operating activities as compared to the prior year is primarily due to the
increase in Wireless inventory. Net income provided $1,870 for operating
activities for the three months ended February 29, 2004 compared to $1,208 in
2003.
The following significant fluctuations in the balance sheet impacted cash
flow from operations:
o Cash flows from operating activities for the three months ended
February 29, 2004 were favorably impacted by a decrease in accounts
receivable primarily from collections. Accounts receivable turnover
approximated 9.7 during for the three months ended February 29, 2004
compared to 11.7 in the comparable period in the prior year. Although
accounts receivable turnover has decreased, overall collections have
increased due to the increase in fourth quarter sales for fiscal 2003
as compared to 2002. Overall collections of accounts receivable and
credit quality of customers has improved, however, accounts receivable
collections are often impacted by general economic conditions.
o The overall decrease in cash flow from operations for the three months
ended February 29, 2004 as compared to 2003 was primarily due to an
increase in inventory as a result of increased purchases of Wireless
inventory during fiscal 2004, partially offset by a decline in
Electronics inventory. The increase in cash used for inventory
purchases was partially offset by increased inventory turnover which
36
approximated 5.3 during for the three months ended February 29, 2004
compared to 4.7 in the comparable period in the prior year. The
increased turnover is a result of increased sales and improved
management of Wireless inventory which consists of more products at
the beginning of their life cycle during the first quarter of fiscal
2004 as compared to the first quarter of fiscal 2003, which consisted
of products near the end of their life cycle. Although this is a
favorable condition, the Company cannot guarantee this to be a trend
in the future.
o In addition, cash flow from operating activities for the three months
ended February 29, 2004, was reduced due to a decrease in accounts
payable, primarily from payments made to inventory vendors. Payments
for accounts payable during the first quarter of fiscal 2004 were not
as significant as compared to the first quarter of fiscal 2003 based
on the timing of payments made. The timing of payments made can
fluctuate and are often impacted by the timing of inventory purchases
and amount of inventory on hand.
Investing activities provided $2,145 during the three months ended February
29, 2004, primarily from the distribution from an equity investee, proceeds from
the reduction of purchase price of acquired business, partially offset by the
purchases of property, plant and equipment.
Financing activities used $2,182 during the three months ended February 29,
2004, primarily from payments of debt, partially offset by net borrowings of
bank obligations.
The Company's principal source of liquidity is its revolving credit
agreement, which expires July 27, 2004. The Company is currently negotiating
with the bank to extend this agreement for an additional three years. At
February 29, 2004, the credit agreement provided for $150,000 of available
credit, including $10,000 for foreign currency borrowings. Under the credit
agreement, the Company may obtain credit through direct borrowings and letters
of credit. The obligations of the Company under the credit agreement are
guaranteed by certain of the Company's subsidiaries and is secured by accounts
receivable, inventory and the Company's shares of ACC. The Company's ability to
borrow under its credit facility is a maximum aggregate amount of $150,000,
subject to certain conditions, based upon a formula taking into account the
amount and quality of its accounts receivable and inventory. The credit
agreement also allows for commitments up to $50,000 in forward exchange
contracts.
The credit agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net worth.
Additionally, the agreement includes restrictions and limitations on payments of
dividends, stock repurchases and capital expenditures.
The Company was in compliance with all of its bank covenants at February
29, 2004 and November 30, 2003. There can be no assurance that the Company will
not violate covenants in the future, therefore, resulting in amounts outstanding
to be payable upon demand. While the Company has historically been able to
obtain waivers for violations, there can be no assurance that future
negotiations with its lenders would be successful. This credit agreement has no
cross covenants with other credit facilities.
The Company also has revolving credit facilities in Malaysia and Germany to
finance additional working capital needs. The Malaysian credit facility is
37
partially secured by the Company under two standby letters of credit and are
payable upon demand or upon expiration of the standby letters of credit. The
obligations of the Company under the Malaysian credit facilities are secured by
the property and building in Malaysia owned by Audiovox Communications Sdn. Bhd.
The German credit facility consists of accounts receivable factoring up to
16,000 Euros and a working capital facility, secured by accounts receivable and
inventory, up to 5,000 Euros. The German and Malaysia facilities are renewable
on an annual basis.
The Company has guaranteed the borrowings of one of its 50%-owned equity
investees (GLM) at a maximum of $300. During fiscal 2003, the Company adopted
FIN 45, "Guarantors Accounting and Disclosure Requirements for Guarantors,
Including Guarantees of Indebtedness of Others" (FIN 45). The Company has not
modified this guarantee after December 31, 2002. No liability has been recorded
for this guarantee on the accompanying consolidated financial statements.
The Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At February 29,
2004, such obligations and commitments are as follows:
Payments Due By Period
---------------------------------------------------------------------
Contractual Cash Less than 1-3 4-5 After
Obligations Total 1 Year Years Years 5 Years
- ------------------------ ------- -------- ------- ------- --------
Capital lease obligations $13,514 $ 553 $ 1,118 $ 1,158 $10,685
Operating leases 13,605 3,913 5,890 3,693 109
------- ------- ------- ------- -------
Total contractual cash
obligations $27,119 $ 4,466 $ 7,008 $ 4,851 $10,794
======= ======= ======= ======= =======
Amount of Commitment
Expiration per period
------------------------------------------------------------------
Total
Other Commercial Amounts Less than 1-3 Over
Commitments Committed 1 Year Years 4-5 Years 5 years
- -------------------------- --------- --------- ------- --------- -------
Lines of credit $40,599 $40,599
Standby letters of credit 2,294 2,294
Guarantees 300 300
Debt 19,791 2,555 $ 4,857 $12,379 --
Commercial letters of
credit 715 715 -- -- --
------- ------- ------- ------- ------
Total commercial
commitments $63,699 $46,463 $ 4,857 $12,379 --
======= ======= ======= ======= ======
The Company regularly reviews its cash funding requirements and attempts to
meet those requirements through a combination of cash on hand, cash provided by
38
operations, available borrowings under bank lines of credit and possible future
public or private debt and/or equity offerings. At times, the Company evaluates
possible acquisitions of, or investments in, businesses that are complementary
to those of the Company, which transaction may require the use of cash. The
Company believes that its cash, other liquid assets, operating cash flows,
credit arrangements, access to equity capital markets, taken together, provide
adequate resources to fund ongoing operating expenditures. In the event that
they do not, the Company may require additional funds in the future to support
its working capital requirements or for other purposes and may seek to raise
such additional funds through the sale of public or private equity and/or debt
financings as well as from other sources. No assurance can be given that
additional financing will be available in the future or that if available, such
financing will be obtainable on terms favorable to the Company when required.
Treasury Stock
The Company's Board of Directors approved the repurchase of 1,563,000
shares of the Company's Class A common stock in the open market under a share
repurchase program (the Program). No shares were purchased under the Program
during fiscal 2003 or fiscal 2004. As of November 30, 2003 and February 29,
2004, 1,072,737 and 1,070,957 shares were repurchased under the Program at an
average price of $7.93 per share for an aggregate amount of $8,511 and $8,497,
respectively.
Off-Balance Sheet Arrangements
The Company does not maintain any off-balance sheet arrangements,
transactions, obligations or other relationships with unconsolidated entities
that would be expected to have a material current or future effect upon our
financial condition or results of operations.
Related Party Transactions
The Company has entered into several related party transactions which are
described below.
Leasing Transactions
During 1998, the Company entered into a 30-year capital lease for a
building with its principal stockholder and chief executive officer, which is
the headquarters of the Wireless operation. Payments on the lease were based
upon the construction costs of the building and the then-current interest rates.
The effective interest rate on the capital lease obligation is 8%.
During 1998, the Company entered into a sale/leaseback transaction with its
principal stockholder and chief executive officer for $2,100 of equipment, which
has been classified as an operating lease. The lease has monthly payments of $34
and expires on March 31, 2005. No gain or loss was recorded on the transaction
as the book value of the equipment equaled the fair market value.
The Company also leases certain facilities from its principal stockholder.
Rentals for such leases are considered by management of the Company to
39
approximate prevailing market rates. Total lease payments required under the
leases for the five-year period ending February 29, 2009 and thereafter are
$5,049.
Transactions with Toshiba Corporation
Toshiba Corporation (Toshiba), a 25% shareholder of ACC, is a major
supplier of ACC products. Inventory on hand at November 30, 2003 and February
29, 2004 purchased from Toshiba approximated $22,405 and $35,288, respectively.
At November 30, 2003 and February 29, 2004, the Company recorded receivables
from Toshiba aggregating approximately $709 and $829, respectively, primarily
for software upgrades.
At November 30, 2003 and February 29, 2004, the Company had inventory on
hand in the amount of $18,841 and $28,240, respectively, which were purchased
from Toshiba and have been recorded in inventory and accounts payable on the
accompanying consolidated balance sheet. The payment terms are such that the
payable is non-interest bearing and is payable in accordance with the terms
established in the distribution agreement between the parties, which is 30 days.
On occasion, the Company negotiates to receive price protection in the
event the selling price to its customers is less than the purchase price from
Toshiba. The Company will record such price protection, if necessary, at the
time of the sale of the units.
Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51",
which addresses consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46 (Revised
Interpretations) resulting in multiple effective dates based on the nature as
well as the creation date of the VIE. The adoption of FIN 46 did not have an
impact on the Company's consolidated financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
"Revenue Recognition" (SAB No. 104), which codifies, revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition", in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on our consolidated results of operations,
consolidated financial position or consolidated cash flows.
Forward-Looking Statements
Except for historical information contained herein, statements made in this
Form 10-Q that would constitute forward-looking statements may involve certain
risks such as our ability to keep pace with technological advances, significant
competition in the wireless, mobile and consumer electronics businesses, quality
40
and consumer acceptance of newly-introduced products, our relationships with key
suppliers and customers, market volatility, non-availability of product, excess
inventory, price and product competition, new product introductions, the
uncertain economic and political climate in the United States and throughout the
rest of the world and the potential that such climate may deteriorate further
and other risks detailed in the Company's Form 10-K for the fiscal year ended
November 30, 2003. These factors, among others, may cause actual results to
differ materially from the results suggested in the forward-looking statements.
Forward-looking statements include statements relating to, among other things:
o growth trends in the wireless, mobile and consumer electronic
businesses
o technological and market developments in the wireless, automotive and
consumer electronics businesses
o liquidity
o availability of key employees
o expansion into international markets
o the availability of new consumer electronic products
o the availability of new wireless products
These forward-looking statements are subject to numerous risks,
uncertainties and assumptions about the Company including, among other things:
o the ability to keep pace with technological advances
o impact of future selling prices on Company profitability and inventory
carrying value
o significant competition in the wireless, automotive and consumer
electronics businesses
o quality and consumer acceptance of newly introduced products
o the relationships with key suppliers
o the relationships with key customers
o possible increases in warranty expense
o changes in the Company's business operations
o the loss of key employees
o foreign currency risks
o political instability
o changes in U.S. federal, state and local and foreign laws
o changes in regulations and tariffs
o seasonality and cyclicality
o inventory obsolescence and availability
o consolidations in the wireless and retail industries, causing a
decrease in the number of carriers and retail stores that carry our
products
o changes in global or local economic conditions
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Sensitive Instruments
The market risk inherent in the Company's market risk sensitive instruments
and positions is the potential loss arising from adverse changes in marketable
equity security prices, foreign currency exchange rates and interest rates.
41
Marketable Securities
Marketable securities at November 30, 2003 and February 29, 2004, which are
recorded at fair value of $9,512 and $9,977, respectively, include an unrealized
gain of $1,831 and $1,497, respectively, and have exposure to price risk. This
risk is estimated as the potential loss in fair value resulting from a
hypothetical 10% adverse change in prices quoted by stock exchanges and amounts
to $951 and $998 as of November 30, 2003 and February 29, 2004, respectively.
Actual results may differ.
Interest Rate Risk
The Company's bank loans expose earnings to changes in short-term interest
rates since interest rates on the underlying obligations are either variable or
fixed for such a short period of time as to effectively become variable. The
fair values of the Company's bank loans are not significantly affected by
changes in market interest rates.
Foreign Exchange Risk
In order to reduce the risk of foreign currency exchange rate fluctuations,
the Company hedges transactions denominated in a currency other than the
functional currencies applicable to each of its various entities. The
instruments used for hedging are forward contracts with banks. The Company does
not obtain collateral to support financial instruments, but monitors the credit
standing of the financial institution. The changes in market value of such
contracts have a high correlation to price changes in the currency of the
related hedged transactions. There were no hedge transactions at November 30,
2003. Intercompany transactions with foreign subsidiaries and equity investments
are typically not hedged. At February 29, 2004, the Company had foreign currency
contracts outstanding that have a notional amount of $1,643. The difference
between the fair market value of the foreign currency contracts and the related
commitments at inception and the fair market value of the contracts and the
related commitments at February 29, 2004 was $27. The foreign currency included
in these forward contracts consists of the Euro and expire during March 2004.
The Company is subject to risk from changes in foreign exchange rates for
its subsidiaries and equity investments that use a foreign currency as their
functional currency and are translated into U.S. dollars. These changes result
in cumulative translation adjustments which are included in accumulated other
comprehensive income. On November 30, 2003 and February 29, 2004, the Company
had translation exposure to various foreign currencies with the most significant
being the Euro, Malaysian ringgit, Thailand baht and Canadian dollar. The
potential loss resulting from a hypothetical 10% adverse change in quoted
foreign currency exchange rates, as of November 30, 2003 and February 29, 2004,
amounts to $1,195 and $899, respectively. Actual results may differ.
ITEM 4 CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q,
the Company's Chief Executive Officer and Principal Financial Officer has each
evaluated the effectiveness of the Company's "Disclosure Controls and
Procedures" and has concluded that they were effective. As such term is used
above, the Company's Controls and Procedures are controls and other procedures
42
of the Company that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Security Exchange Commission's rules
and forms. Disclosure Controls and Procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by the Company in such reports is accumulated and communicated to the
Company's management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date that the Company's Chief Executive Officer and Principal Financial Officer
conducted their evaluations of the Disclosure Controls and Procedures, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is currently, and has in the past been, a party to routine
litigation incidental to its business. From time to time, the Company receives
notification of alleged violations of registered patent holders' rights. The
Company has either been indemnified by its manufacturers in these matters,
obtained the benefit of a patent license or has decided to vigorously defend
such claims.
The Company and Audiovox Communications Corp. (ACC), along with other
manufacturers of wireless phones and cellular service providers, were named as
defendants in two class action lawsuits alleging non-compliance with FCC ordered
emergency 911 call processing capabilities. These lawsuits were consolidated and
transferred to the United States District Court for the Northern District of
Illinois, which in turn referred the cases to the Federal Communications
Commission ("FCC") to determine if the manufacturers and service providers are
in compliance with the FCC's order on emergency 911 call processing
capabilities. The Company and ACC intend to vigorously defend this matter.
However, no assurances regarding the outcome of this matter can be given at this
point in the litigation.
During 2001, the Company, along with other suppliers, manufacturers and
distributors of hand-held wireless telephones, was named as a defendant in five
class action lawsuits alleging damages relating to exposure to radio frequency
radiation from hand-held wireless telephones. These class actions have been
consolidated and transferred to a Multi-District Litigation Panel before the
United States District Court of the District of Maryland. On March 5, 2003,
Judge Catherine C. Blake of the United States District Court for the District of
Maryland granted the defendants' consolidated motion to dismiss these
complaints. Plaintiffs have appealed to the United States Circuit Court of
Appeals, Fourth Circuit. The appeal pending before the United States Circuit
Court of Appeals, Fourth Circuit in the consolidated class action lawsuits
(Pinney, Farina, Gilliam, Gimpelson and Naquin) against ACC and other suppliers,
manufacturers and distributors as well as wireless carriers of hand-held
wireless telephones alleging damages relating to risk of exposure to radio
frequency radiation from the wireless telephones has not yet been heard. It is
43
anticipated that the appeal will be heard in June 2004.
During the third quarter of fiscal 2003, a certain Venezuelan employee, who
is also a minority shareholder in Audiovox Venezuela, submitted a claim to the
Venezuela Labor Court for severance compensation of approximately $560. The
Court approved the claim and it was paid and expensed by Audiovox Venezuela in
the third quarter of fiscal 2003. The Company is challenging the payment of this
claim and will seek reimbursement from the Venezuelan shareholder or the
Company's insurance carrier.
The Company does not expect the outcome of any pending litigation,
separately and in the aggregate, to have a material adverse effect on its
business, consolidated financial position or results of operations.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
31.1 Certification Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934 (furnished herewith)
31.2 Certification Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934 (furnished herewith)
32.1 Certification Pursuant to Rule 13a-14(a) And Rule 15d-
14(a) Section 1350, Chapter 63 of Title 18 of The
United State Code, As Adopted Pursuant to Section 906
of The Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2 Certification Pursuant to Rule 13a-14(a) And Rule 15d-
14(a) Section 1350, Chapter 63 of Title 18 of The
United State Code, As Adopted Pursuant to Section 906
of The Sarbanes-Oxley Act of 2002 (furnished herewith)
(b) Reports on Form 8-K
During the first quarter ended February 29, 2004, the Company filed one (1)
report on Form 8-K, dated and filed on February 25, 2004, reporting that two (2)
press releases were issued. The first press release announced the signing of a
non-binding letter of intent to sell a controlling interest in the Company's
wireless subsidiary, Audiovox Communications Corp., and the second press release
announced results for the fourth quarter and fiscal year ended November 30,
2003.
44
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: April 14, 2004
By:/s/Charles M. Stoehr
---------------------------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
45