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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2002
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 Number)
150 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 231-7750
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of each class: Which Registered
Class A Common Stock $.01 par value Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days.
Yes No X
----------- -----
Indicate by check mark whether Registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2).
Yes X No
----------- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
--------
1
The aggregate market value of the common stock held by non-affiliates of the
Registrant was $168,886,196 (based upon closing price on the Nasdaq Stock Market
on May 30, 2003).
The number of shares outstanding of each of the registrant's classes of common
stock, as of May 23, 2003 was:
Class Outstanding
----- -----------
Class A common stock $.01 par value 20,651,374
Class B common stock $.01 par value 2,260,954
2
TABLE OF CONTENTS
PART I .........................................................................................................4
Item 1 - Business........................................................................................4
Item 2 - Properties.....................................................................................29
Item 3 - Legal Proceedings..............................................................................29
Item 4 - Submission of Matters to a Vote of Security Holders............................................30
PART II ........................................................................................................31
Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters......................31
Item 6 - Selected Consolidated Financial Data...........................................................31
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations..........33
Item 7a - Quantitative and Qualitative Disclosures About Market Risk....................................67
Item 8 - Consolidated Financial Statements and Supplementary Data.......................................68
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........145
PART III .......................................................................................................145
Item 10 - Directors and Executive Officers of the Registrant...........................................145
Item 11 - Executive Compensation.......................................................................145
Item 12 - Security Ownership of Certain Beneficial Owners and Management...............................150
Item 13 - Certain Relationships and Related Transactions...............................................152
PART IV .......................................................................................................153
Item 14 - Controls and Procedures......................................................................153
Item 15 - Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8...................153
SIGNATURES......................................................................................................158
SCHEDULE II.....................................................................................................160
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.........................................161
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PART I
ITEM 1 - BUSINESS
All tabular presentation is in thousands unless otherwise indicated.
(a) Restatement of Consolidated Financial Statements
The Company has restated its consolidated financial statements for the
fiscal years ended November 30, 2000 and 2001 and for the quarters ended
February 28, 2002, May 31, 2002 and August 31, 2002. In addition, the Company
has reclassified certain expenses from operating expenses to cost of sales for
fiscal 2000 and 2001 and for each of the quarters in the nine months ended
August 31, 2002. These restatement adjustments are the result of the
misapplication of generally accepted accounting principles.
The net effect of all of the restatement adjustments is as follows:
First Second Third
Fiscal Fiscal Quarter Quarter Quarter
2000 2001 2002 2002 2002
------ ------ ------ ------ -----
(Unaudited) (Unaudited) (Unaudited
Increase (decrease) income/(increase)
decrease (loss) before extraordinary
item and cumulative effect of a
change in accounting for negative
goodwill $ 263 $1,011 $(1,308) $ (782) $ 751
Increase (decrease) net income/
(increase) decrease net (loss) 263 1,011 (1,308) (782) 751
Increase (decrease) net income/
(increase) decrease net (loss) per
common share - diluted $0.01 $ 0.05 $ (0.06) $(0.03) $ 0.04
4
The following table provides additional information regarding these restatement
adjustments:
EFFECTS OF RESTATEMENT ADJUSTMENTS ON NET INCOME OR NET LOSS
(IN THOUSANDS)
Increase (Decrease) (Increase) Decrease Increase (Decrease)
in Net Income for the in Net Loss for the in Net Income for the
Fiscal Year Ended Fiscal Year Ended Nine Months Ended
November 30, 2000 November 30, 2001 August 31, 2002
----------------- ----------------- ----------------
Unaudited
Restatement adjustments:
Revenue recognition $ (779) $ 779 -
Timing of revenue (15) $ (103)
Litigation (373) 427
Foreign currency translation - - (1,491)
Inventory pricing - - 420
Sales incentives 1,884 910 847
Gain on the issuance of subsidiary shares - - (1,556)
Operating expense reclassification to cost of
sales (2) - - -
-------------- -------------- -------------
Total adjustment to pre-tax income (loss) 1,105 1,301 (1,456)
(Provision for) recovery of income taxes (842) (310) 204
Minority interest (1) - 20 (87)
--------------- ------------ ------------
Total effect on net income (loss) $ 263 $ 1,011 $ (1,339)
=========== ========= =========
(1) This adjustment reflects the impact of the restatement adjustments on
minority interest.
(2) This adjustment represents a reclassification of warehousing and
technical support and general and administrative costs (which are
components of operating expenses) to cost of sales. This
reclassification did not have any effect on previously reported net
income or (loss) for any fiscal year or period presented herein.
See Note 2, "Restatement of Consolidated Financial Statements", of
Notes to Consolidated Financial Statements for restatement adjustments to
previously reported fiscal years 2000 and 2001 and Note 26, "Unaudited Quarterly
Financial Data- As Restated", of Notes to Consolidated Financial Statements for
restatement adjustments to previously reported unaudited quarterly consolidated
statements of operations data for the quarters ended February 28, 2001 through
August 31, 2002 as a result of the restatements and reclassifications.
The following discussion addresses each of the restatement adjustments
and the reclassification adjustment for the corrections of accounting errors.
Any references to quarterly amounts are unaudited.
Revenue recognition. The Company overstated net sales in each of the
third and fourth quarters of fiscal 2000 for shipments of product that
did not conform to the technical requirements of the customer (i.e.,
the goods were non-conforming). The Company did not properly evaluate
this shipment of non-conforming goods as required in accordance with
Staff Accounting Bulletin No. 101 (SAB No. 101), "Revenue Recognition
in Financial Statements", which would preclude revenue recognition
until the specific performance obligations have been met by the
Company. These product shipments resulted in the Company overstating
net sales by $19,166 and gross profit by $779 for fiscal 2000. During
the first quarter of fiscal 2001, the Company recorded
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a sales return of this fiscal 2000 non-conforming product sale. The
recording of this product return (sales reversal) resulted in the
Company understating net sales by $19,166 and gross profit by $779 for
fiscal 2001.
Timing of revenue. During each of the third and fourth quarters of
fiscal 2001 and the first, second and third quarters of fiscal 2002,
the Company (overstated) understated net sales by $(976), $857,
$(4,601), $(7,757) and $10,472, respectively, as the timing of revenue
recognition was not in accordance with the established shipping terms
with certain customers. SAB 101 specifically states that delivery
generally is not considered to have occurred unless the customer has
taken title (which is, in this situation, when the product was
delivered to the customer's site). Accordingly, the Company should have
deferred revenue recognition until delivery was made to the customer's
site. During each of the third and fourth quarters of fiscal 2001 and
the first, second and third quarters of fiscal 2002, gross profit was
overstated (understated) by $34, ($19), $99, $562 and ($535),
respectively. During each of the third and fourth quarters of fiscal
2001 and the first, second and third quarters of fiscal 2002, operating
expenses were overstated (understated) by $0, $0, $17, $136 and ($130),
respectively.
Litigation. During the fourth quarter of fiscal 2001 and each of the
first three quarters of fiscal 2002, the Company overestimated its
provisions for certain litigation matters, thereby overstating cost of
sales by $314, $176, $345 and $457 for each respective quarterly
period. Also, the Company understated operating expenses by $497 in the
first quarter of fiscal 2002 as a result of not recording a settlement
offer in the period the Company offered it.
During the second, third and fourth quarters of 2001 and the first,
second and third quarters of 2002, the Company understated (overstated)
operating expenses by $189, $302, $196, $78 and $276 and ($300),
respectively as a result of inappropriately deferring costs related to
an insurance claim. The Company's insurance company refused to defend
the Company against a legal claim made against the Company. The Company
took legal action against the insurance company and was unsuccessful.
The Company was improperly capitalizing costs that were not probable of
recovery.
Foreign currency translation. During the first three quarters of fiscal
2002, the Company did not properly account for a change in accounting
for its Venezuelan subsidiary as operating in a non-highly inflationary
economy. In fiscal 2001 and in prior years, Venezuela was deemed to be
a highly-inflationary economy in accordance with certain technical
accounting pronouncements. Effective January 1, 2002, it was deemed
that Venezuela should cease to be considered a highly-inflationary
economy, however, the Company did not account for this change. The
Company incorrectly recorded the foreign currency translation
adjustment in other income rather than as other comprehensive income.
As a result, the Company understated other expenses, net, by $1,360 for
the first quarter of fiscal 2002, overstated other income, net, by $71
for the second quarter of fiscal 2002 and understated other expenses,
net, by $243 for the third quarter of fiscal 2002. Also the Company
overstated operating expenses by $41, $54 and $88 for the first, second
and third quarters of fiscal 2002, respectively.
Inventory pricing. During the first three quarters of fiscal 2002, the
Company overstated (understated) cost of sales related to an inventory
pricing error that occurred at its Venezuelan subsidiary. The Company
was not aware of this pricing error until the fourth quarter of fiscal
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2002 and, accordingly, was not properly pricing its inventory at the
lower of cost or market in accordance with generally accepted
accounting principles. As a result, the Company overstated
(understated) cost of sales by $387, ($2) and $35, for the first,
second and third quarters of fiscal 2002, respectively.
Sales incentives. During fiscal 2000 and 2001 and for the nine months
ended August 31, 2002, the Electronics segment overestimated accruals
for additional sales incentives (other trade allowances) that were not
yet offered to its customers. As a result, for fiscal 2000 and 2001 and
for the nine months ended August 31, 2002, the Company understated net
sales by $1,884, $784 and $292, respectively.
Furthermore, during fiscal 2001 and for the nine months ended August
31, 2002, the Electronics segment was also not reversing earned and
unclaimed sales incentives (i.e., cooperative advertising, market
development and volume incentive rebate funds) upon the expiration of
the established claim period. As a result, for fiscal 2001 and for the
nine months ended August 31, 2002, the Company understated net sales
by $126 and $555, respectively.
Gain on the Issuance of Subsidiary Shares. During the second quarter of
fiscal 2002, the Company overstated the gain on issuance of subsidiary
shares by $1,735 due to expenses related to this issuance being charged
to additional paid in capital. This adjustment also reflects the impact
of the other restatement adjustments on the calculation of the gain on
the issuance of subsidiary shares of $179 that was originally recorded
by the Company in the quarter ended May 31, 2002. As a result, the
Company decreased the gain on issuance of subsidiary shares and
increased the additional paid in capital by $1,556.
Income taxes. Income taxes were adjusted for the restatement
adjustments discussed above for each period presented.
The Company also applied income taxes to minority interest amounts
during all quarters of fiscal 2000 and 2001, as well as the first three
quarters of fiscal 2002. As a result of all these adjustments, the
Company overstated (understated) the provision for/recovery of income
taxes by $(842), ($310) and $(455) for fiscal 2000, 2001 and the nine
months ended August 31, 2002, respectively.
Operating expense reclassification. The Company reclassified certain
costs as operating expenses, which were included as a component of
warehousing and technical support and general and administrative costs,
which should have been classified as a component of cost of sales. The
effect of this reclassification on fiscal 2000 and 2001 was to increase
cost of sales and decrease operating expenses by $17,962 and $20,024,
respectively. The effect of this reclassification for the nine months
ended August 31, 2002 was to understate cost of sales and overstate
operating expenses by $15,488. This reclassification did not have any
effect on previously reported net income or loss for any fiscal year or
period presented herein. This reclassification reduced gross margin by
1.0, 1.6 and 1.9 percentage points for fiscal years November 30, 2000,
2001 and the nine months ended August 31, 2002, respectively.
7
(b) General Development of Business
Audiovox was incorporated in Delaware on April 10, 1987, as successor
to a business founded in 1960 by John J. Shalam, our President, Chief Executive
Officer and controlling stockholder. Its principal executive offices are located
at 150 Marcus Boulevard, Hauppauge, New York 11788, and the telephone number is
631-231-7750.
The Company designs and markets a diverse line of products and provides
related services throughout the world. These products and services include:
o handsets and accessories for wireless communications
o mobile entertainment and security products
o mobile electronic and accessories products and accessories
o consumer electronic products and accessories
The Company generally markets its products under the well-recognized
Audiovox brand name, which it has used for over 38 years. The Company was a
pioneer in the wireless industry, selling its first vehicle-installed wireless
telephone in 1984 as a natural expansion of its automotive aftermarket products
business. The Company's extensive distribution network and its long-standing
industry relationships have allowed the Company to benefit from growing market
opportunities in the wireless industry and to exploit emerging niches in the
consumer electronics business.
The Company operates in two primary markets:
o Wireless communications. The Wireless Company (Wireless), which
accounts for approximately 66% of revenues, sells wireless
handsets and accessories through domestic and international
wireless carriers and their agents, independent distributors and
retailers.
o Mobile and consumer electronics. The Electronics Group
(Electronics), which accounts for approximately 34% of revenues,
sells autosound, mobile video, mobile electronics and consumer
electronics through domestic and international distribution
channels primarily to mass merchants, power retailers, specialty
retailers, new car dealers, original equipment manufacturers
(OEMs), independent installers of automotive accessories and the
U.S. military.
The business grew significantly in fiscal 2000, primarily because of
increased sales of digital handsets, as the market continued to shift to digital
technology from analog technology.
Prior to and including 2000, our wireless business increased as new
subscribers came onto the carrier networks as a result of lower price-plans, the
shift from analog to digital technologies and the shift from mobile to hand-held
portable phones. Since 2000, several factors have affected the Company. New
subscriber subscriptions slowed down, the consolidation within our wireless
customer base created a more competitive market within a smaller number of
customers and there was a slow down in the development of new technologies which
slowed consumer demand for one technology to another.
The Electronics Group has been positively influenced by an increase in
the sale of consumer electronic items such as FRS (Family Radio System) Radios
and Mobile Video products.
8
The following table shows net sales by group and the increase in
Electronics sales compared to a decrease in Wireless:
Percent
Change
2000 2001 2002 2000/2002
---- ---- ---- ---------
As Restated (1) As Restated (1)
----------- -----------
(millions)
Wireless $1,394 $ 979 $ 727 (47.8)%
Electronics 276 298 373 35.1 %
-------- -------- -------- -------
Total $1,670 $1,277 $1,100 (34.1)%
====== ====== ====== =======
(1) See Note 2 of Notes to Consolidated Financial Statements.
To remain flexible and limit our research and fixed costs, the Company
does not manufacture its products. Instead, the Company has relationships with a
broad group of suppliers who manufacture its products. The Company works
directly with its suppliers in feature design, development and testing of all of
its products and performs certain software installations or upgrades for
wireless products and some assembly functions for its electronics products.
The Company's product development efforts focus on meeting changing
consumer demand for technologically-advanced, high-quality products, and the
Company consults with customers throughout the design and development process.
The Company stands behind all of its products by providing warranties and
end-user service support.
STRATEGY
The Company's objective is to leverage the well-recognized Audiovox
brand name and its extensive distribution network to capitalize on the growing
worldwide demand for wireless products and continue to provide innovative mobile
and consumer electronics products in response to consumer demand. The key
elements of the Company's strategy are:
Enhance and capitalize on the Audiovox brand name. The Company believes
that the "Audiovox" brand name is one of its greatest strengths. During
the past 38 years, the Company has invested to establish the Audiovox
name as a well-known consumer brand for communications and electronics
products. The Company's wireless handsets generally bear the Audiovox
brand name or are co-branded with either a wireless carrier or brand
name of our supplier. To further benefit from the Audiovox name, the
Company continues to introduce new products using its brand name and
licenses its brand name for selected consumer products.
Expand wireless technology offerings to increase market opportunities.
The Company intends to continue to offer an array of
technologically-advanced wireless products, including the planned
introduction of wireless handsets with cameras and enhanced Internet
capabilities. The Company's wide selection of wireless products will
allow it to satisfy different carrier demands, both domestically and
internationally.
9
Capitalize on niche market opportunities in the consumer electronics
industry. The Company intends to continue to use its extensive
distribution and supply networks to capitalize on niche market
opportunities, such as navigation, mobile video, DVD's and cruise
controls, in the consumer electronics industry. The Company believes
that focusing on high-demand, high-growth niche products results in
better profit margins and growth potential for its electronics
business.
Continue to expand international presence. During fiscal 2003, the
Company intends to continue to expand its international business, both
in the Wireless and Electronics Groups, as it plans to introduce new
products compatible with international wireless technologies, such as
GSM, CDMA and GPRS and expand the mobile video category.
Continue to outsource manufacturing to increase operating leverage. One
of the key components of the Company's business strategy is outsourcing
the manufacturing of its products. This allows the Company to deliver
the latest technological advances without the fixed costs associated
with manufacturing.
Continue to provide value-added services to customers and suppliers.
The Company believes that it provides key services, such as product
design, development and testing, sales support, product repair and
warranty and software upgrading, more efficiently than its customers
and suppliers could provide for themselves. The Company intends to
continue to develop its value- added services as the market evolves and
customer needs change.
(c) Financial Information About Industry Segments
The Company's industry segments are the Wireless Group and the
Electronics Group. Net sales, income before provision for income taxes and total
assets attributable to each segment for each of the last three years are set
forth in Note 23 of the Company's consolidated financial statements included
herein.
(d) Narrative Description of Business
WIRELESS
Wireless, which accounts for approximately 66% of the Company's
revenues, markets wireless handsets and accessories through domestic and
international wireless carriers and their agents, independent distributors and
retailers.
WIRELESS PRODUCTS AND TECHNOLOGY
Wireless sells an array of digital handsets, hand-held computing
devices and accessories in a variety of technologies, principally CDMA. In
fiscal 2000, 2001 and 2002 digital products represented 78%, 89% and 96%,
respectively, of Wireless' total unit sales. Wireless generally markets its
wireless products under the Audiovox brand name or co-brands its products with
its carrier customers, such as Verizon Wireless and Bell Distribution, Inc. or
with the brand name of the supplier.
In addition to handsets, Wireless sells a complete line of accessories
that includes batteries, hands-free kits, battery eliminators, cases and data
cables. In fiscal 2003, Wireless intends to continue
10
to broaden its digital product offerings and introduce handsets with new
features such as wireless handsets with cameras and enhanced Internet
capabilities.
WIRELESS MARKETING AND DISTRIBUTION
Wireless sells wireless products to wireless carriers and the carrier's
respective agents, distributors and retailers. In addition, a majority of its
handsets are designed to meet carrier specifications. In fiscal 2000, the five
largest wireless customers were Verizon Wireless, AllTel Communications, MCI
Worldcom, Brightpoint, Inc. and Canadian Mobility. One of these customers
accounted for 61.7% of Wireless' net sales for fiscal 2000 and 50.5% of the 2000
consolidated net sales. In fiscal 2001, the five largest wireless customers were
Verizon Wireless, PrimeCo Personal Communications LP, Sprint Spectrum LP, Bell
Distribution Inc. and Brightpoint, Inc. One of these customers accounted for
44.8% of Wireless' net sales and 35.0% of consolidated net sales for fiscal
2001. In fiscal 2002, the five largest wireless customers were Verizon Wireless,
Bell Distribution, Inc., Sprint Spectrum LP, Telus Mobility and AllTel
Communications. Three of these customers accounted for 36%, 11% and 10%,
respectively, of Wireless' net sales for fiscal 2002. All of these customers
represented 71% of Wireless' net sales and 47% of consolidated net sales during
fiscal 2002.
In addition, Wireless promotes its products through trade and consumer
advertising, participation at trade shows and direct personal contact by its
sales representatives. Wireless also assists wireless carriers with their
marketing campaigns by scripting telemarketing presentations, funding
co-operative advertising campaigns, developing and printing custom sales
literature, logistic services, conducting in-house training programs for
wireless carriers and their agents and providing assistance in market
development.
Wireless operates approximately seven retail facilities under the name
Quintex. In addition, Wireless licenses the trade name Quintex(R) to ten outlets
in selected markets in the United States. Wireless also serves as an agent (in
activating cell phone numbers) for the following carriers in selected areas:
Tmobile, Nextel, Suncom, NTelos, AT & T Wireless, Verizon Wireless, Sprint and
Sprint Spectrum LP. For fiscal 2002, revenues from Quintex were 6.1% of total
Wireless revenues and 4.1% of consolidated revenues.
Wireless' policy is to ship its products within 24 hours of a requested
shipment date from public warehouses in Florida, New York, California , New
Jersey, Canada and Netherlands and from leased facilities located in New York
and California.
WIRELESS PRODUCT DEVELOPMENT, WARRANTY AND CUSTOMER SERVICE
Although Wireless does not have its own manufacturing facilities, it
works closely with both customers and suppliers in feature design, development
and testing of its products. In particular, Wireless:
o with its wireless customers, determines future market feature
requirements
o works with its suppliers to develop products containing those
features
o participates in the design of the features and cosmetics of its
wireless products
o tests products in its own facilities to ensure compliance with
Audiovox standards
o supervises testing of the products in its carrier markets to
ensure compliance with carrier specifications
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Wireless' Hauppauge facility is ISO-9001:1994 certified, which requires
it to carefully monitor quality standards in all facets of its business.
Wireless believes customer service is an important tool for enhancing
its brand name and its relationship with carriers. In order to provide full
service to its customers, Wireless warranties its wireless products to the
end-user for periods ranging from up to one year for portable handsets to up to
three years for mobile car phones. To support its warranties, Wireless has
approximately 1,950 independent warranty centers throughout the United States
and Canada and has experienced technicians in its warranty repair stations at
its headquarters facility. Wireless has experienced customer service
representatives who interact directly with both end-users and its customers.
These representatives are trained to respond to questions on handset operation
and warranty and repair issues.
WIRELESS SUPPLIERS
Wireless purchases its wireless products from several manufacturers
located in Pacific Rim countries, including Japan, China, South Korea, Taiwan
and Malaysia. In selecting its suppliers, Wireless considers quality, price,
service, market conditions and reputation. Wireless generally purchases its
products under short-term purchase orders and does not enter into long-term
contracts with its suppliers. Wireless considers its relations with its
suppliers to be good. Wireless believes that alternative sources of supply are
currently available, although there could be a time lag and increased costs if
it were to have an unplanned shift to a new supplier. Approximately 56% of
Wireless' 2002 purchases were from Toshiba, a related party (see Related Party
Transaction of Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.)
WIRELESS COMPETITION
The market for wireless handsets and accessories is highly competitive
and is characterized by intense price competition, significant price erosion
over the life of a product whose life cycle has continued to shorten, demand for
value-added services, rapid technological development and industry consolidation
of both customers and manufacturers. Currently, Wireless' primary competitors
for wireless handsets include Motorola, Nokia, Kyocera and Samsung.
Wireless also competes with numerous established and new manufacturers
and distributors, some of whom sell the same or similar products directly to its
customers. Historically, Wireless' competitors have also included some of its
own suppliers and customers. Many of Wireless' competitors offer more extensive
advertising and promotional programs than it does.
Wireless competes for sales to carriers, agents and distributors on the
basis of its products and services and price. As its customers are requiring
greater value-added logistic services, Wireless believes that competition will
continually be required to support an infrastructure capable of providing these
services. Wireless' ability to continue to compete successfully will largely
depend on its ability to perform these value-added services at a reasonable
cost.
Wireless' products compete primarily on the basis of value in terms of
price, features and reliability. There have been, and will continue to be,
several periods of extreme price competition in the wireless industry,
particularly when one or more or its competitors has sought to sell off excess
inventory by
12
lowering its prices significantly or carriers canceling or modifying sales
programs.
As a result of global competitive pressures, there have been
significant consolidations in the domestic wireless industry including:
o Cricket and Leap Wireless
o Verizon Wireless: Bell Atlantic, AirTouch Communications, GTE
Mobilnet, PrimeCo Personal Communications LP, Frontier, Ameritech
and Vodafone
o Cingular Wireless: SBC Communications and Bell South
o VoiceStream: Expanded into major markets through acquisition of
Omnipoint
o Telus and Clearnet
These consolidations may result in greater competition for a smaller
number of large customers and may favor one or more of its competitors over
Wireless.
ELECTRONICS GROUP
ELECTRONICS INDUSTRY
The mobile and consumer electronics industry is large and diverse and
encompasses a broad range of products. There are many large manufacturers in the
industry, such as Sony, RCA, Panasonic, Kenwood, Motorola and JVC, as well as
large companies that specialize in niche products. The Electronics Group
participates in selected niche markets such as autosound, mobile video, vehicle
security and selected consumer electronics.
The introduction of new products and technological advancements drives
growth in the electronics industry. For example, the transition from analog to
digital technology is leading to the development of a new generation of consumer
electronic products. Some of these products include digital satellite radio,
portable DVD, home and mobile video systems, navigation systems and FRS radios.
ELECTRONICS PRODUCTS
The Company's electronics products consist of two major categories,
mobile electronics and consumer electronics.
Mobile electronics products include:
o autosound products, such as radios, speakers, amplifiers, CD
changers and satellite radios
o mobile video products, including overhead and center console mobile
entertainment systems, video cassette players and DVD players
o automotive security and remote start systems
o automotive power accessories
o navigation systems
Consumer electronics include:
o home and portable stereos
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o FRS two-way radios
o LCD televisions
The Electronics Group markets its products under the Audiovox(R) brand
name, as well as several other Audiovox-owned trade names that include
Prestige(R), Pursuit(R) and Rampage(TM) and Code Systems, Inc. Sales by the
Company's Malaysian, Venezuelan and American Radio subsidiaries fall under the
Electronics Group. For the fiscal years ended November 30, 2000, 2001 and 2002,
the Electronics Group's sales by product category were as follows:
Percent
Change
2000 2001 2002 2000/2002
---- ---- ---- ---------
(millions)
(As Restate (As Restated)
Mobile electronics $134.6 $157.7 $229.3 70.4%
Sound 77.4 57.5 56.3 (27.3)
Consumer electronics 60.5 80.3 86.5 43.0
Other 3.9 2.2 0.6 (82.1)
------ ------ ------ -------
Total $276.4 $297.7 $372.7 34.9%
====== ====== ====== =======
The increase in Electronic's sales reflects new product introductions
in the mobile and consumer electronics categories and a continuing trend in
lower sound sales as automakers incorporate full-featured sound systems at the
factory instead of as an aftermarket option.
In the future, the Electronics Group will continue to focus its efforts
on new technologies to take advantage of market opportunities created by the
digital convergence of data, communications, navigation and entertainment
products.
LICENSING
In the late 1990's, the Company began to license its brand name for use
on selected products, such as home and portable stereo systems. Actual sales of
licensed products are not included in the Company's sales figures. However,
licensed customers have reported sales of $43.6 million in licensed goods in
2002 compared to $24.0 million in 2001 for which the Company received license
fees. License sales promote the Audiovox brand name without adding any
significant costs. License fees are recognized on a per unit basis upon sale to
the end-user and are recorded in other income. License fees in 2002 approximated
$922 compared to approximately $500 in 2001.
ELECTRONICS DISTRIBUTION AND MARKETING
The Electronics Group sells its electronics products to:
o mass merchants
o chain stores
o specialty retailers
o distributors
o new car dealers
14
o the U.S. military
The Electronics Group also sells its products under OEM arrangements
with domestic and/or international subsidiaries of automobile manufacturers such
as Ford Corporation, Daimler Chrysler, General Motors Corporation and Nissan.
OEM projects represent a significant portion of the Electronics Group sales,
accounting for approximately 14.0% of the Electronics Group's sales in 2002
versus 17.1% in 2001. These projects require a close partnership with the
customer as the Electronics Group develops products to their specific
requirements. Three of the largest auto makers, General Motors, Daimler Chrysler
and Ford require QS registration for all of their vendors. The Electronics
Group's Hauppauge facility is both QS 9000 and ISO 9001 registered. In addition,
Audiovox Electronics is Q1 rated for the Ford Motor Company.
In fiscal 2000, the Electronics Group's five largest customers were
Nissan, Wal-Mart, Target, Gulf States Toyota and Circuit City. They represented
21.3% of the Electronics Group's net sales and 3.5% of consolidated net sales.
In fiscal 2001, the Electronics Group's five largest customers were Wal-Mart,
Target, Ford, KMart and Circuit City. They represented 27.0% of the Electronics
Group's net sales and 6.3% of consolidated net sales. In fiscal 2002, the
Electronics Group's five largest customers were Circuit City, Target, Walmart,
Sam's Wholesale Club and Gulf States Toyota. They represented 25% of the
Electronics Group's net sales and 8% of the consolidated net sales.
As part of the Electronics Group's sales process, the Electronics Group
provides value-added management services including:
o product design and development
o engineering and testing
o technical and sales support
o electronic data interchange (EDI)
o product repair services and warranty
o nationwide installation network
The Electronics Group has flexible shipping policies designed to meet
customer needs. In the absence of specific customer instructions, the
Electronics Group ships its products within 24 to 48 hours from the receipt of
an order. The Electronics Group makes shipments from public warehouses in
Virginia, Nevada, Florida, New Jersey, California and Venezuela and from leased
facilities located in New York.
ELECTRONICS PRODUCT DEVELOPMENT, WARRANTY AND CUSTOMER SERVICE
The Electronics Group works closely with its customers and suppliers in
the design, development and testing of its products. For the Electronics Group's
OEM automobile customers, the Electronics Group performs extensive validation
testing to ensure that its products meet the special environmental and
electronic standards of the manufacturer. The Electronics Group also performs
final assembly of products in its Hauppauge location. The Electronics Group's
product development cycle includes:
o working with key customers and suppliers to identify consumer
trends and potential demand
o working with the suppliers to design and develop products to meet
those demands
o evaluating and testing the products in our own facilities to
ensure compliance with our
15
standards
o performing software design and validation testing
The Electronics Group provides a warranty to the end-users of its
electronics products, generally ranging from 90 days up to the life of the
vehicle for the original owner on some of its automobile-installed products. To
support its warranties, the Electronics Group has independent warranty centers
throughout the United States, Canada, Venezuela and Malaysia. At its Hauppauge
facility, the Electronics Group has a customer service group that provides
product information, answers questions and serves as a technical hotline for
installation help for both end-users and its customers.
The Electronics Group Hauppauge facility is QS-9000:1998 /
ISO-9001:1994 certified, which requires it to carefully monitor quality
standards in all facets of its business.
ELECTRONICS SUPPLIERS
The Electronics Group purchases its electronics products from
manufacturers located in several Pacific Rim countries, including Japan, China,
South Korea, Taiwan, Singapore and Malaysia. The Electronics Group also uses
several manufacturers in the United States for cruise controls, mobile video and
power amplifiers. In selecting its manufacturers, the Electronics Group
considers quality, price, service, market conditions and reputation. The
Electronics Group maintains buying offices or inspection offices in Taiwan,
South Korea, China and Hong Kong to provide local supervision of supplier
performance such as price negotiations, delivery and quality control. The
Electronics Group generally purchases its products under short-term purchase
orders and does not have long-term contracts with its suppliers. The Electronics
Group believes that alternative sources of supply are currently available,
although there could be a time lag and increased costs if it were to have an
unplanned shift to a new supplier.
The Electronics Group considers relations with its suppliers to be
good. In addition, the Electronics Group believes that alternative sources of
supply are generally available within 120 days.
ELECTRONICS COMPETITION
The Electronics Group's business is highly competitive across all of
its product lines and competes with a number of well-established companies that
manufacture and sell similar products. The Electronics Group's mobile
electronics products compete against factory-supplied radios (including General
Motors, Ford and Daimler Chrysler), security and mobile video systems . The
Electronics Group's mobile electronics products also compete in the automotive
aftermarket against major companies such as Sony, Panasonic, Kenwood, Motorola
and Pioneer. The Electronics Group's consumer electronics product lines compete
against major consumer electronic companies, such as JVC, Sony, Panasonic,
Motorola, RCA and AIWA. Brand name, design, features and price are the major
competitive factors across all of its product lines.
(e) Financial Information About Foreign and Domestic Operations and Export
Sales
The amounts of net sales and long-lived assets, attributable to each of
the Company's geographic segments for each of the last three fiscal years are
set forth in Note 23 to the Company's consolidated financial statements included
herein. During fiscal 2000, 2001 and 2002, the Company exported
16
approximately $246, $215 and $233 million, respectively, in product sales.
TRADEMARKS
The Company markets products under several trademarks, including
Audiovox(R), Prestige(R), Pursuit(R) and Rampage(TM) . The trademark Audiovox(R)
is registered in approximately 67 countries. The Company believes that these
trademarks are recognized by customers and are therefore significant in
marketing its products.
OTHER MATTERS
EQUITY INVESTMENTS
The Company has investments in unconsolidated joint ventures which were
formed to market its products in specific market segments or geographic areas.
The Company seeks to blend its financial and product resources with local
operations to expand its distribution and marketing capabilities. The Company
believes its joint ventures provide a more cost-effective method of focusing on
specialized markets. The Company does not participate in the day-to-day
management of these joint ventures.
The Company's significant joint ventures are:
Percentage Formation
Venture Ownership Date Function
------- --------- --------- --------
Audiovox Specialized Distribution of products for van, RV
Applications 50.0% 1997 and other specialized vehicles.
Bliss-Tel Company,
Ltd. 20.0% 1997 Distribution of wireless products and
accessories in Thailand.
EMPLOYEES
The Company employs approximately 1,000 people. The Company's headcount
has been relatively stable for the past several years, but will change based
upon economic conditions within the two groups. The Company considers its
relations with its employees to be good. No employees are covered by collective
bargaining agreements.
17
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are listed below.
All officers of the Company are elected by the Board of Directors to serve
one-year terms. There are no family relationships among officers, or any
arrangement or understanding between any officer and any other person pursuant
to which the officer was selected. Unless otherwise indicated, positions listed
in the table have been held for more than five years.
Name Age Current Position
- ---- --- ----------------
John J. Shalam 69 President, Chief Executive Officer and
Chairman of the Board of Directors
Philip Christopher 54 Executive Vice President and a Director
Charles M. Stoehr 56 Senior Vice President, Chief Financial Officer
and a Director
Patrick M. Lavelle 51 Senior Vice President and a Director
Ann M. Boutcher 52 Vice President, Marketing and a Director
Richard A. Maddia 44 Vice President, IS and a Director
Paul C. Kreuch, Jr.* 64 Director
Dennis F. McManus* 52 Director
Irving Halevy* 86 Director
*Member of the Audit and Compensation Committees
John J. Shalam has served as President, Chief Executive Officer and as
Director of Audiovox or its predecessor since 1960. Mr. Shalam also serves as
President and a Director of most of Audiovox's operating subsidiaries. Mr.Shalam
is on the Board of Directors of the Electronics Industry Association and is on
the Executive Committee of the Consumer Electronics Association.
Philip Christopher, our Executive Vice President, has been with
Audiovox since 1970 and has held his current position since 1983. Before 1983,
he served as Senior Vice President of Audiovox. Mr. Christopher is Chief
Executive Officer of Audiovox's wireless subsidiary, Audiovox Communications
Corp. From 1973 through 1987, he was a Director of our predecessor, Audiovox
Corp. Mr. Christopher serves on the Executive Committee of the Cellular
Telephone Industry Association.
Charles M. Stoehr has been our Chief Financial Officer since 1979 and
was elected Senior Vice President in 1990. Mr. Stoehr has been a Director of
Audiovox since 1987. From 1979 through 1990, he was a Vice President of
Audiovox.
18
Patrick M. Lavelle has been a Vice President of the Company since 1980 and
was appointed Senior Vice President in 1991. He was elected to the Board of
Directors in 1993. Mr. Lavelle is Chief Executive Officer and President of the
Company's subsidiary, Audiovox Electronics Corp. Mr. Lavelle is also a member of
the Board of Directors and Executive Committee of the Consumer Electronics
Association and serves as Chairmen of its Mobile Electronics Division.
Ann M. Boutcher has been our Vice President of Marketing since 1984. Ms.
Boutcher's responsibilities include the development and implementation of our
advertising, sales promotion and public relations programs. Ms. Boutcher was
elected to the Board of Directors in 1995.
Richard A. Maddia has been our Vice President of Information Systems since
1992. Prior thereto, Mr. Maddia was Assistant Vice President, MIS. Mr. Maddia's
responsibilities include development and maintenance of information systems. Mr.
Maddia was elected to the Board of Directors in 1996.
Paul C. Kreuch, Jr. was elected to the Board of Directors in February
1997. Mr. Kreuch is a Managing Director of WJM Associates, Inc., a leading
executive development firm. Prior career responsibilities include Executive Vice
President of NatWest Bank, N.A. from 1993 to 1996, and, before that, President
of National Westminster Bank, USA.
Dennis F. McManus was elected to the Board of Directors in March 1998.
Mr. McManus is currently the Vice President - New Product Marketing at the LSSi
Corporation. Prior to that Mr. McManus had been self-employed as a
telecommunications consultant. Before that, he was employed by NYNEX Corp. for
over 27 years, most recently as a Senior Vice President and Managing Director.
Mr. McManus held this position from 1991 through December 31, 1997.
Irving Halevy served on the Board of Directors from 1987 to 1997 and
was re-elected to the Board of Directors in 2001. Mr. Halevy is a retired
professor of Industrial Relations and Management at Fairleigh Dickinson
University where he taught from 1952 to 1986. He was also a panel member of the
Federal Mediation and Conciliation Service.
All of our executive officers hold office at the discretion of the
Board of Directors.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
We have identified certain risk factors that apply to either Audiovox
as a whole or one of our specific business units. You should carefully consider
each of the following risk factors and all of the other information included or
incorporated by reference in this Form 10-K. If any of these risks, or other
risks not presently known to us or that we currently believe not to be
significant, develop into actual events, then our business, financial condition,
liquidity, or results of operations could be materially adversely affected. If
that happens, the market price of our common stock would likely decline, and you
may lose all or part of your investment.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE WIRELESS
INDUSTRY.
The market for wireless handsets and accessories is highly competitive
and is characterized by:
19
o intense price competition
o shorter product life cycles
o significant price erosion over the life of a product
o industry consolidation
o rapid technological development
o the demand by wireless carriers for value-added services provided
by their suppliers
Our primary competitors for wireless handsets currently are Motorola,
Nokia, Kyocera and Samsung. In addition, we compete with numerous other
established and new manufacturers and distributors, some of whom sell the same
or similar products directly to our customers. Historically, our competitors
have also included some of our own suppliers and customers. Many of our
competitors offer more extensive advertising and promotional programs than we
do.
During the last decade, there have been several periods of extreme
price competition, particularly when one or more or our competitors has sought
to sell off excess inventory by lowering its prices significantly. In
particular, when technologies changed in 2000 from analog to digital, several of
our larger competitors lowered their prices significantly to reduce their
inventories, which required us to similarly reduce our prices. These price
reductions had a material adverse effect on our profitability. There can be no
assurance that our competitors will not do this again, because, among other
reasons, many of them have significantly greater financial resources than we do
and can withstand substantial price competition. Since we sell products that
tend to have low gross profit-margins, price competition has had, and may in the
future have, a material adverse effect on our financial performance.
THE ELECTRONICS BUSINESS IS HIGHLY COMPETITIVE; OUR ELECTRONICS BUSINESS ALSO
FACES SIGNIFICANT COMPETITION FROM ORIGINAL EQUIPMENT MANUFACTURERS (OEMS).
The market for electronics is highly competitive across all three of
our product lines. We compete against many established companies who have
substantially greater resources than us. In addition, we compete directly with
OEMs, including divisions of well-known automobile manufacturers, in the
autosound, auto security, mobile video and accessories industry. Most of these
companies have substantially greater financial and other resources than we do.
We believe that OEMs have increased sales pressure on new car dealers with whom
they have close business relationships to purchase OEM-supplied equipment and
accessories. OEMs have also diversified and improved their product lines and
accessories in an effort to increase sales of their products. To the extent that
OEMs succeed in their efforts, this success would have a material adverse effect
on our sales of automotive entertainment and security products to new car
dealers.
WIRELESS CARRIERS AND SUPPLIERS MAY NOT CONTINUE TO OUTSOURCE VALUE-ADDED
SERVICES; WE MAY NOT BE ABLE TO CONTINUE TO PROVIDE COMPETITIVE VALUE-ADDED
SERVICES.
Wireless carriers purchase from us, rather than directly from our
suppliers, because, among other reasons, we provide added services valued by our
customers. In order to maintain our sales levels, we must continue to provide
these value-added services at reasonable costs to our carrier-customers and
suppliers, including:
o product sourcing
20
o product distribution
o marketing
o custom packaging
o warranty support
o programming wireless handsets
o testing for carrier system acceptance
Our success depends on the wireless equipment manufacturers, wireless
carriers, network operators and resellers continuing to outsource these
functions rather than performing them in-house. To encourage the use of our
services, we must keep our prices reasonable. If our internal costs of supplying
these services increase, we may not be able to raise our prices to pass these
costs along to our customers and suppliers. As a result of the consolidations in
the telecommunications industry, wireless carriers, which are the largest
customers of our wireless business, may attempt to perform these services
themselves. Alternatively, our customers and suppliers may transact business
directly with each other rather than through us. If our customers or suppliers
begin to perform these services internally or do business directly with each
other, it could have a material adverse effect on our sales and our profits.
OUR SUCCESS DEPENDS ON OUR ABILITY TO KEEP PACE WITH TECHNOLOGICAL ADVANCES IN
THE WIRELESS INDUSTRY.
Rapid technological change and frequent new product introductions
characterize the wireless product market. Our success depends upon our ability
to:
o identify the new products necessary to meet the demands of the
wireless marketplace and
o locate suppliers who are able to manufacture those products on a
timely and cost-effective basis.
As a result of the emergence of the digital market, which resulted in
the reduction of selling prices of analog hand-held phones, we recorded analog
inventory write-downs to market of $8.2 million and $13.5 million in 2000 and
2001, respectively. These write-downs had a material adverse effect on our
profitability. As a result of increasing pricing pressures and a surplus of
supply created by other manufacturers also attempting to sell off analog
inventories, there was a drop off in demand for analog products. The write down
was based upon the drop in demand, as carriers no longer promoted analog product
and notified the Company that previous indications for orders of analog phones
were no longer viable. Also during 2001, the Company recorded an additional
inventory write-down to market of $7,150 associated with older digital products
as newer products were being introduced.
During 2002, Wireless recorded inventory write-downs totaling of
$13,823 pertaining to its digital inventory due to more current technological
advances in the market. This write-down was made based upon open purchase orders
from customers and selling prices subsequent to the balance sheet date as well
as indications from customers based upon the then current negotiations. There
can be no assurance that this will not occur again given the emergence of new
technologies.
Since we do not make any of our own products and do not conduct our own
research, we cannot assure you that we will be able to source the products that
advances in technology require to remain competitive. Furthermore, the
introduction or expected introduction of new products or technologies may
depress sales of existing products and technologies. This may result in
declining prices and inventory
21
obsolescence. Since we maintain a substantial investment in product inventory,
declining prices and inventory obsolescence could have a material adverse effect
on our business and financial results. (See further discussions in Business
Overview Page 37).
WE DEPEND ON A SMALL NUMBER OF KEY CUSTOMERS FOR A LARGE PERCENTAGE OF OUR
SALES.
The wireless industry is characterized by a small number of key
customers. In fiscal 2000, 75% of our wireless sales were to five customers, and
for 2001 70% of our wireless sales were to five customers. Our five largest
customers accounted for 71% of our wireless sales in fiscal 2002, one of which
accounted for 36% of our wireless sales in fiscal 2002. The loss of one or more
of these customers would have a material impact on our business.
WE DO NOT HAVE LONG-TERM SALES CONTRACTS WITH ANY OF OUR CUSTOMERS.
Sales of our wireless products are made by written purchase orders and
are terminable at will by either party. The unexpected loss of all or a
significant portion of sales to any one of our large customers could have a
material adverse effect on our performance. Sales of our electronics products
are made by purchase order and are terminated at will at the option of either
party. We do not have long-term sales contracts with any of our customers. The
unexpected loss of all or a significant portion of sales to any one of these
customers could result in a material adverse effect on our performance.
WE COULD LOSE CUSTOMERS OR ORDERS AS A RESULT OF CONSOLIDATION IN THE WIRELESS
TELECOMMUNICATIONS CARRIER INDUSTRY.
As a result of global competitive pressures, there has been significant
consolidation in the domestic wireless industry:
o Cricket and Leap Wireless
o Verizon Wireless: Bell Atlantic, AirTouch Communications, GTE
Mobilnet, Prime Co Personal Communications LP, Frontier,
Ameritech and Vodafone
o Cingular Wireless: SBC Communications and Bell South
o VoiceStream: Expanded into major markets through acquisition of
Omnipoint
o Telus and Clearnet
Future consolidations could cause us to lose business if any of the new
consolidated entities do not perform as they expect to because of integration or
other problems. In addition, these consolidations will result in a smaller
number of wireless carriers, leading to greater competition in the wireless
handset market and may favor one or more of our competitors over us. This could
also lead to fluctuations in our quarterly results and carrying value of our
inventory. If any of these new entities orders less product from us or elects
not to do business with us or changes current pricing in order to compete, it
would have a material adverse effect on our business. In fiscal 2002, the five
largest wireless customers were Verizon Wireless, Bell Distribution, Inc.,
Sprint Spectrum LP, Telus Mobility and AllTel Communications. Three customers
each accounted for 36%, 11% and 10%, respectively, of Wireless' net sales for
fiscal 2002. All of these customers represented 71% of Wireless' net sales and
47% of consolidated net sales during fiscal 2002.
22
SALES IN OUR ELECTRONICS BUSINESS ARE DEPENDENT ON NEW PRODUCTS AND CONSUMER
ACCEPTANCE.
Our electronics business depends, to a large extent, on the
introduction and availability of innovative products and technologies.
Significant sales of new products in niche markets, such as FRS two-way radios,
known as FRS radios, portable DVD players and mobile video systems, have fueled
the recent growth of our electronics business. If we are not able to continually
introduce new products that achieve consumer acceptance, our sales and profit
margins will decline.
SINCE WE DO NOT MANUFACTURE OUR PRODUCTS, WE DEPEND ON OUR SUPPLIERS TO PROVIDE
US WITH ADEQUATE QUANTITIES OF HIGH QUALITY COMPETITIVE PRODUCTS ON A TIMELY
BASIS.
We do not manufacture our products. We do not have long-term contracts
but have exclusive distribution arrangements with certain suppliers. The
suppliers can only sell their products through the Company for a given
geographic or designated market area. Most of our products are imported from
suppliers under short-term purchase orders. Accordingly, we can give no
assurance that:
o our supplier relationships will continue as presently in effect
o our suppliers will be able to obtain the components necessary to
produce high-quality, technologically-advanced products for us
o we will be able to obtain adequate alternatives to our supply
sources should they be interrupted
o if obtained, alternatively sourced products of satisfactory
quality would be delivered on a timely basis, competitively
priced, comparably featured or acceptable to our customers
o exclusive geographic or market area distribution agreements will
be renewed
Because of the increased demand for wireless and consumer electronics
products, there have been, and still could be, industry-wide shortages of
components. As a result, our suppliers have not been able to produce the
quantities of these products that we desire. Our inability to supply sufficient
quantities of products that are in demand could reduce our profitability and
have a material adverse effect on our relationships with our customers. If any
of our supplier relationships were terminated or interrupted, we could
experience an immediate or long-term supply shortage, which could have a
material adverse effect on us. It is likely that our supply of wireless products
would be interrupted before we could obtain alternative products.
BECAUSE WE PURCHASE A SIGNIFICANT AMOUNT OF OUR PRODUCTS FROM SUPPLIERS IN
PACIFIC RIM COUNTRIES, WE ARE SUBJECT TO THE ECONOMIC RISKS ASSOCIATED WITH
CHANGES IN THE SOCIAL, POLITICAL, REGULATORY AND ECONOMIC CONDITIONS INHERENT IN
THESE COUNTRIES.
We import most of our products from suppliers in the Pacific Rim.
Countries in the Pacific Rim have experienced significant social, political and
economic upheaval over the past several years. Because of the large
concentrations of our purchases in Pacific Rim countries, particularly Japan,
China, South Korea, Taiwan and Malaysia, any adverse changes in the social,
political, regulatory and economic conditions in these countries may materially
increase the cost of the products that we buy from our foreign suppliers or
delay shipments of products, which could have a material adverse effect on our
business. In addition, our dependence on foreign suppliers forces us to order
products further in advance than we would if our products were manufactured
domestically. This increases the risk that our products will become obsolete or
face selling price reductions before we can sell our inventory.
23
WE PLAN TO EXPAND THE INTERNATIONAL MARKETING AND DISTRIBUTION OF OUR PRODUCTS,
WHICH WILL SUBJECT US TO ADDITIONAL BUSINESS RISKS.
As part of our business strategy, we intend to increase our
international sales, although we cannot assure you that we will be able to do
so. Conducting business outside of the United States subjects us to significant
additional risks, including:
o export and import restrictions, tax consequences and other trade
barriers
o currency fluctuations
o greater difficulty in accounts receivable collections
o economic and political instability
o foreign exchange controls that prohibit payment in U.S. dollars
o increased complexity and costs of managing and staffing
international operations
For instance, our international sales have been affected by political
unrest and currency fluctuation in Venezuela. Any of these factors could have a
material adverse effect on our business, financial condition and results of
operations.
FLUCTUATIONS IN FOREIGN CURRENCIES COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR
BUSINESS.
We cannot predict the effect of exchange rate fluctuations on our
future operating results. Also, due to the short-term nature of our supply
arrangements, the relationship of the U.S. dollar to foreign currencies will
impact price quotes when negotiating new supply arrangements denominated in U.S.
dollars. As a result, we could experience declining selling prices in our market
without the benefit of cost decreases on purchases from suppliers or we could
experience increasing costs without an ability to pass the costs to the
customers. We cannot assure you that we will be able to effectively limit our
exposure to foreign currencies. Foreign currency fluctuations could cause our
operating results to decline and have a material adverse effect on our ability
to compete. Many of our competitors manufacture products in the United States or
outside the Pacific Rim, which could place us at a competitive disadvantage if
the value of the Pacific Rim currencies increased relative to the currency in
the countries where our competitors obtain their products.
TRADE SANCTIONS AGAINST FOREIGN COUNTRIES OR FOREIGN COMPANIES COULD HAVE A
MATERIAL ADVERSE IMPACT ON OUR BUSINESS.
As a result of trade disputes, the United States and foreign countries
have occasionally imposed tariffs, regulatory procedures and importation bans on
certain products, including wireless handsets that have been produced in foreign
countries. Trade sanctions or regulatory procedures involving a country in which
we conduct a substantial amount of business could have a material adverse effect
on our operations. Some of the countries we purchase products from are: China,
Japan, South Korea, Taiwan and Malaysia. China and Japan have been affected by
such sanctions in the past. In addition, the United States has imposed, and may
in the future impose, sanctions on foreign companies for anti-dumping and other
violations of U.S. law. If sanctions were imposed on any of our suppliers or
customers, it could have a material adverse effect on our operations.
24
WE MAY NOT BE ABLE TO SUSTAIN OUR RECENT GROWTH RATES OR MAINTAIN PROFIT
MARGINS.
Sales of our wireless products, a large portion of our business that
operates on a high-volume, low-margin basis, have varied significantly over the
past several years, from approximately $423 million in fiscal 1998 to
approximately $1.4 billion for fiscal 2000 back to approximately $727 million in
2002. Sales of our electronics products also increased significantly from
approximately $182 million for fiscal 1998 to approximately $373 million for
fiscal 2002. We may not be able to continue to achieve this overall revenue
growth rate or maintain profit margins because, among other reasons, of
increased competition and technological changes. This can be seen in the decline
of our Wireless Group during 2000 from the changeover from analog to digital. In
addition, we expect that our operating expenses will continue to increase as we
seek to expand our business, which could also result in a reduction in profit
margins if we do not concurrently increase our sales proportionately.
IF OUR SALES DURING THE HOLIDAY SEASON FALL BELOW OUR EXPECTATIONS, OUR ANNUAL
RESULTS COULD ALSO FALL BELOW EXPECTATIONS.
Seasonal consumer shopping patterns significantly affect our business.
We generally make a substantial amount of our sales and net income during
September, October and November, our fourth fiscal quarter. We expect this trend
to continue. December is also a key month for us, due largely to the increase in
promotional activities by our customers during the holiday season. If the
economy faltered in these periods, if our customers altered the timing or
frequency of their promotional activities or if the effectiveness of these
promotional activities declined, particularly around the holiday season, it
could have a material adverse effect on our annual financial results.
A DECLINE IN GENERAL ECONOMIC CONDITIONS COULD LEAD TO REDUCED CONSUMER DEMAND
FOR THE DISCRETIONARY PRODUCTS WE SELL.
Consumer spending patterns, especially discretionary spending for
products such as consumer electronics and wireless handsets, are affected by,
among other things, prevailing economic conditions, wage rates, inflation,
consumer confidence and consumer perception of economic conditions. A general
slowdown in the U.S. economy or an uncertain economic outlook could have a
material adverse effect on our sales. So far, the recent economic slowdown has
not materially affected our business. In addition, our mobile electronics
business is dependent on the level of car sales in our markets.
WE DEPEND HEAVILY ON EXISTING MANAGEMENT AND KEY PERSONNEL AND OUR ABILITY TO
RECRUIT AND RETAIN QUALIFIED PERSONNEL.
Our success depends on the continued efforts of John J. Shalam, Philip
Christopher, C. Michael Stoehr and Patrick Lavelle, each of whom has worked with
Audiovox for over two decades, as well as our other executive officers and key
employees. We only have one employment contract, with Philip Christopher and
none with any other executive officers or key employees. The loss or
interruption of the continued full-time service of certain of our executive
officers and key employees could have a material adverse effect on our business.
In addition, to support our continued growth, we must effectively
recruit, develop and retain additional qualified personnel both domestically and
internationally. Our inability to attract and retain necessary qualified
personnel could have a material adverse effect on our business.
25
WE ARE RESPONSIBLE FOR PRODUCT WARRANTIES AND DEFECTS.
Even though we outsource manufacturing, we provide warranties for all
of our products for which we have provided an estimated liability. Therefore, we
are highly dependent on the quality of our suppliers. The warranties for our
electronics products range from 90 days to the lifetime of a vehicle for the
original owner. The warranties for our wireless products generally range from
one to three years. In addition, if we are required to repair a significant
amount of product, the value of the product could decline while we are repairing
the product. In particular, in 1998, a software problem caused us to recall a
specific line of analog handsets. After a $1 million reimbursement from the
manufacturer for warranty costs, this recall resulted in a net pre-tax charge of
$6.6 million to cover the decline in the selling price of the product during the
period we were repairing the handsets. We cannot assure you that we will not
have similar problems in the future.
OUR CAPITAL RESOURCES MAY NOT BE SUFFICIENT TO MEET OUR FUTURE CAPITAL AND
LIQUIDITY REQUIREMENTS.
We believe that we currently have sufficient resources to fund our
existing operations for the foreseeable future through our cash flows and
borrowings under our credit facility. However, we may need additional capital to
operate our business if:
o market conditions change
o our business plans or assumptions change
o we make significant acquisitions
o we need to make significant increases in capital expenditures or
working capital
We cannot assure you that we would be able to raise additional capital
on favorable terms, if at all. If we could not obtain sufficient funds to meet
our capital requirements, we would have to curtail our business plans. We may
also raise funds to meet our capital requirements by issuing additional equity,
which could be dilutive to our stockholders, though there can be no assurance
that we would be able to do this.
RESTRICTIVE COVENANTS IN OUR CREDIT FACILITY MAY RESTRICT OUR ABILITY TO
IMPLEMENT OUR GROWTH STRATEGY, RESPOND TO CHANGES IN INDUSTRY CONDITIONS, SECURE
ADDITIONAL FINANCING AND MAKE ACQUISITIONS.
Our credit facility contains restrictive covenants that:
o require us to attain specified pre-tax income
o limit our ability to incur additional debt
o require us to achieve specific financial ratios
o restrict our ability to make capital expenditures or acquisitions
If our business needs require us to take on additional debt, secure
financing or make significant capital expenditures or acquisitions, and we are
unable to comply with these restrictions, we would be forced to negotiate with
our lenders to waive these covenants or amend the terms of our credit facility.
At May 31, 2001, November 30, 2001 and 2002, and the first quarter ended
February 28, 2002, the Company was not in compliance with certain of its pre-tax
income covenants. Furthermore, as of
26
November 30, 2002, the Company was also not in compliance with the requirement
to deliver audited financial statements 90 days after the Company's fiscal
year-end, and as of February 28, 2003, the requirement to deliver unaudited
quarterly financial statements 45 days after the Company's quarter end. The
Company received a waiver for the November 30, 2001 pre-tax income violation
subsequent to its issuance of the November 30, 2001 financial statements. In
addition, the Company received waivers for the May 31, 2001 and February 28,
2002 violations.
The Company has not received waivers for the November 30, 2002
violation of a particular pre-tax income covenant or delivery of audited
financial statements 90 days after the Company's fiscal year-end. Accordingly,
as of November 30, 2001 and 2002, the Company's outstanding domestic obligations
of $86,525 and 36,883, have been classified as current on the accompanying
consolidated financial statements, respectively. Management is in the process of
requesting a waiver for the November 30, 2002 and February 28, 2003 violations.
While the Company was able to obtain waivers for such violations in 2001 and the
first quarter ended February 28, 2002, 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. Subsequent to November 30, 2002, the Company repaid its
obligation of $36,883 in full resulting in bank obligations outstanding at May
15, 2003 of $0. This credit agreement has no cross covenants with the other
credit facilities described below.
Achieving pre-tax income is significantly dependant upon the timing of
customer acceptance of new technologies, customer demand and the ability of our
vendors to supply sufficient quantities to fulfill anticipated customer demand,
among other factors.
THERE ARE CLAIMS OF POSSIBLE HEALTH RISKS FROM WIRELESS HANDSETS.
Claims have been made alleging a link between the non-thermal
electromagnetic field emitted by wireless handsets and the development of
cancer, including brain cancer. The television program 20/20 on ABC reported
that several of the handsets available on the market, when used in certain
positions, emit radiation to the user's brain in amounts higher than permitted
by the Food and Drug Administration. The scientific community is divided on
whether there is any risk associated with the use of wireless handsets and, if
so, the magnitude of the risk. Unfavorable publicity, whether or not warranted,
medical studies or findings or litigation could have a material adverse effect
on our growth and financial results.
In the past, several plaintiffs' groups have brought class actions
against wireless handset manufacturers and distributors, including us, alleging
that wireless handsets have caused cancer. To date, none of these actions has
been successful. However, actions based on these or other claims may succeed in
the future and have a material adverse effect on us.
27
SEVERAL DOMESTIC AND FOREIGN GOVERNMENTS ARE CONSIDERING, OR HAVE RECENTLY
ADOPTED, LEGISLATION THAT RESTRICTS THE USE OF WIRELESS HANDSETS WHILE DRIVING.
Several foreign governments have adopted, and a number of U.S. state
and local governments are considering or have recently enacted, legislation that
would restrict or prohibit the use of a wireless handset while driving a vehicle
or, alternatively, require the use of a hands-free telephone. For example, Ohio
and New York have adopted statutes that restricts the use of wireless handsets
or requires the use of a hands-free kit while driving. Widespread legislation
that restricts or prohibits the use of wireless handsets while operating a
vehicle could have a material adverse effect on our future growth.
OUR STOCK PRICE COULD FLUCTUATE SIGNIFICANTLY.
The market price of our common stock could fluctuate significantly in
response to various factors and events, including:
o operating results being below market expectations
o announcements of technological innovations or new products by us
or our competitors
o loss of a major customer or supplier
o changes in, or our failure to meet, financial estimates by
securities analysts
o industry developments
o economic and other external factors
o period-to-period fluctuations in our financial results
o financial crises in foreign countries
o general downgrading of our industry sector by securities analysts
In addition, the securities markets have experienced significant price
and volume fluctuations over the past several years that have often been
unrelated to the operating performance of particular companies. These market
fluctuations may also have a material adverse effect on the market price of our
common stock.
OUR SECURITIES WILL CONTINUE TO BE LISTED ON THE NASDAQ NATIONAL MARKET PURSUANT
TO EXCEPTIONS.
Following the Company's hearing with the NASDAQ related to its late
filing of its annual and quarterly report with the SEC, the Company was notified
that it must become timely in its filings and continue in the future to be
timely to insure its continued listing on The Nasdaq National Market.
JOHN J. SHALAM, OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, OWNS A SIGNIFICANT
PORTION OF OUR COMMON STOCK AND CAN EXERCISE CONTROL OVER OUR AFFAIRS.
Mr. Shalam beneficially owns approximately 54% of the combined voting
power of both classes of common stock. This will allow him to elect our Board of
Directors and, in general, to determine the outcome of any other matter
submitted to the stockholders for approval. Mr. Shalam's voting power may have
the effect of delaying or preventing a change in control of Audiovox.
28
We have two classes of common stock: Class A common stock is traded on
the Nasdaq Stock Market under the symbol VOXX, and Class B common stock, which
is not publicly traded and substantially all of which is beneficially owned by
Mr. Shalam. Each share of Class A common stock is entitled to one vote per share
and each share of Class B common stock is entitled to ten votes per share. Both
classes vote together as a single class, except in certain circumstances, for
the election and removal of directors and as otherwise may be required by
Delaware law. Since our charter permits shareholder action by written consent,
Mr. Shalam may be able to take significant corporate actions without prior
notice and a shareholder meeting.
ITEM 2 - PROPERTIES
As of November 30, 2002, the Company leased a total of twenty-six
operating facilities located in eleven states. The leases have been classified
as operating leases, with the exception of one, which is recorded as a capital
lease. Wireless utilizes ten of these facilities located in California, New
York, Virginia, Pennsylvania and Canada. The Electronics Group utilizes 16 of
these facilities located in California, Florida, Georgia, Massachusetts, New
York, Ohio, Tennessee, Texas and Michigan. These facilities serve as offices,
warehouses, distribution centers or retail locations for both Wireless and
Electronics. Additionally, the Company utilizes public warehouse facilities
located in Norfolk, Virginia and Sparks, Nevada for its Electronics Group and in
Miami, Florida, Toronto, Canada, Farmingdale, New York, Rancho Dominguez,
California and Tilburg, Netherlands for its Wireless Group. The Company also
leases facilities in Venezuela for its Electronics Group.
ITEM 3 - LEGAL PROCEEDINGS
The Company is currently, and has in the past been, a party to routine
litigation incidental to its business. 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. On November 6, 2002, Audiovox Electronics Corporation ("AEC") was
served with a summons and complaint in an action for patent infringement that
was instituted by Nissho Iwai American Corporation against AEC in the United
State District Court for the Southern District of New York. The complaint seeks
equitable relief and damages for alleged infringement of a patent. AEC has
meritorious defenses to this claim and has decided to vigorously defend this
action. However, the Company cannot be certain of the outcome of this matter.
Subsequent to November 30, 2002, 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. There are various procedural motions pending and no discovery has
been conducted to date. These lawsuits have been consolidated and transferred to
the United States District Court for the Northern District of Illinois. 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.
In July 2002, Audiovox Communications Corp. instituted suit against
Northcoast Communications, LLC in the Supreme Court of the State of New York,
County of Suffolk seeking recovery of the sum of
29
$1,818 as the balance due it for cellular telephones sold and delivered. In its
answer Northcoast interposed counterclaims including fraud, negligent
misrepresentation and breach of contract seeking damages in excess of $10,000.
The parties have recently served discovery demands and no depositions have been
taken to date. Based on discussions with management and review of Audiovox's
documents, Northcoast's counterclaims appear to be without merit and interposed
to avoid payment of the underlying indebtedness.
The Company is the subject of an administrative agency investigation
involving alleged reimbursement of a fixed nominal amount of federal campaign
contributions during the years 1995 through 1996. The Company has fully
cooperated with the investigation and believes that it has committed no
wrongdoing.
The Company had previously reported that during 2001, ACC, along with
other suppliers, manufacturers and distributors as well as wireless carriers of
hand-held wireless telephones had been named as a defendant in five state court
class action lawsuits (Pinney, Farina, Gilliam, Gimpelson and Naquin) alleging
damages relating to risk of exposure to radio frequency radiation from the
wireless telephones. These lawsuits were removed to their respective federal
district courts and thereafter consolidated and transferred to a federal
Multi-District Litigation Panel before the United States District Court for 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. It is anticipated that
the appeal will be heard in late 2003 or early 2004.
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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2002.
30
PART II
-------
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Summary of Stock Prices and Dividend Data
The Class A Common Stock of Audiovox are traded on the Nasdaq Stock
Market under the symbol VOXX. No dividends have been paid on the Company's
common stock. The Company is restricted by agreements with its financial
institutions from the payment of common stock dividends while certain loans are
outstanding (see Liquidity and Capital Resources of Management's Discussion and
Analysis). There are approximately 566 holders of record of our Class A Common
Stock and four holders of Class B Convertible Common Stock.
Class A Common Stock
Average
Daily
Trading
Fiscal Period High Low Volume
- ------------- ---- --- ------
2001
First Quarter 14.13 7.38 373,083
Second Quarter 12.13 7.28 162,019
Third Quarter 12.10 8.37 82,509
Fourth Quarter 9.39 5.90 105,022
2002
First Quarter 8.25 6.00 117,420
Second Quarter 8.93 6.50 82,356
Third Quarter 9.05 5.95 91,708
Fourth Quarter 11.53 6.30 71,940
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements, the notes to the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are included elsewhere in
this report. The consolidated statements of operations data for each of the five
fiscal years in the period ended November 30, 2002, and the consolidated balance
sheet data as of the end of each such fiscal year, are derived from our audited
consolidated financial statements (in thousands except per share data).
31
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Event" and Note 2, "Restatement of Consolidated
Financial Statements", and Note 26, "Unaudited Quarterly Financial Data - As
Restated" of Notes to Consolidated Financial Statements for more detailed
information regarding the restatement of our consolidated financial statements
for the fiscal years ended November 30, 2000 and 2001 and restated unaudited
quarterly data for fiscal quarters during the years ended November 30, 2000 and
2001 and the fiscal 2002 quarters ended February 28, 2002, May 31, 2002 and
August 31, 2002, respectively. The Company did not restate fiscal years ended
November 30, 1998 and 1999 as any restatement amounts applicable to those years
were not material and were recorded in 2000.
Years Ended November 30,
--------------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
As Restated As Restated
----------- -----------
Consolidated Statement of
Operations Data
Net sales (1)(2) $606,108 $1,149,537 $1,670,291 $1,276,591 $1,100,382
Net income (loss) before
extraordinary item and cumulative
effect of a change in accounting
for negative goodwill 2,972 27,246 25,303 (7,198) (14,280)
Extraordinary item - - 2,189 - -
Cumulative effect of a change in
accounting for negative goodwill - - - - 240
Net income (loss) 2,972 27,246 27,492 (7,198) (14,040)
Net income (loss) per common share
before extraordinary item and
cumulative effect:
Basic 0.16 1.43 1.19 (0.33) (0.65)
Diluted 0.16 1.39 1.12 (0.33) (0.65)
Net income (loss) per common share:
Basic 0.16 1.43 1.29 (0.33) (0.64)
Diluted 0.16 1.39 1.22 (0.33) (0.64)
Consolidated Balance Sheet Data
Total assets $287,816 $ 486,220 $ 517,586 $ 544,497 $ 551,235
Working capital 160,609 272,081 305,369 284,166 292,687
Long-term obligations, less current
installments 33,724 122,798 23,468 10,040 18,250
Stockholders' equity 177,720 216,744 330,766 323,220 309,513
(1) Effective March 1, 2002, the Company adopted Emerging Issues Task Force
(EITF) Issue No. 01-9, "Accounting for Consideration Given by a Vendor
to a Customer". Upon adoption of this Issue, the Company reclassified
its sales incentives offered to its customers from selling expenses to
net sales. For purposes of comparability, these reclassifications have
been reflected retroactively for all periods presented.
(2) In fiscal 2001, the Company adopted the provisions of EITF Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs", which
requires the Company to report all amounts billed to a customer related
to shipping and handling as revenue. The Company has reclassified such
billed amounts, which were previously netted in cost of sales, to net
sales. Gross profit has remained unchanged by this adoption. For
purposes of comparability, these reclassifications
32
have been reflected retroactively for all periods presented.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking Statements
This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Words such as "may," "believe," "estimate,"
"expect," "plan," "intend," "project," "anticipate," "continues," "could,"
"potential," "predict" and similar expressions may identify forward-looking
statements. The Company has based these forward-looking statements on its
current expectations and projections about future events, activities or
developments. The Company's actual results could differ materially from those
discussed in or implied by these forward-looking statements. Forward-looking
statements include statements relating to, among other things:
o growth trends in the wireless, automotive, mobile and consumer
electronic businesses
o technological and market developments in the wireless,
automotive, mobile and consumer electronics businesses
o liquidity
o availability of key employees
o expansion into international markets
o the availability of new consumer electronic products
These forward-looking statements are subject to numerous risks,
uncertainties and assumptions about the Company including, among other things:
o the ability to keep pace with technological advances
o 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 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
Restatement of Consolidated Financial Statements
33
The Company has restated its consolidated financial statements for the
fiscal years ended November 30, 2000 and 2001 and for the quarters ended
February 28, 2002, May 31, 2002 and August 31, 2002. In addition, the Company
has reclassified certain expenses from operating expenses to cost of sales for
fiscal 2000 and 2001 and for each of the quarters in the nine months ended
August 31, 2002. These restatement adjustments are the result of the
misapplication of generally accepted accounting principles.
The net effect of all of the restatement adjustments is as follows:
First Second Third
Fiscal Fiscal Quarter Quarter Quarter
2000 2001 2002 2002 2002
------ ------ ------ ------ -----
(Unaudited) (Unaudited) (Unaudited)
Increase (decrease) income/(increase)
decrease (loss) before extraordinary item
and cumulative effect of a change in
accounting for negative goodwill $ 263 $1,011 $(1,308) $ (782) $ 751
Increase (decrease) net income
(increase) decrease net (loss) 263 1,011 (1,308) (782) 751
Increase (decrease) net income/
(increase) decrease net (loss) per
common share - diluted $0.01 $ 0.05 $ (0.06) $(0.03) $ 0.04
The following table provides additional information regarding these restatement
adjustments:
EFFECTS OF RESTATEMENT ADJUSTMENTS ON NET INCOME OR NET LOSS
(IN THOUSANDS)
Increase (Decrease) (Increase) Decrease Increase (Decrease)
in Net Income for the in Net Loss for the in Net Income for the
Fiscal Year Ended Fiscal Year Ended Nine Months Ended
November 30, 2000 November 30, 2001 August 31, 2002
----------------- ----------------- ----------------
Unaudited
Restatement adjustments:
Revenue recognition $ (779) $ 779 -
Timing of revenue (15) $ (103)
Litigation (373) 427
Foreign currency translation - - (1,491)
Inventory pricing - - 420
Sales incentives 1,884 910 847
Gain on the issuance of subsidiary shares - - (1,556)
Operating expense reclassification to cost of
sales (2) - - -
---------- -------- --------
Total adjustment to pre-tax income (loss) 1,105 1,301 (1,456)
(Provision for) recovery of income taxes (842) (310) 204
Minority interest (1) - 20 (87)
---------- -------- --------
Total effect on net income (loss) $ 263 $ 1,011 $ (1,339)
========== ======== ========
(1) This adjustment reflects the impact of the restatement adjustments on
minority interest.
34
(2) This adjustment represents a reclassification of warehousing and
technical support and general and administrative costs (which are
components of operating expenses) to cost of sales. This
reclassification did not have any effect on previously reported net
income or (loss) for any fiscal year or period presented herein.
See Note 2, "Restatement of Consolidated Financial Statements", of
Notes to Consolidated Financial Statements for restatement adjustments to
previously reported fiscal years 2000 and 2001 and Note 26, "Unaudited Quarterly
Financial Data- As Restated", of Notes to Consolidated Financial Statements for
restatement adjustments to previously reported unaudited quarterly consolidated
statements of operations data for the quarters ended February 28, 2001 through
August 31, 2002 as a result of the restatements and reclassifications.
The following discussion addresses each of the restatement adjustments
and the reclassification adjustment for the corrections of accounting errors.
Any references to quarterly amounts are unaudited.
Revenue recognition. The Company overstated net sales in each of the
third and fourth quarters of fiscal 2000 for shipments of product that
did not conform to the technical requirements of the customer (i.e.,
the goods were non-conforming). The Company did not properly evaluate
this shipment of non-conforming goods as required in accordance with
Staff Accounting Bulletin No. 101 (SAB No. 101), "Revenue Recognition
in Financial Statements", which would preclude revenue recognition
until the specific performance obligations have been met by the
Company. These product shipments resulted in the Company overstating
net sales by $19,166 and gross profit by $779 for fiscal 2000. During
the first quarter of fiscal 2001, the Company recorded a sales return
of this fiscal 2000 non-conforming product sale. The recording of this
product return (sales reversal) resulted in the Company understating
net sales by $19,166 and gross profit by $779 for fiscal 2001.
Timing of revenue. During each of the third and fourth quarters of
fiscal 2001 and the first, second and third quarters of fiscal 2002,
the Company (overstated) understated net sales by $(976), $857,
$(4,601), $(7,757) and $10,472, respectively, as the timing of revenue
recognition was not in accordance with the established shipping terms
with certain customers. SAB 101 specifically states that delivery
generally is not considered to have occurred unless the customer has
taken title (which is, in this situation, when the product was
delivered to the customer's site). Accordingly, the Company should have
deferred revenue recognition until delivery was made to the customer's
site. During each of the third and fourth quarters of fiscal 2001 and
the first, second and third quarters of fiscal 2002, gross profit was
overstated (understated) by $34, ($19), $99, $562 and ($535),
respectively. During each of the third and fourth quarters of fiscal
2001 and the first, second and third quarters of fiscal 2002, operating
expenses were overstated (understated) by $0, $0, $17, $136 and ($130),
respectively.
Litigation. During the fourth quarter of fiscal 2001 and each of the
first three quarters of fiscal 2002, the Company overestimated its
provisions for certain litigation matters, thereby overstating cost of
sales by $314, $176, $345 and $457 for each respective quarterly
period. Also, the Company understated operating expenses by $497 in the
first quarter of fiscal 2002 as a result of not recording a settlement
offer in the period the Company offered it.
35
During the second, third and fourth quarters of 2001 and the first,
second and third quarters of 2002, the Company understated (overstated)
operating expenses by $189, $302, $196, $78 and $276 and ($300),
respectively as a result of inappropriately deferring costs related to
an insurance claim. The Company's insurance company refused to defend
the Company against a legal claim made against the Company. The Company
took legal action against the insurance company and was unsuccessful.
The Company was improperly capitalizing costs that were not probable of
recovery.
Foreign currency translation. During the first three quarters of fiscal
2002, the Company did not properly account for a change in accounting
for its Venezuelan subsidiary as operating in a non-highly inflationary
economy. In fiscal 2001 and in prior years, Venezuela was deemed to be
a highly-inflationary economy in accordance with certain technical
accounting pronouncements. Effective January 1, 2002, it was deemed
that Venezuela should cease to be considered a highly-inflationary
economy, however, the Company did not account for this change. The
Company incorrectly recorded the foreign currency translation
adjustment in other income rather than as other comprehensive income.
As a result, the Company understated other expenses, net, by $1,360 for
the first quarter of fiscal 2002, overstated other income, net, by $71
for the second quarter of fiscal 2002 and understated other expenses,
net, by $243 for the third quarter of fiscal 2002. Also the Company
overstated operating expenses by $41, $54 and $88 for the first, second
and third quarters of fiscal 2002, respectively.
Inventory pricing. During the first three quarters of fiscal 2002, the
Company overstated (understated) cost of sales related to an inventory
pricing error that occurred at its Venezuelan subsidiary. The Company
was not aware of this pricing error until the fourth quarter of fiscal
2002 and, accordingly, was not properly pricing its inventory at the
lower of cost or market in accordance with generally accepted
accounting principles. As a result, the Company overstated
(understated) cost of sales by $387, ($2) and $35, for the first,
second and third quarters of fiscal 2002, respectively.
Sales incentives. During fiscal 2000 and 2001 and for the nine months
ended August 31, 2002, the Electronics segment overestimated accruals
for additional sales incentives (other trade allowances) that were not
offered to its customers. As a result, for fiscal 2000 and 2001 and for
the nine months ended August 31, 2002, the Company understated net
sales by $1,884, $784 and $292, respectively.
Furthermore, during fiscal 2001 and for the nine months ended August
31, 2002,the Electronics segment was also not reversing earned and
unclaimed sales incentives (i.e., cooperative advertising, market
development and volume incentive rebate funds) upon the expiration of
the established claim period. As a result, for fiscal 2001 and for the
nine months ended August 31, 2002, the Company understated net sales
by $126 and $555, respectively.
Gain on the Issuance of Subsidiary Shares. During the second quarter of
fiscal 2002, the Company overstated the gain on issuance of subsidiary
shares by $1,735 due to expenses related to this issuance being charged
to additional paid in capital. This adjustment also reflects the impact
of the other restatement adjustments on the calculation of the gain on
the issuance of subsidiary shares of $179 that was originally recorded
by the Company in the quarter ended
36
May 31, 2002. As a result, the Company decreased the gain on issuance
of subsidiary shares and increased the additional paid in capital by
$1,556.
Income taxes. Income taxes were adjusted for the restatement
adjustments discussed above for each period presented.
The Company also applied income taxes to minority interest amounts
during all quarters of fiscal 2000 and 2001, as well as the first three
quarters of fiscal 2002. As a result of all these adjustments, the
Company overstated (understated) the provision for/recovery of income
taxes by $(842), ($310) and $(455) for fiscal 2000, 2001 and the nine
months ended August 31, 2002, respectively.
Operating expense reclassification. The Company reclassified certain
costs as operating expenses, which were included as a component of
warehousing and technical support and general and administrative costs,
which should have been classified as a component of cost of sales. The
effect of this reclassification on fiscal 2000 and 2001 was to increase
cost of sales and decrease operating expenses by $17,962 and $20,024,
respectively. The effect of this reclassification for the nine months
ended August 31, 2002 was to understate cost of sales and overstate
operating expenses by $15,488. This reclassification did not have any
effect on previously reported net income or loss for any fiscal year or
period presented herein. This reclassification reduced gross margin by
1.0, 1.6 and 1.9 percentage points for fiscal years November 30, 2000,
2001 and the nine months ended August 31, 2002, respectively.
Business Overview
The Company markets its products under the Audiovox brand name as well
as private labels through a large and diverse distribution network both
domestically and internationally. The Company operates through two marketing
groups: Wireless and Electronics. Wireless consists of Audiovox Communications
Corp. (ACC), a 75%-owned subsidiary of Audiovox, and Quintex, which is a wholly-
owned subsidiary of ACC. ACC markets wireless handsets and accessories primarily
on a wholesale basis to wireless carriers in the United States and carriers
overseas. Quintex is a small operation for the direct sale of handsets,
accessories and wireless telephone service. Quintex also receives residual fees
and activation commissions from the carriers. Residuals are paid by the carriers
based upon a percentage of usage of customers activated by Quintex for a period
of time (1-5 years). Quintex also sells a small volume of electronics products
not related to wireless which are categorized as "other".
The Electronics Group consists of three wholly-owned subsidiaries:
Audiovox Electronics Corporation (AEC), American Radio Corp. and Code Systems,
Inc. (Code) and three majority-owned subsidiaries, Audiovox Communications
(Malaysia) Sdn. Bhd., Audiovox Holdings (M) Sdn. Bhd. and Audiovox Venezuela,
C.A. The Electronics Group markets, both domestically and internationally,
automotive sound and security systems, electronic car accessories, home and
portable sound products, FRS radios, in-vehicle video systems, flat-screen
televisions, DVD players and navigation systems. Sales are made through an
extensive distribution network of mass merchandisers and others. In addition,
the Company sells some of its products directly to automobile manufacturers on
an OEM basis. American Radio Corp. is also involved on a limited basis in the
wireless marketplace. Wireless related sales are categorized as "other".
37
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.
From fiscal 1998 through 2002, several major events and trends have
affected the Company's results and financial conditions.
Wireless increased its handset sales from 3.3 million units in fiscal
1998 to an all-time high of 8.9 million units in fiscal 2000 as a result of the
introduction of digital technology, reduced cost of service plans and expanded
feature options which attracted more subscribers to the carriers systems. During
2001 through 2002, as a result of the change in technology from analog to
digital, the consolidation of our carrier customer base and increased price
competition from our competitors, the Company's overall wireless growth was
impacted. Further during this period, the addition of several new competitors
had an effect on the Company's sales. These factors resulted in a reduction of
our net sales to 5.0 million units in 2002. This overall trend in our wireless
business from 1998 was impacted by:
o the introduction of digital technology, which has allowed
carriers to significantly increase subscriber capacity
o reduced cost of service and expanded feature options
o consolidation of carrier customers
o price competition
o increased competition
In fiscal 2000, 2001 and 2002, the Company recorded inventory
write-downs to market of $8,152, $20,650 and $13,823, respectively. These
write-downs were primarily due to increased pricing pressures, competition and
changing technologies. Wireless' gross profit margins were negatively impacted
by 0.6, 2.1 and 1.8 percentage points, respectively, as a result of these
write-downs. This trend of competition, price erosion, and changing technologies
will continue to affect the overall wireless business segment.
In fiscal 2000, 2001 and 2002, Wireless recorded $8,265, $12,555 and
$3,216, respectively, into income due to reversals of previously established
sales incentive accruals. Wireless' gross profit margins were positively
impacted by 0.6, 1.3 and 0.4 percentage points, respectively, as a result of
these reversals. See further discussion in critical accounting policies.
Sales by the Electronics Group were $175.1 million in 1998 and $372.7
million in 2002. During this period, the Company's sales were impacted by the
following items:
o the growth of our consumer electronic products business from
$11.7 million in fiscal 1998 to $86.5 million in fiscal 2002 was
a result of the introduction of new consumer goods
o the introduction of mobile video entertainment systems and other
new technologies
o growth of OEM business
38
Both of the Company's segments, Electronics and Wireless, are
influenced by the introduction of new products and changes in technology (see
Cautionary Factors That May Affect Future Results: Our success depends on our
ability to keep pace with technological advances in the wireless industry).
During fiscal 2002, the Company introduced several new products in our
Electronics segment, which included an extended line of portable DVD products
for the consumer market, new flat panel TV's and satellite radios. In our
Wireless group, the technology has evolved to new 1X technology, color view
screens for the phones, PDA's with built-in wireless capabilities and certain 1X
phones have the availability to utilize the new GPS locator systems. As a result
of the continuous introduction of new products, the Company must sell existing
older models prior to new product introduction or the value of the inventory may
be impacted (See Critical Accounting Policies - Inventory, MD&A Discussions).
Gross margins in the Company's electronics business have decreased to
16.1% for fiscal 2002 from 20.5% in 1998 due, in part, to a change in the
product mix, partially offset by higher margins in mobile video products, other
new technologies and products and the growth of the international business.
In fiscal 2000, 2001 and 2002, Electronics recorded $0, $132 and $588,
respectively, into income upon the expiration of unclaimed sales incentive
accruals. Electronics' gross profit margins were positively impacted by 0.0, 0.1
and 0.2 percentage points, respectively, as a result of this.
The Company's total operating expenses have increased at a slower rate
than sales since 1998. Total operating expenses were $70.5 million in 1998 and
$88.6 million in 2002. The Company has invested in management information
systems and its operating facilities to increase its efficiency.
During the period 1998 to 2002, the Company's financial position was
improved by the 2.3 million share follow-on offering in which the Company
received $96.6 million net proceeds and the sale of 25% of its previously
100%-owned subsidiary, ACC, to Toshiba for $27.2 million.
All financial information, except share and per share data, is
presented in thousands.
Critical Accounting Policies and Estimates
General
The consolidated financial statements of the Company are prepared in
conformity with accounting principles generally accepted in the United States of
America. As such, the Company is required to make certain estimates, judgments
and assumptions that management believes are reasonable based upon the
information available. These estimates and assumptions, which can be subjective
and complex, affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. As a result, actual results could differ from such
estimates and assumptions. The significant accounting policies which the Company
believes are the most critical to aid in fully understanding and evaluating the
reported consolidated financial results include the following:
Revenue Recognition
39
The Company recognizes revenue from product sales at the time of
passage of title and risk of loss to the customer either at FOB Shipping Point
or FOB Destination, based upon terms established with the customer. Any customer
acceptance provisions are satisfied prior to revenue recognition. There are no
further obligations on the part of the Company subsequent to revenue recognition
except for returns of product from the Company's customers. The Company does
accept returns of products, if properly requested, authorized, and approved by
the Company. The Company records an estimate of returns of products returned by
its customers. Management continuously monitors and tracks such product returns
and records the provision for the estimated amount of such future returns, based
on historical experience and any notification the Company receives of pending
returns. The Electronic segment's selling price to its customers is a fixed
amount that is not subject to refund or adjustment or contingent upon additional
rebates. The Wireless segment has sales agreements with certain customers that
provide for a rebate of the selling price if the particular product is
subsequently sold at a lower price. The Wireless segment records an estimate of
the rebate at the time of sale.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's current
credit worthiness, as determined by a review of their current credit
information. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that have been
identified. The Company's reserve for estimated credit losses at November 30,
2002 was $6,829. While such credit losses have historically been within
management's expectations and the provisions established, the Company cannot
guarantee that it will continue to experience the same credit loss rates that
have been experienced in the past. Since the Company's accounts receivable is
concentrated in a relatively few number of customers, a significant change in
the liquidity or financial position of any one of these customers could have a
material adverse impact on the collectability of the Company's accounts
receivables and future operating results.
Sales Incentives
Both of the Company's segments, Wireless and Electronics, offer sales
incentives to its customers in the form of (1) co-operative advertising
allowances; (2) market development funds and (3) volume incentive rebates. The
Electronics segment also offers other trade allowances to its customers. The
terms of the sales incentives vary by customer and are offered from time to
time. Except for other trade allowances, all sales incentives require the
customer to purchase the Company's products during a specified period of time.
All sales incentives require the customer to claim the sales incentive within a
certain time period. Although all sales incentives require customers to claim
the sales incentive within a certain time period (referred to as the "claim
period"), the Wireless segment historically has settled sales incentives claimed
after the claim period has expired if a customer demands payment. The sales
incentive liabilities are settled either by the customer claiming a deduction
against an outstanding account receivable owed to the Company by the customer
or by the customer requesting a check from the Company. The Company is unable to
demonstrate that an identifiable benefit of the sales incentives has been
received as such, all costs associated with sales incentives are classified as a
reduction of net sales. The following is a summary of the various sales
incentive programs offered by the Company and the related accounting policies:
40
Co-operative advertising allowances are offered to customers as
reimbursement towards their costs for print or media advertising in which our
product is featured on its own or in conjunction with other companies' products
(e.g., a weekly advertising circular by a mass merchant). The amount offered is
either based upon a fixed percentage of the Company's sales revenue or is a
fixed amount per unit sold to the customer during a specified time period.
Market development funds are offered to customers in connection with new product
launches or entering into new markets. Those new markets can be either new
geographic areas or new customers. The amount offered for new product launches
is based upon a fixed percentage of the Company's sales revenue to the customer
or is a fixed amount per unit sold to the customer during a specified time
period. The Company accrues the cost of co-operative advertising allowances and
market development funds at the later of when the customer purchases our
products or when the sales incentive is offered to the customer.
Volume incentive rebates offered to customers require that minimum
quantities of product be purchased during a specified period of time. The amount
offered is either based upon a fixed percentage of the Company's sales revenue
to the customer or is a fixed amount per unit sold to the customer. Certain of
the volume incentive rebates offered to customers include a sliding scale of the
amount of the sales incentive with different required minimum quantities to be
purchased. The customer's achievement of the sales threshold and consequently
the measurement of the total rebate for the Wireless segment cannot be
reasonably estimated. Accordingly, the Wireless segment recognizes a liability
for the maximum potential amount of the rebate with the exception of certain
volume incentive rebates that include very aggressive tiered levels of volume
purchases, as the underlying revenue transactions that result in progress by the
customer toward earning the rebate or refund on a program by program basis are
recognized. The Electronics segment makes an estimate of the ultimate amount of
the rebate their customers will earn based upon past history with the customer
and other facts and circumstances. The Electronics segment has the ability to
estimate these volume incentive rebates, as there does not exist a relatively
long period of time for a particular rebate to be claimed, the Electronics
segment does have historical experience with these sales incentive programs and
the Electronics segment does have a large volume of relatively homogenous
transactions. Any changes in the estimated amount of volume incentive rebates
are recognized immediately using a cumulative catch-up adjustment.
With respect to the accounting for co-operative advertising allowances,
market development funds and volume incentive rebates, there was no impact upon
the adoption of EITF 01-9, "Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of Vendor's Products)", as the Company's
accounting policy prior to March 1, 2002 was consistent with its accounting
policy after the adoption of EITF 01-9.
Other trade allowances are additional sales incentives that the Company
provides to the Electronics segment customers subsequent to the related revenue
being recognized. In accordance with EITF 01-9, the Company records the
provision for these additional sales incentives at the later of when the sales
incentive is offered or when the related revenue is recognized. Such additional
sales incentives are based upon a fixed percentage of the selling price to the
customer, a fixed amount per unit, or a lump-sum amount.
For the fiscal years ended November 30, 2000, 2001 and 2002, reversals
of previously established sales incentive liabilities amounted to $9,348,
$14,369 and $4,716, respectively. These reversals include unearned sales
incentives and unclaimed sales incentives. Unearned sales incentives are volume
incentive rebates where the customer did not purchase the required minimum
quantities of product during the
41
specified time. Volume incentive rebates for both segments are reversed into
income in the period when the customer did not purchase the required minimum
quantities of product during the specified time. Unearned sales incentives for
fiscal years ended November 30, 2000, 2001 and 2002 amounted to $4,167, $9,051
and $1,354, respectively. Unclaimed sales incentives are sales incentives earned
by the customer but the customer has not claimed payment of the earned sales
incentive from the Company. Unclaimed sales incentives for fiscal years ended
November 30, 2000, 2001 and 2002 amounted to $5,181, $5,318 and $3,362,
respectively.
The accrual for earned but unclaimed sales incentives is reversed by
Wireless only when management is able to conclude, based upon an individual
judgment of each sales incentive, that it is remote that the customer will claim
the sales incentive. The methodology applied for determining the amount and
timing of reversals for the Wireless segment is disciplined, consistent and
rational. The methodology is not systematic (formula based), as the Company
makes an estimate as to when it is remote that the sales incentive will not be
claimed. Reversals by the Wireless segment of unclaimed sales incentives have
historically occurred in varying periods up to 12 months after the recognition
of the accrual. In deciding on whether to reverse the sales incentive liability
into income, the Company makes an assessment as to the likelihood of the
customer ever claiming the funds after the claim period has expired and
considers the specific facts and circumstances pertaining to the individual
sales incentive. The factors considered by management in making the decision to
reverse accruals for unclaimed sales incentives include (i) past practices of
the customer requesting payments after the expiration of the claim period; (ii)
recent negotiations with the customer for new sales incentives; (iii) subsequent
communications with the customer with regard to the status of the claim; and
(iv) recent activity in the customer's account.
The Electronics segment reverses earned but unclaimed sales incentives
upon the expiration of the claim period. The Company believes that the reversal
of earned but unclaimed sales incentives for Electronics upon the expiration of
the claim period is a disciplined, rational, consistent and systematic method of
reversing unclaimed sales incentives. For the Electronics segment, 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 accrual for sales incentives at November 30, 2001 and 2002 was
$8,474 and $12,151, respectively. The Company's sales incentive liability may
prove to be inaccurate, in which case the Company may have understated or
overstated the provision required for these arrangements. Therefore, although
the Company makes its best estimate of its sales incentive liability, many
factors, including significant unanticipated changes in the purchasing volume of
its customers and the lack of claims made by customers of offered and accepted
sales incentives, could have significant impact on the Company's liability for
sales incentives and the Company's reported operating results.
Inventories
The Company values its inventory at the lower of the actual cost to
purchase and/or the current estimated market value of the inventory less
expected costs to sell the inventory. The Company regularly reviews inventory
quantities on-hand and records a provision for excess and obsolete inventory
based primarily on open purchase orders from customers and selling prices
subsequent to the balance sheet date as well as indications from customers based
upon the then current negotiations. As demonstrated in recent years, demand for
the Company's products can fluctuate significantly. A significant sudden
42
increase in the demand for the Company's products could result in a short-term
increase in the cost of inventory purchases while a significant decrease in
demand could result in an increase in the amount of excess inventory quantities
on-hand. In addition, the Company's industry is characterized by rapid
technological change and frequent new product introductions that could result in
an increase in the amount of obsolete inventory quantities on-hand. In such
situations, the Company generally does not obtain price protection from its
vendors, however, on occasion, the Company has received price protection which
reduces the cost of inventory. Since price protection reduces the cost of
inventory, as the Company sells the inventory for which it has received price
protection, the amount is reflected as a reduction to cost of sales. There can
be no assurances that the Company will be successful in negotiating such price
protection from its vendors in the future.
The Company has, on occasion, performed upgrades on certain inventory
on behalf of its vendors. The reimbursements the Company receives to perform
these upgrades are reflected as a reduction to the cost of inventory and is
recognized as a reduction to cost of sales as the related inventory is sold.
Additionally, the Company's estimates of excess and obsolete inventory may prove
to be inaccurate, in which case the Company may have understated or overstated
the provision required for excess and obsolete inventory. In the future, if the
Company's inventory is determined to be overvalued, it would be required to
recognize such costs in its cost of goods sold at the time of such
determination. Likewise, if the Company does not properly estimate the lower of
cost or market of its inventory and it is therefore determined to be
undervalued, it may have over-reported its cost of goods sold in previous
periods and would be required to recognize such additional operating income at
the time of sale. Therefore, although the Company makes every effort to ensure
the accuracy of its forecasts of future product demand, any significant
unanticipated changes in demand or technological developments could have a
significant impact on the value of the Company's inventory and its reported
operating results. During the year ended November 30, 2002, the Company recorded
inventory write-downs to market of $13,823 as a result of the recent reduction
of selling prices primarily related to digital hand-held phones and other
wireless products in anticipation and the introduction of new digital
technologies as well as the overall decrease in demand for wireless products. At
November 30, 2002, Wireless had on hand 640,084 units of previously written-down
inventory, which approximated $94,264. It is reasonably possible that additional
write-downs to market may be required in the future, given the continued
emergence of new technologies. (See Cautionary Factors That May Affect Future
Results: Our success depends on our ability to keep pace with technological
advances in the wireless industry).
Warranties
The Company offers warranties of various lengths depending upon the
specific product. The Company's standard warranties require the Company to
repair or replace defective product returned to the Company by both end users
and its customers during such warranty period at no cost to the end users or
customers. The Company records an estimate for warranty related costs based upon
its actual historical return rates and repair costs at the time of sale, which
are included in cost of sales. The estimated liability for future warranty
expense amounted to $9,143 at November 30, 2002, which has been included in
accrued expenses and other current liabilities. While the Company's warranty
costs have historically been within its expectations and the provisions
established, the Company cannot guarantee that it will continue to experience
the same warranty return rates or repair costs that have been experienced in the
past. A significant increase in product return rates, or a significant increase
in the costs to repair the Company's products, could have a material adverse
impact on its operating results for the period or periods in which such returns
or additional costs materialize.
43
Income Taxes
The Company has accounted for, and currently accounts for, income taxes
in accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". This Statement establishes financial accounting
and reporting standards for the effects of income taxes that result from an
enterprise's activities during the current and preceding years. It requires an
asset and liability approach for financial accounting and reporting of income
taxes.
The realization of tax benefits of deductible temporary differences and
operating loss or tax credit carryforwards will depend on whether the Company
will have sufficient taxable income of an appropriate character within the
carryback and carryforward period permitted by the tax law to allow for
utilization of the deductible amounts and carryforwards. Without sufficient
taxable income to offset the deductible amounts and carryforwards, the related
tax benefits will expire unused. The Company has evaluated both positive and
negative evidence in making a determination as to whether it is more likely than
not that all or some portion of the deferred tax asset will not be realized.
Effective May 29, 2002, the Company's ownership in the Wireless Group was
decreased to 75% (see Note 3). As such, the Company no longer files a
consolidated U.S. Federal tax return. As a result, the realizability of the
Wireless Group's deferred tax assets are assessed on a stand-alone basis. The
Company's Wireless Group has incurred cumulative losses in recent years, and
therefore based upon these cumulative losses and other material factors
(including the Wireless Group's inability to reasonably and accurately estimate
future operating and taxable income based upon the volatility of their
historical operations), the Company has determined that it is more likely than
not that some of the benefits of the Wireless Group's deferred tax assets and
carryforwards will expire unused. Accordingly, the Company has recorded an
additional valuation allowance of $13,090 during fiscal year ended November 30,
2002 related to the Wireless Group's deferred tax assets.
Furthermore, the Company provides tax reserves for Federal, state and
international exposures relating to potential tax examination issues, planning
initiatives and compliance responsibilities. The development of these reserves
requires judgments about tax issues, potential outcomes and timing and is a
subjective critical estimate.
44
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
statements of operations data for the Company expressed as a percentage of net
sales:
Percentage of Net Sales
Years Ended November 30,
--------------------------------------------
2000 2001 2002
---- ---- ----
As Restated As Restated
----------- -----------
Net sales (a):
Wireless
Wireless products 81.4% 74.3% 63.7%
Activation commissions 1.7 2.1 2.2
Residual fees 0.1 0.2 0.2
Other 0.2 0.1 0.1
------------ ------------ --------
Total Wireless 83.4 76.7 66.1
----------- ----------- -------
Electronics
Mobile electronics 8.1 12.4 20.8
Sound 4.6 4.5 5.1
Consumer electronics 3.6 6.3 7.9
Other 0.2 0.1 0.1
------------ ------------ --------
Total Electronics 16.6 23.6 33.9
----------- ----------- -------
Total net sales 100.0 100.0 100.0
Cost of sales (92.9) (94.4) (93.2)
---------- ---------- -------
Gross profit 7.1 5.6 6.8
Selling (1.7) (2.4) (2.7)
General and administrative (2.8) (3.6) (5.0)
Warehousing and technical support (0.2) (0.3) (0.4)
----------- ----------- --------
Total operating expenses (4.7) (6.3) (8.1)
----------- ----------- --------
Operating income (loss) 2.4 (0.7) (1.3)
Interest and bank charges (0.4) (0.5) (0.4)
Equity in income in equity investments 0.2 0.3 0.2
Gain on sale of investments 0.1 - -
Gain on hedge of available-for-sale securities 0.1 - -
Gain on issuance of subsidiary shares - - 1.3
Other, net 0.1 - (0.4)
----------- ------------- -------
Income (loss) before provision for (recovery of) income
taxes, minority interest, extraordinary item and
cumulative effect 2.5 (0.9) (0.6)
Provision for (recovery of) income taxes 0.9 (0.3) 1.2
Minority interest (0.1) 0.1 0.4
Extraordinary item 0.1 - -
Cumulative effect - - -
------------- ------------- --------
Net income (loss) 1.6 % (0.6)% (1.3)%
========== ========= =========
(a) Effective March 1, 2002, the Company adopted Emerging Issues Task Force
(EITF) Issue No. 01-9, "Accounting for Consideration Given by a Vendor
to a Customer". Upon adoption
45
of this Issue, the Company reclassified its sales incentives offered to
its customers from selling expenses to net sales. Previously reported
operating income (loss) has remained unchanged by this adoption. For
purposes of comparability, these reclassifications have been reflected
retroactively for all periods presented.
The net sales and percentage of net sales by product line and marketing
group for the fiscal years ended November 30, 2000, 2001 and 2002 are reflected
in the following table. Certain reclassifications and recaptionings have been
made to the data for periods prior to fiscal 2002 in order to conform to fiscal
2002 presentation.
Fiscal Years Ended November 30,
---------------------------------------------------------------------------------
2000 2001 2002
---- ---- ----
As Restated As Restated
---------------------------- ---------------------------
Net sales:
Wireless
Products $1,359,366 81.4% $ 948,921 74.3% $ 700,658 63.7%
Activation commissions 28,983 1.7 26,879 2.1 24,393 2.2
Residual fees 1,852 0.1 2,396 0.2 2,187 0.2
Other 3,619 0.2 692 0.1 420 0.1
---------- ----- ---------- ----- ---------- -----
Total Wireless 1,393,820 83.4 978,888 76.7 727,658 66.1
---------- ----- ---------- ----- ---------- -----
Electronics
Mobile electronics 134,563 8.1 157,706 12.4 229,327 20.8
Sound 77,412 4.6 57,456 4.5 56,281 5.1
Consumer electronics 60,547 3.6 80,380 6.3 86,472 7.9
Other 3,949 0.2 2,160 0.1 644 0.1
---------- ----- --------- ----- ---------- -----
Total Electronics 276,471 16.6 297,702 23.3 372,724 33.9
---------- ----- --------- ----- ---------- -----
Total $1,670,291 100.0% $1,276,591 100.0% $1,100,382 100.0%
========== ===== ========== ===== ========== =====
FISCAL 2001 (AS RESTATED) COMPARED TO FISCAL 2002
CONSOLIDATED RESULTS
Net sales for fiscal 2002 were $1,100,382, a 13.8% decrease from net
sales of $1,276,591 in fiscal 2001. Wireless Group sales were $727,658 in fiscal
year 2002, a 25.7% decrease from sales of $978,888 in fiscal 2001. Unit sales of
wireless handsets decreased 29.3% to approximately 4,950,000 units in fiscal
2002 from approximately 7,000,000 units in fiscal 2001. However, the average
selling price of the Company's handsets increased to $136 per unit in fiscal
2002 from $127 per unit in fiscal 2001 as a result of new product introductions.
Wireless sales were impacted by late introductions of new products by its
vendor, delays in acceptances testing by our customers and slower growth in the
wireless industry.
Electronics Group sales were $372,724 in fiscal 2002, a 25.2% increase
from sales of $297,702 in fiscal 2001. This increase was largely due to
increased sales in the mobile video and consumer electronics product lines as
newer digital video products were offered to our customers. Offsetting some of
this increase were sound sales, which continue to decline given the change in
the marketplace as fully-featured sound systems are being incorporated into
vehicles at the factory rather than being
46
sold in the aftermarket. This declining trend in sound systems is expected to
continue except in the satellite radio product line. Sales by the Company's
international subsidiaries decreased 21.5% in fiscal 2002 to approximately
$21,971 due to a 39.2% decrease in Venezuela due to political and economic
instability and a 7.4% decrease in Malaysia as a result of lower OEM sales.
Sales were also impacted by increased sales incentives of $23,035, primarily in
the Wireless Group.
Gross profit margin for fiscal 2002 was 6.8%, compared to 5.6% in
fiscal 2001. However, this increase in profit margin resulted primarily from
lower inventory write-downs to market of $7,612 in 2002 compared to 2001. During
fiscal 2002, there was no significant impact to our gross profit margins on the
subsequent sale of previously written-down inventory. There was also a change in
the mix of sales from Wireless product sales to Electronics product sales, which
carry a higher gross margin. Wireless margins were impacted by late product
introductions by its suppliers. This trend of late product introductions
continues to have a major effect on the gross margins of the Wireless Group.
Margins declined to 16.1% from 16.5% in the Electronics Group. Consolidated
gross margins were also adversely impacted by increased sales incentives,
principally in the Wireless Group. Further trends in the operations will be
discussed in detail in each individual marketing group MD&A discussion.
Operating expenses increased $8,049 to $88,675 in fiscal 2002, compared
to $80,626 in fiscal 2001. As a percentage of net sales, operating expenses
increased to 8.1% in fiscal 2002 from 6.3% in fiscal 2001. Major components of
this increase were compensation expenses of $3,200 related to the sale of ACC
shares to Toshiba and the impact of Code acquisition (Note 6 of Notes to
Consolidated Financial Statements) of $1,852. Additionally, bad debt expenses
increased $2,948 principally in the Wireless Group as a result of economic
conditions in South America and increased insurance expense, particularly with
general liability insurance, of $1,167. This increase in operating expenses was
partially offset by reductions in employee benefits expense of $1,332 due to
reduced bonuses and lower health care costs. Operating loss for fiscal 2002 was
$14,076, compared to operating loss of $9,236 in 2001.
Net loss for fiscal 2002 was $14,040 compared to net loss of $7,198 in
fiscal 2001. Loss per share for fiscal 2002 was $0.64, basic and diluted
compared to $0.33 for fiscal 2001, basic and diluted.
47
WIRELESS RESULTS
The following table sets forth for the fiscal years indicated certain
statements of operations data for Wireless expressed as a percentage of net
sales:
2001 2002
------ -----
As Restated
-----------------------------
Net sales:
Wireless products $ 948,921 96.9% $ 700,658 96.3%
Activation commissions 26,879 2.8 24,393 3.3
Residual fees 2,396 0.2 2,187 0.3
Other 692 0.1 420 0.1
--------- ----- --------- -----
Total net sales 978,888 100.0 727,658 100.0
Gross profit 21,980 2.2 14,291 2.0
Operating expenses
Selling 13,108 1.3 11,148 1.5
General and administrative 16,077 1.6 21,522 3.0
Warehousing and technical support 2,761 0.3 2,593 0.4
--------- ----- --------- -----
Total operating expenses 31,946 3.2 35,263 4.9
--------- ----- --------- -----
Operating loss (9,966) (1.0) (20,972) (2.9)
Other expense (7,690) (0.8) (3,934) (0.5)
--------- ----- --------- -----
Pre-tax loss $ (17,656) (1.8)% $ (24,906) (3.4)%
========= ====== ========= =====
Wireless is composed of ACC and Quintex, both subsidiaries of the
Company.
Net sales were $727,658 in fiscal 2002, a decrease of $251,230, or
25.7%, from fiscal 2001. Unit sales of wireless handsets decreased by 2,050,000
units in fiscal 2002, or 29.3%, to approximately 4,950,000 units from 7,000,000
units in fiscal 2001. This decrease was attributable to decreased sales of
digital handsets due to delayed new product introductions, longer testing cycles
required by our customers and overall lower demand for wireless products. In
addition, there was a $20,845 of a net increase in sales incentives expense
compared to 2001 due to increased sales incentive programs and a reduction in
the reversals for unclaimed sales incentives. In connection with the
introduction of the new 1X phones, one sales incentive program with a large
customer resulted in an increase of $18,000 in sales incentives. The reversals
for unclaimed sales incentives decreased by $2,374 in fiscal 2002 compared to
fiscal 2001 for Wireless due to more of the Company's larger customers claiming
earned sales incentives as compared to prior periods. These sales incentive
programs are expected to continue and will either increase or decrease based
upon competition and customer demands. The average selling price of handsets,
however, increased to $136 per unit in fiscal 2002 from $127 per unit in fiscal
2001. This increase was due to higher selling prices of the newly-introduced 1X
digital products. Gross profit margins remained essentially unchanged at 2.0%
vs. 2.2% in 2001 due to the sales of new, higher margin products and lower
inventory write-downs, offset by increased sales incentive programs. The Company
expects due to market conditions, competition and customer concentration, it
could experience increased sales incentives expense in the future. Inventory
write-downs were $20,650
48
in 2001 compared to $13,823 in 2002. The write-downs recorded in 2002 were a
result of the reduction of selling prices primarily related to older model,
digital hand-held phones and other wireless products in anticipation of newer
digital technologies. At November 30, 2002, the Company had on hand
approximately 640,084 units of previously written-down inventory which, after
write-down, had an extended value of $94,264. The new technology that was
introduced during the second quarter of 2002 was 1XXT and GPS phones. In
addition to inventory write-downs recorded in previous quarters, the Company
determined the valuation of the older technology digital models on hand as of
November 30, 2002 by reviewing open purchase orders from customers and selling
prices subsequent to the balance sheet date as well as indications from
customers based upon current negotiations. The Company plans to sell these items
to its existing customers during the next year. A majority of the units that
were previously written-down in fiscal 2001 have been sold. The remaining
balance of inventory previously written-down in fiscal 2001 is not material and
will be sold in the next fiscal year. None of this inventory was scrapped. The
Company expects that, due to market conditions and customer consolidation, it
could experience additional write-downs in the future. Gross margins were
favorably impacted by reimbursement from a vendor for software upgrades
performed on inventory sold of $1,615 and $1,331 for fiscal 2001 and 2002,
respectively. Without this reimbursement, gross margins would have been lower by
0.1% and 0.2% for fiscal 2001 and 2002, respectively. The Company has received
price protection of $4,550 and $32,643 for fiscal 2001 and 2002, respectively,
from a vendor for certain inventory, of which $4,550 and $27,683 was recorded as
a reduction to cost of sales, as related inventory was sold. The other $4,960 in
price protection for 2002 has been reflected as a reduction to the remaining
inventory cost. Without this price protection, gross profit margins would have
been lower by 0.5% and 4.5% for fiscal 2001 and 2002, respectively. The Company
has an agreement with its vendor for additional future price protection with
respect to specific inventory items, if needed.
Operating expenses increased $3,317 in fiscal 2002 from fiscal 2001. As
a percentage of net sales operating expenses increased to 4.8% during fiscal
2002 compared to 3.3% in fiscal 2001. Selling expenses decreased $1,960 in
fiscal 2002 from fiscal 2001, primarily in commissions of $2,246 from reduced
sales in Mexico, $587 from reduced sales in Europe and the balance from lower
over-all commissionable sales. Travel and entertainment decreased $126 due to a
reduction in the sales force and less international travel. These decreases were
partially offset by increases in advertising and trade show expense of $498
primarily due to increased sales promotions and broadcast media advertising of
$274. Numerous other individually insignificant fluctuations account for the
remaining net change in selling expenses. General and administrative expenses
increased $5,445 in fiscal 2002 from fiscal 2001, primarily in salaries of
$2,818 due to $3,200 bonus payments associated with the Toshiba transaction
(Note 3), insurance expense of $681 due to increased insurance premiums for
general liability coverage, occupancy costs of $128 due to increased rent, real
estate taxes and utilities, bad debt expense of $2,853 primarily due to two
accounts in Venezuela and Argentina as a result of the political and economic
conditions and one account in the United States for slow payment. The Company
does not consider this a trend in the overall accounts receivable. Depreciation
and amortization increased $236 due to purchase of additional testing equipment
as new 1X product is being introduced. These increases were partially offset by
decreases in travel and entertainment of $193 due to less salesmen traveling as
a result of lower sales and a reduced budget for travel and entertainment,
employee benefits of $634 as a result of reduction in profit bonus and
reductions in health plan costs due to improved claim experience and licenses of
$466 due to a non-recurring licensing fee. Warehousing and technical support
expenses decreased $168 in fiscal 2002 from fiscal 2001, primarily in direct
labor, taxes and benefits of $130 and overseas buying offices of $107 due to
lower expenses in the buying offices in South Korea as a result of reduced
sales. These decreases were partially offset by an increase in travel of
49
$69 due to increased travel for product compliance testing. Numerous other
individually insignificant fluctuations in various categories account for the
remaining net change in operating expenses. Pre-tax loss for fiscal 2002 was
$24,906, compared to $17,656 for fiscal 2001.
Management believes that the wireless industry is extremely competitive
and that this competition could affect gross margins and the carrying value of
inventories in the future as new competitors enter the marketplace. This
pressure from increased competition is further enhanced by the consolidation of
many of Wireless' customers into a smaller group, dominated by only a few, large
customers. Also, timely delivery and carrier acceptance of new product could
affect our quarterly performance. These new products require extensive testing
and software development which could delay entry into the market and affect our
sales in the future. In addition, given the anticipated emergence of new
technologies in the wireless industry, the Company will need to sell existing
inventory quantities of current technologies to avoid further write-downs to
market.
ELECTRONICS RESULTS
The following table sets forth for the fiscal years indicated certain
statements of income data for the Electronics Group expressed as a percentage of
net sales:
2001 2002
------ -----
As Restated
-----------------------------
Net sales:
Mobile electronics $157,706 53.0% $229,327 61.5%
Sound 57,456 19.3 56,281 15.1
Consumer electronics 80,380 27.0 86,472 23.2
Other 2,160 0.7 644 0.2
--------- ------ --------- -----
Total net sales 297,702 100.0 372,724 100.0
Gross profit 49,088 16.5 60,037 16.1
Operating expenses
Selling 14,449 4.9 15,944 4.3
General and administrative 19,547 6.6 23,300 6.2
Warehousing and technical support 1,134 0.3 1,137 0.3
--------- ------ -------- ------
Total operating expenses 35,130 11.8 40,381 10.8
--------- ------ -------- ------
Operating income 13,958 4.7 19,656 5.3
Other expense (178) (0.1) (1,927) (0.5)
--------- ------ -------- ------
Pre-tax income $ 13,780 4.6% $ 17,729 4.8%
========= ====== ======== ======
Net sales were $372,724 in fiscal 2002, a 25.2% increase from net sales
of $297,702 in fiscal 2001. Mobile and consumer electronics' sales increased
over last year, partially offset by a decrease in Sound and other. Mobile
electronics increased $71,621 (45.4%) during 2002 from 2001. Sales of Mobile
Video within the Mobile Electronics category increased over 59% in fiscal 2002
from fiscal 2001 as a result of the introduction of new video digital product,
satellite radio and navigation products.
50
Consumer Electronics increased $6,092 (7.6%) to $86,472 in fiscal 2002 from
$80,380 in fiscal 2001, primarily in sales of video-in-a-bag and portable DVD
players. These increases were partially offset by a decrease in the sound
category, particularly AV and Prestige audio lines. Given change in the
marketplace, fully-featured sound systems are being incorporated into vehicles
at the factory rather than being sold in the aftermarket. This declining trend
in sound systems is expected to continue except in the satellite radio product
line. There was also an increase in sales incentives of $2,190 due to an
increase in sales as compared to the prior year in the consumer goods category,
which requires more promotion support. As many sales incentive programs are
based on a percentage of sales, the increase in sales resulted in an increase in
sales incentives. Net sales in the Company's Malaysian subsidiary decreased from
last year by approximately $933 (7.4%) primarily from lower OEM business. The
Company's Venezuelan subsidiary experienced a decrease of $5,823 (39.2%) in
sales from last year, primarily from lower OEM business and the impact of
economic and political instability in the country.
Gross profit margins decreased to 16.1% in fiscal 2002 from 16.5% in
fiscal 2001 despite an increase in sales. The gross margin decreased in Sound,
partially offset by an increase in Mobile Electronics and international
operations. Also affecting margins was the integration of Code Systems into the
Electronics Group (see Note 6). During 2002, the Company was in the process of
converting Code from their own domestic manufacturing to having products
produced by overseas vendors. As a result, Code's gross margins were
significantly lower than other product lines in the Electronics Group. Lower
margins from Code were partially offset by higher margins in new models of
consumer and mobile electronics. This integration of Code has been completed.
Operating expenses increased $5,251 in fiscal 2002, a 14.9% increase
from operating expenses in fiscal 2001. As a percentage of net sales, operating
expenses decreased to 10.8% during fiscal 2002 compared to 11.8% in fiscal 2001.
Selling expenses increased $1,495 during fiscal 2002, primarily in commissions
of $911 due to increased commissionable sales in the video and consumer goods
product categories, which has a different commission rate structure and grew
faster than other product groups, salaries of $598 primarily due to Code, a new
company, newly hired international salesmen and travel and entertainment of $144
due to increased travel to support increased business both in the Segment's core
business and its two subsidiaries, American Radio and Code. These increases were
partially offset by decreases of $262 in advertising and trade shows. General
and administrative expenses increased $3,753 from fiscal 2001, mostly in
salaries of $1,713 primarily due to Code, increased bonuses due to sales
increases and increased head count, travel and entertainment of $234 due to
additional business and acquisitions, office expenses of $122 due to increased
use of employment agencies, for additional staff to support sales growth,
equipment repair of $101 due to increased maintenance of office equipment,
insurance expense of $378 due to higher premiums on general liability and Ocean
Cargo as shipments and sales have increased, professional fees of $589 due to
litigation expenses related to royalties and other matters and increased use of
consulting services related to a new customer's navigation system, occupancy
costs of $260 due to relocation of the display department to another separate
facility, bad debt expense of $311 due to non-payment by an international
customer, which is not indicative of a trend, and depreciation and amortization
of $163 due to general expansion of the facilities to support the growing
operations. These increases were partially offset by decreases in equipment
rentals of $111 due to the elimination of certain office machines. Warehousing
and technical support expenses remained essentially unchanged at $1,137 in
fiscal 2002 from fiscal 2001 compared to $1,134 in fiscal 2002. Pre-tax income
for fiscal 2002 was $17,729, compared to $13,780 for fiscal 2001.
51
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.
OTHER INCOME AND EXPENSE
Interest expense and bank charges decreased $1,703 during fiscal 2002
from fiscal 2001, primarily due to lower interest rates on lower borrowing
levels.
Equity in income of equity investees decreased by approximately $1,807
for fiscal 2002 compared to fiscal 2001. The majority of the decrease was due to
a decrease in the equity income of ASA due to a general slow down in the market
for their products. Other expenses increased as a result of foreign exchange
translation in our Venezuelan subsidiary as a result of the devaluation of the
Venezuelan currency against the U.S. Dollar and the effects of the change from
hyper-inflationary accounting for foreign exchange translation to
non-hyper-inflationary accounting in fiscal 2002. During fiscal 2001, the
Company accounted for foreign exchange translation in its Venezuelan subsidiary
under hyper- inflationary method. The foreign exchange losses were $333 in 2001
and $2,819 in 2002.
In addition, the Company recorded an other-than-temporary impairment
for investment in common stock of Shintom Co., Ltd. of $1,158. The Company also
recognized a gain of $14,269 on the sale of ACC shares to Toshiba (Note 3).
PROVISION FOR INCOME TAXES
The effective tax rate for 2001 was a (benefit) of (31.6%) as compared
to the effective tax rate for 2002 which was an expense of 202.0%. The increase
in the effective tax rate is principally due to the increase in valuation
allowance, relating to various deferred tax assets. Effective May 29, 2002, the
Company's ownership in the Wireless Group was decreased to 75% (see Note 3). As
such, the Company now files two consolidated U.S. Federal tax returns, one for
the Wireless Group and one for the Electronics Group. As a result, the
realizability of the Wireless Group's deferred tax assets are assessed on a
stand-alone basis. The Company's Wireless Group has incurred cumulative losses
in recent years and therefore based upon these cumulative losses and other
material factors (including the Wireless Group's inability to reasonably and
accurately estimate future operating and taxable income based upon the
volatility of their historical operations), the Company has determined that it
is more likely than not that some of the benefits of the Wireless Group's
deferred tax assets and carryforwards will expire unused, accordingly, the
Company has recorded an additional valuation allowance of $13,090 during fiscal
year ended November 30, 2002 related to the Wireless Group's deferred tax
assets. The increase in the valuation allowance relates principally to the
deferred tax assets of the Wireless segment, which has recorded cumulative
losses in recent years, and to certain state net operating losses which the
Company has determined are more likely than not to expire unused.
FISCAL 2000 (AS RESTATED) COMPARED TO FISCAL 2001 (AS RESTATED)
CONSOLIDATED RESULTS
Net sales for fiscal 2001 were $1,276,591, a 23.6% decrease from net
sales of $1,670,291 in fiscal 2000. Wireless Group sales were $978,888 in fiscal
year 2001, a 29.8% decrease from sales
52
of $1,393,820 in fiscal 2000. Unit sales of wireless handsets decreased 21.4% to
approximately 7,000,000 units in fiscal 2001 from approximately 8,909,000 units
in fiscal 2000. The average selling price of the Company's handsets decreased to
$127 per unit in fiscal 2001 from $150 per unit in fiscal 2000 due to the
introduction of newer digital models and the change of technology from analog to
digital.
Electronics Group sales were $297,702 in fiscal 2001, an 7.7% increase
from sales of $276,471 in fiscal 2000. This increase was largely due to
increased sales in the mobile video and consumer electronics product lines.
Offsetting some of this increase were sound sales, which continue to decline
given the change in the marketplace as fully-featured sound systems are being
incorporated into vehicles at the factory, rather than being sold in the
aftermarket. This declining trend in sound is expected to continue except in the
satellite radio product line. Sales by the Company's international subsidiaries
increased 6.2% in fiscal 2001 to approximately $28.0 million, primarily due to a
41.7% increase in Venezuela due to increasing OEM sales, partially offset by a
17.8% decrease in Malaysia from declining OEM sales. Sales were impacted by
decreased sales incentives of $4,288, primarily in the Wireless Group. Without
this decrease in sales incentives, sales would have decreased 23.3% in 2001 from
2000.
Gross profit margin for fiscal 2001 was 5.6%, compared to 7.1% in
fiscal 2000. This decline in profit margin resulted primarily from $20,650 of
inventory write-downs to market and margin reductions in Wireless attributable
to increased sales of digital products, which have lower margins offset by the
reimbursement of $4,550 received from a manufacturer for software upgrades. A
portion of the write-down of $13,500 was related to the analog write-down which
was recorded in the second quarter. A majority of the analog product was sold to
customers in Latin America at a price higher than the write-down and had a
favorable impact on the Wireless Group's gross profit for the third quarter.
This improved reported third quarter consolidated margins of 10.8% by 0.6% from
10.2% and 0.8% for the Wireless segment which reported margins 5.9% as compared
to 5.1% without the recovery. Due to specific technical requirements of
individual carrier customers, carriers place large purchase commitments for
digital handsets with Wireless, which results in a lower selling price which
then lowers gross margins. Consolidated gross margins were also favorably
impacted by decreased sales incentives, principally in the Wireless Group, as
there were fewer incentive programs.
Operating expenses increased $1,630 in fiscal 2001, compared to fiscal
2000. As a percentage of net sales, operating expenses increased to 6.3% in
fiscal 2001 from 4.7% in fiscal 2000. Major components of this increase were
professional fees, salaries and commissions. Operating loss for fiscal 2001 was
$9,237, compared to operating income of $39,629 in 2000.
During 2000, the Company also recorded an extraordinary gain of $2,189
in connection with the extinguishment of debt.
Net loss for fiscal 2001 was $7,198 compared to net income of $27,492
in fiscal 2000. Loss per share was $(0.33), basic and diluted for fiscal 2001
compared to $1.19, basic, and $1.12, diluted, and $1.29, basic and $1.22,
diluted after extraordinary item, in fiscal 2000.
53
WIRELESS RESULTS
The following table sets forth for the fiscal years indicated certain
statements of operations data for Wireless expressed as a percentage of net
sales:
2000 2001
------ -----
As Restated As Restated
------------------------------ ------------------------------
Net sales:
Wireless products $1,359,366 97.5% $ 948,921 96.9%
Activation commissions 28,983 2.1 26,879 2.8
Residual fees 1,852 0.1 2,396 0.2
Other 3,619 0.3 692 0.1
---------- ----- --------- -----
Total net sales 1,393,820 100.0 978,888 100.0
Gross profit 69,365 5.0 21,980 2.2
Operating expenses
Selling 13,609 1.0 13,108 1.3
General and administrative 15,183 1.1 16,077 1.6
Warehousing and technical support 2,691 0.2 2,761 0.3
---------- ----- --------- -----
Total operating expenses 31,483 2.3 31,946 3.2
---------- ----- --------- -----
Operating income (loss) 37,882 2.7 (9,966) (1.0)
Other expense (7,663) (0.5) (7,690) (0.8)
---------- ----- --------- -----
Pre-tax income (loss) $ 30,219 2.2% $ (17,656) (1.8)%
========== ====== ========= =====
Net sales were $978,888 in fiscal 2001, a decrease of $414,932, or
29.8%, from fiscal 2000. Unit sales of wireless handsets decreased by 1,909,000
units in fiscal 2001, or 21.4%, to approximately 7,000,000 units from 8,909,000
units in fiscal 2000. This decrease was attributable to decreased sales of both
analog and digital handsets which was due to delayed digital product acceptances
by our customers, the change in technology from analog to digital and overall
slower sales. The average selling price of handsets decreased to $127 per unit
in fiscal 2001 from $150 per unit in fiscal 2000. During 2000, Wireless adjusted
the carrying value of its analog inventory by recording write-downs to market of
$8,152. During 2001, the Company recorded total inventory write-downs to market
of $20,650. During the second quarter of 2001, the Company recorded an
additional inventory write down of $13,500 also pertaining to its analog
inventory. (See Consolidated Results, Page 46). As a result of increasing
pricing pressures and a surplus of supply created by other manufacturers also
attempting to sell off analog inventories, there was a drop off in demand for
analog products during the second quarter. The write down was based upon the
drop in demand, as carriers no longer promoted analog product and notified the
Company that previous indications for orders of analog phones were no longer
viable, and the continued decline in analog selling prices. There was a decrease
in sales incentives of $5,850 due to lower sales and the changeover to digital
products from analog products.
During the fourth quarter of 2001, the Company recorded an inventory
write-down of $7,150 pertaining to its digital inventory due to older technology
which is to be replaced during fiscal 2002. This write-down was made based upon
open purchase orders from customers and selling prices subsequent
54
to the balance sheet date as well as indications from customers based upon the
then current negotiations. During the quarter ended November 30, 2001, the
Company recorded a reduction to cost of sales of approximately $4,550 for
reimbursement from a manufacturer for upgrades performed in 2001 on certain
digital phones which partially offset the decline in margins. Without this
reimbursement, gross margins would have been lower by 0.5%. There were no
upgrades performed in 2000. During 2001 and 2000, Wireless recorded $4,550 and
$0 of price protection. Without this price protection, gross margins would have
been lower by 0.5% in 2001. As of November 30, 2001, the Company had 871,000
units of inventory previously written-down with an extended value, after
write-down, of $118,500. The Company sold all but 3,500 units during fiscal
2002.
Operating expenses increased to $31,946 in fiscal 2001 from $31,483 in
fiscal 2000. As a percentage of net sales, operating expenses increased to 3.3%
during fiscal 2001 compared to 2.3% in fiscal 2000. Selling expenses decreased
$501 in fiscal 2001 from fiscal 2000, primarily in advertising of $776 due to
discounted advertising costs and reimbursement from various carriers . This
decrease was partially offset by an increase in commissions of $268. Commissions
increased by $268 from fiscal 2000 to fiscal 2001, which was not consistent with
the change in sales. This increase was primarily due to a higher analog
commission on sales of analog products sold in Mexico. As analog programs were
canceled with the major wireless carriers in the United States, the Company
offered a higher commission to sell the analog models quickly. General and
administrative expenses increased $895 in fiscal 2001 from fiscal 2000.
Professional fees increased $1,164 due to litigation expenses. Office salaries
increased by approximately $158, and travel expense increased by approximately
$54 during fiscal 2001 from fiscal 2000, primarily due to increased travel by
senior executives and engineers for meetings with overseas vendors regarding new
product developments. The increase in travel expense was offset by a reduction
in travel expenses resulting from the closing of certain small Quintex retail
locations. Corporate allocations increased $967 for additional support for the
growing business for MIS and computer services. The increase was offset by a
decrease in bad debt expense by $1,317, primarily due to a significant bad debt
recorded in fiscal 2000 (one customer that ultimately went out of business) that
did not recur to the same extent in 2001. The Company does not expect the
decrease to continue given the volatility in the marketplace and the overall
downturn in economic conditions. Warehousing and technical support expenses
increased $70 in fiscal 2001 from fiscal 2000, primarily in travel of $105 by
our engineering department for product testing and compliance. Numerous other
individually insignificant fluctuations in warehousing and technical support
accounted for the remaining net decrease of $35. Pre-tax loss for fiscal 2001
was $17,656, a decrease of $47,875 from fiscal 2000.
Management believes that the wireless industry is extremely competitive
and that this competition could affect gross margins and the carrying value of
inventories in the future as new competitors enter the marketplace. 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. (See
Business Overview, page 37.) 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.
55
ELECTRONICS RESULTS
The following table sets forth for the fiscal years indicated certain
statements of income data for the Electronics Group expressed as a percentage of
net sales:
2000 2001
------ -----
As Restated As Restated
--------------------------- ------------------------
Net sales:
Mobile electronics $134,563 48.7% $157,706 53.0%
Sound 77,412 28.0 57,456 19.3
Consumer electronics 60,547 21.9 80,380 27.0
Other 3,949 1.4 2,160 0.7
-------- ----- --------- -----
Total net sales 276,471 100.0 297,702 100.0
Gross profit 49,960 18.1 49,088 16.5
Operating expenses
Selling 13,114 4.8 14,449 4.9
General and administrative 17,618 6.4 19,547 6.6
Warehousing and technical support 639 0.2 1,134 0.3
-------- ----- --------- -----
Total operating expenses 31,371 11.4 35,130 11.8
-------- ----- --------- -----
Operating income 18,589 6.7 13,958 4.7
Other expense (1,937) (0.7) (178) (0.1)
-------- ----- --------- -----
Pre-tax income $ 16,652 6.0% $ 13,780 4.6%
======== ===== ========= =====
Net sales were $297,702 in fiscal 2001, an 7.7% increase from net sales
of $276,471 in fiscal 2000, net of reversals of $1,814 and $1,083 for sales
incentive programs in 2001 and 2000, respectively. Mobile and consumer
electronics' sales increased over last year, partially offset by a decrease in
sound. Mobile electronics increased $23,143 (17.2%) during 2001 from 2000. Sales
of mobile video within the mobile electronics category increased over 27% in
fiscal 2001 from fiscal 2000. Consumer electronics increased 32.8% to $80,380 in
fiscal 2001 from $60,547 in fiscal 2000. These increases were due to the
introduction of new product lines in both categories. These increases were
partially offset by a decrease in the sound category, particularly SPS, AV,
private label and Prestige audio lines. Given the change in the marketplace,
fully-featured sound systems are being incorporated into vehicles at the factory
rather than being sold in the aftermarket. This declining trend in sound systems
is expected to continue except in the satellite radio product line. There was
also an increase in sales incentives of $1,562 primarily due to the increase in
mobile video sales.
Gross profit margins decreased to 16.5% in fiscal 2001 from 18.1% in
fiscal 2000, primarily in Prestige Audio and international operations, partially
offset by a decrease in AV, Private Label and Security. During fiscal 2001,
there was a decrease in sales incentive expense of $1,814, due to changes in the
estimated amount due under accrued sales incentive programs.
Operating expenses increased by $3,759 in fiscal 2001, a 12.0% increase
from operating expenses of $31,371 in fiscal 2000. As a percentage of net sales,
operating expenses increased to 11.8% during
56
fiscal 2001 compared to 11.3% in fiscal 2000. Selling expenses increased $1,335
during fiscal 2001, primarily in commissions and advertising. Commissions
increased by approximately $1,266 from fiscal 2000 to fiscal 2001. The increase
in commissions was not consistent with the increase in sales due to a change in
the mix of consumer goods and mobile video products sold which have varying
commission rates. Advertising and trade show expense increased by approximately
$581 from fiscal 2000 to fiscal 2001 as more products were sold in the consumer
and mobile electronics category which require more advertising to create a
demand among end users. These new products include mobile video, portable DVD's,
navigation systems and mobile security products. These increases were partially
offset by a decrease in salesmen salaries of $578 due to the restructuring of
salesmen's base salaries and the downsizing of some sales offices. General and
administrative expenses increased $1,929 from fiscal 2000, mostly in office
salaries, insurance, bad debt, depreciation and amortization. Office salaries
increased approximately $450 from fiscal 2000 to fiscal 2001 primarily due to
additional employees hired to support the growth of the Electronics business.
Insurance expense increased approximately $248 due to an increase in insurance
rates, primarily in ocean cargo and general liability. Depreciation and
amortization expense increased approximately $123 from fiscal 2000 to fiscal
2001 as a result of a full year of depreciation on fixed asset additions
incurred in the prior year. Bad debt expense increased by approximately $333
from fiscal 2000 to fiscal 2001 due to two specific bad debts that occurred in
fiscal 2001 that did not occur in fiscal 2000. The Company does not expect the
increase to continue given that these were two specific customers, with which
the Company no longer does business. Other increases were in professional fees
of $105 due to legal expenses and increased corporate allocation of $1,093 for
additional support for the growing business. These increases were partially
offset by a decrease in temporary help of $303, as new employees were hired to
support the growing business. Warehousing and technical support expenses
increased $495 in fiscal 2001 from fiscal 2000, primarily due to direct labor.
Direct labor expense increased by approximately $560 as a result of increased
sales. This was partially offset by a decrease of $62 in engineering department
travel. Pre-tax income for fiscal 2001 was $13,780, a decrease of $2,872 from
fiscal 2000.
The Company believes that the Electronics Group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales and general economic conditions. Also, certain of its products are
subject to price fluctuations which could affect the carrying value of
inventories and gross margins in the future.
OTHER INCOME AND EXPENSE
Interest expense and bank charges decreased $388 during fiscal 2001
from fiscal 2000, primarily due to decreased interest rates on similar borrowing
levels.
Equity in income of equity investees increased by approximately $1,014
for fiscal 2001 compared to fiscal 2000. The majority of the increase was due to
increases in the equity income of ASA due to increased sales in the specialized
vehicle market. Other expenses increased as a result of foreign exchange
translation in our Venezuelan subsidiary as a result of the devaluation of the
Venezuelan currency against the U.S. Dollar (see Note 2(d)).
PROVISION FOR INCOME TAXES
The effective tax expense rate for 2000 was 37.4%. The effective tax
benefit rate in 2001 was 31.6%. The decrease in the effective tax rate is due to
the Company having a loss in 2001 for federal purposes combined with state tax
expense on certain profitable subsidiaries.
57
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations primarily through
a combination of available borrowings under bank lines of credit and debt and
equity offerings. As of November 30, 2002, the Company had working capital
(defined as current assets less current liabilities) of $292,687, which includes
cash of $2,758 compared with working capital of $284,166 at November 30, 2001,
which includes cash of $3,025.
Operating activities provided approximately $24,070 in fiscal 2002 as
compared to a cash usage of $74,076 in fiscal 2001, primarily from a decrease in
accounts receivable of $48,555 due to lower sales and better cash collections,
an increase in accounts payable, accrued expenses and other current liabilities
due to new trade terms from vendor, offset by an increase in inventory due to
cancellation of certain orders in the Electronics Group and new products in
Wireless slated for shipment in 2003.
Investing activities provided approximately $20,090, primarily from
proceeds from the issuance of subsidiary shares, partially offset by the
purchase of certain assets of Code-Alarm, Inc.
Financing activities used approximately $44,198, primarily for
repayments to bank institutions.
The Company's Board of Directors approved the repurchase of 1,563,000
shares of the Company's Class A common stock in the open market under a share
repurchase program (the Program). As of November 30, 2001 and 2002, 909,537 and
1,072,737 shares, respectively, were repurchased under the Program at an average
price of $8.12 and $7.93 per share, respectively, for an aggregate amount of
$7,386 and $8,511, respectively.
In February 2000, the Company completed a follow on offering of
3,565,000 Class A common shares at a price to the public of $45.00 per share. Of
the 3,565,000 shares sold, the Company offered 2,300,000 shares and 1,265,000
shares were offered by selling shareholders. Audiovox received approximately
$96,573 after deducting expenses. The Company used these net proceeds to repay a
portion of amounts outstanding under their revolving credit facility, any
portion of which can be reborrowed at any time. The Company did not receive any
of the net proceeds from the sale of shares by the selling shareholders.
The Company's principal source of liquidity is its revolving credit
agreement which expires July 27, 2004 and cash flows from operations. Subsequent
to year-end, the Company requested a reduction of available credit from $250,000
to $200,000. This is a result of excess bank availability being reduced to limit
paid fees on unused portions of bank availability. The credit agreement was
amended on March 13, 2003 and provides for $200,000 of available credit,
including $15,000 for foreign currency borrowings. The continued availability of
this financing is dependent upon the Company's operating results and borrowing
base which would be negatively impacted by a decrease in demand for the
Company's products.
Under the credit agreement, the Company may obtain credit through
direct borrowings and letters of credit. The obligations of the Company under
the credit agreement are guaranteed by certain of the Company's subsidiaries and
is secured by accounts receivable and inventory. As of November 30, 2002,
availability under this line of credit is subject to certain conditions, based
upon a formula taking into account the amount and quality of its accounts
receivable and inventory. At November
58
30, 2002, the amount of unused available credit is $102,491. The credit
agreement also allows for commitments up to $50,000 in forward exchange
contracts. In addition, the Company guarantees the borrowings of one of its
equity investees at a maximum of $300.
The credit agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net worth.
Additionally, the agreement includes restrictions and limitations on payments of
dividends, stock repurchases and capital expenditures.
At May 31, 2001, November 30, 2001 and 2002, and the first quarter
ended February 28, 2002, the Company was not in compliance with certain of its
pre-tax income covenants. Furthermore, as of November 30, 2002, the Company was
also not in compliance with the requirement to deliver audited financial
statements 90 days after the Company's fiscal year-end, and as of February 28,
2003, the requirement to deliver unaudited quarterly financial statements 45
days after the Company's quarter end. The Company received a waiver for the
November 30, 2001 pre-tax income violation subsequent to its issuance of the
November 30, 2001 financial statements. In addition, the Company received
waivers for the May 31, 2001 and February 28, 2002 violations.
The Company has not received waivers for the November 30, 2002
violation of a particular pre-tax income covenant or delivery of audited
financial statements 90 days after the Company's fiscal year-end. Accordingly,
as of November 30, 2001 and 2002, the Company's outstanding domestic obligations
of $86,525 and 36,883, have been classified as current on the accompanying
consolidated financial statements, respectively. Management is in the process of
requesting a waiver for the November 30, 2002 and February 28, 2003 violations.
While the Company was able to obtain waivers for such violations in 2001 and the
first quarter ended February 28, 2002, 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. Subsequent to November 30, 2002, the Company repaid its
obligation of $36,883 in full resulting in bank obligations outstanding at May
15, 2003 of $0. This credit agreement has no cross covenants with the other
credit facilities described below.
The Company also has revolving credit facilities in Malaysia to finance
additional working capital needs. As of November 30, 2002, the available line of
credit for direct borrowing, letters of credit, bankers' acceptances and other
forms of credit approximately $5,000. The Malaysian credit facilities are
partially secured by the Company under three standby letters of credit of
$1,300, $800 and $800 and are payable on demand or upon expiration of the
standby letters of credit which expire on December 31, 2002, August 31, 2003 and
August 31, 2003, respectively. The obligations of the Company under the
Malaysian credit facilities are secured by the property and building in Malaysia
owned by Audiovox Communications Sdn. Bhd.
The Company also has a revolving credit facility in Brazil to finance
additional working capital needs. The Brazilian credit facility is secured by
the Company under a standby letter of credit in the amount of $200, which
expires on January 15, 2003 and is payable on demand or upon expiration of the
standby letter of credit. At November 30, 2002, outstanding obligations under
the credit facility were 172 Brazilian Bolivars ($47), and interest on the
credit facility ranged from 19% to 29%.
Total debt as a percent of total capitalization was 20% at November 30,
2002 as compared with 33% at November 30, 2001, primarily as a result of lower
outstanding indebtedness.
59
At November 30, 2002, the Company had additional outstanding standby
letters of credit aggregating $640 which expire in July 2004.
The Company has certain contractual cash obligations and other
commercial commitments which will impact its short and long-term liquidity. At
November 30, 2002, such obligations and commitments are as follows:
Payments Due By Period
------------------------------------------------------------------------------
Less than Over
Contractual Cash Obligations Total 1 Year 1-3 Years 4-5 Years 5 Years
- ---------------------------- ----- -------- --------- --------- -------
Capital lease obligations $ 14,206 $ 554 $ 1,666 $ 1,157 $10,829
Operating leases 6,680 1,983 2,359 1,449 889
-------- -------- -------- ------- -------
Total contractual cash
obligations $ 20,886 $ 2,537 $ 4,025 $ 2,606 $11,718
======== ======= ======= ======= =======
Amount of Commitment
Expiration per period
----------------------------------------------------------------------------------
Total
Other Commercial Amounts Less than Over
Commitments Committed 1 Year 1-3 Years 4-5 Years 5 years
- ------------- --------- -------- --------- --------- -------
Lines of credit $ 40,248 $ 40,248 - - -
Standby letters of credit 3,740 3,740 - - -
Guarantees 300 300 - - -
Commercial letters of credit 8,129 8,129 - - -
-------- -------- --------- -------- --------
Total commercial
commitments $ 52,417 $ 52,417 - - -
======== ======== ========= ======== ========
The Company regularly reviews its cash funding requirements and attempts to
meet those requirements through a combination of cash on hand, cash provided by
operations, available borrowings under bank lines of credit and possible future
public or private debt and/or equity offerings. At times, the Company evaluates
possible acquisitions of, or investments in, businesses that are complementary
to those of the Company, which transaction may 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.
In February 2003, the Company entered into an agreement to buy a building for
expansion purposes for $3,480, made a deposit of $348 and expects to close in
the very near term.
60
In May 2003, the Company entered into an asset purchase agreement to
buy certain assets of Recoton Corporation. In accordance with the agreement, the
Company made a deposit of $2,000, which is currently being held in escrow. The
Company is awaiting final approval of this purchase from a bankruptcy court.
This purchase would amount to approximately $40,000 plus the assumption of
$5,000 in debt, not including related acquisition costs. The Company anticipates
using its existing cash and available financing to fund this acquisition.
RELATED PARTY TRANSACTIONS
The Company has entered into several related party transactions which
are described below.
Leasing Transactions
During 1998, the Company entered into a 30-year capital lease for a
building with its principal stockholder and chief executive officer, which is
the headquarters of the Wireless operation. Payments on the lease were based
upon the construction costs of the building and the then-current interest rates.
The effective interest rate on the capital lease obligation is 8%. In connection
with the capital lease, the Company paid certain costs on behalf of its
principal stockholder and chief executive officer in the amount of $1,301. The
advance does not have a specified due date or interest rate. During 2001 and
2002, the entire balance of $1,301 was repaid to the Company.
During 1998, the Company entered into a sale/leaseback transaction with
its principal stockholder and chief executive officer for $2,100 of equipment,
which has been classified as an operating lease. The lease is a five-year lease
with monthly payments of $34. No gain or loss was recorded on the transaction as
the book value of the equipment equaled the fair market value.
The Company also leases certain facilities from its principal
stockholder. Rentals for such leases are considered by management of the Company
to approximate prevailing market rates. Total lease payments required under the
leases for the five-year period ending November 30, 2007 are $2,739.
Amounts Due from Officers
A note due from an officer/director of the Company, which bore interest
at the LIBOR rate, to be adjusted quarterly, plus 1.25% per annum, was paid in
full during fiscal 2002. In addition, the Company has outstanding notes due from
various officers of the Company aggregating $235 as of November 30, 2002, which
have been included in prepaid expenses and other current assets on the
accompanying consolidated balance sheet. The notes bear interest at the LIBOR
rate plus 0.5% per annum. Principal and interest are payable in equal annual
installments beginning July 1, 1999 through July 1, 2003. In accordance with the
Sarbanes-Oxley Act of 2002, the Company will not alter the terms of the notes
and all amounts will be repaid in full in July 2003. In addition, no new notes
with officers or directors of the Company will be entered into.
Transactions with Shintom and TALK
In April 2000, AX Japan purchased land and a building (the Property)
from Shintom Co., Ltd. (Shintom) for 770,000,000 Yen (approximately $7,300) and
entered into a leaseback agreement whereby Shintom has leased the Property from
AX Japan for a one-year period. This lease is being accounted for as an
operating lease by AX Japan. Shintom is a stockholder who owns all of the
outstanding preferred stock of the Company and is a manufacturer of products
purchased by the Company through its previously- owned equity investment, TALK
Corporation (TALK). The Company currently holds stock in Shintom and has
previously invested in Shintom convertible debentures.
The purchase of the Property by AX Japan was financed with a
500,000,000 Yen ($4,671) subordinated loan obtained from Vitec Co., Ltd.
(Vitec), a 150,000,000 Yen loan ($1,397) from Pearl First (Pearl) and a
140,000,000 Yen loan ($1,291) from the Company. The land and building have
61
been included in property, plant and equipment, and the loans have been recorded
as notes payable on the accompanying consolidated balance sheet as of November
30, 2002 . Vitec is a major supplier to Shintom, and Pearl is an affiliate of
Vitec. The loans bear interest at 5% per annum, and principle is payable in
equal monthly installments over a six-month period beginning six months
subsequent to the date of the loans. The loans from Vitec and Pearl are
subordinated completely to the loan from the Company and, in liquidation, the
Company receives payment first.
Upon the expiration of six months after the transfer of the title to
the Property to AX Japan, Shintom has the option to repurchase the Property or
purchase all of the shares of stock of AX Japan. These options can be extended
for one additional six month period. The option to repurchase the building is at
a price of 770,000,000 Yen plus the equity capital of AX Japan (which in no
event can be less than 60,000,000 Yen) and can only be made if Shintom settles
any rent due AX Japan pursuant to the lease agreement. The option to purchase
the shares of stock of AX Japan is at a price not less than the aggregate par
value of the shares and, subsequent to the purchase of the shares, AX Japan must
repay the outstanding loan due to the Company. If Shintom does not exercise its
option to repurchase the Property or the shares of AX Japan, or upon occurrence
of certain events, AX Japan can dispose of the Property as it deems appropriate.
The events which result in the ability of AX Japan to be able to dispose of the
Property include Shintom petitioning for bankruptcy, failing to honor a check,
failing to pay rent, etc. If Shintom fails, or at any time becomes financially
or otherwise unable to exercise its option to repurchase the Property, Vitec has
the option to repurchase the Property or purchase all of the shares of stock of
AX Japan under similar terms as the Shintom options.
In connection with this transaction, the Company received 100,000,000
Yen ($922) from Shintom for its 2,000 shares of TALK stock. The Company had the
option to repurchase the shares of TALK at a purchase price of 50,000 Yen per
share, with no expiration date. Given the option to repurchase the shares of
TALK, the Company did not surrender control over the shares of TALK and,
accordingly, had not accounted for this transaction as a sale. In August 2000,
the Company surrendered its option to repurchase the shares of TALK. As such,
the Company recorded a gain on the sale of shares in the amount of $427 in
August 2000.
AX Japan had the option to delay the repayment of the loans for an
additional six months if Shintom extended its options to repurchase the Property
or stock of AX Japan. In September 2000, Shintom extended its option to
repurchase the Property and AX Japan delayed its repayment of the loans for an
additional six months.
In October 2002, the Company sold all of its shares in AX Japan to RMS
Co., Ltd., an unrelated party to the Company. The purchase price of the shares
was 60,000 Yen. As a result of this transaction, the purchaser repaid in full
113,563 Yen which represented the full balance of amounts then owed to the
Company by AX Japan. The agreement required the purchaser to immediately change
the name of AX Japan to RMS Co., Ltd., and the Company resigned from all officer
and Board of Directors positions. The Company has no further relationship or
obligations, whether contingent or direct, to RMS Co., Ltd., formerly known as
AX Japan.
As a result of the completion of this transaction, all assets and
liabilities of Audiovox Japan have been removed from the accompanying
consolidated balance sheet as of November 30, 2002, specifically, the land and
the building and the notes payable for the Vitec Co., Ltd (Vitec) 150,000 Yen
loan and the Pearl First (Pearl) a 140,000 Yen loan. As a result of this
transaction, the Company recovered in Yen its initial investment in AX Japan as
well as its loan to finance the purchase of the
62
land and building. However, the Company recognized a $338 loss on the sale of
its shares in AX Japan, as the sales price was less than the value of the net
assets of AX Japan sold to Vitec. Contributing to the loss on sale were foreign
currency loss and other expenses that will not be recovered. The loss on the
sale of the shares of AX Japan has been included in other net on the
accompanying consolidated statements of operations for the year ended November
30, 2002.
The Company engages in transactions with Shintom and TALK. TALK, which
holds world-wide distribution rights for product manufactured by Shintom, has
given the Company exclusive distribution rights on all wireless personal
communication products for all countries except Japan, China, Thailand and
several mid-eastern countries. Through October 2000, the Company held a 30.8%
interest in TALK. The Company no longer holds an equity interest in TALK.
Transactions with Shintom and TALK include financing arrangements and
inventory purchases which approximated 7%, 1.5% and 0.7% for the years ended
November 30, 2000, 2001 and 2002, respectively, of total inventory purchases. At
November 30, 2000, 2001 and 2002, the Company had recorded $1, $331 and $0,
respectively, of liability due to TALK for inventory purchases included in
accounts payable. There were no documentary acceptance obligations payable to
TALK as of November 30, 2000, 2001 and 2002. At November 30, 2000, 2001 and
2002, the Company had recorded a receivable from TALK in the amount of $3,823,
$265 and $13, respectively, a portion of which is payable with interest, which
is reflected in receivable from vendors on the accompanying consolidated
financial statements. During 2002, the Company recorded an impairment charge of
$1,158 on the 634,666 shares owned at November 30, 2002.
Transactions with Toshiba
On March 31, 1999, Toshiba purchased 5% of the Company's subsidiary,
ACC, a supplier of wireless products for $5,000 in cash. The Company then owned
95% of ACC; prior to the transaction ACC was a wholly-owned subsidiary. In
February 2001, the Board of Directors of ACC, declared a dividend payable to its
shareholders, Audiovox Corporation, a then 95% shareholder, and Toshiba, a then
5% shareholder. ACC paid Toshiba its share of the dividend, which approximated
$1,034 in the first quarter of 2001. The dividend equaled 5.0% of ACC's prior
year net income. There were no dividends declared during 2002, due to the net
loss of ACC during 2001. During the second quarter of 2002, Toshiba purchased an
additional 20% of ACC. Under the terms of the transaction, Toshiba acquired, in
exchange for $23,900 cash, the additional shares of ACC. In addition, Toshiba
paid $8,100 in exchange for an $8,100 convertible subordinated note (the Note)
due from ACC. The Note bears interest at a per annum rate equal to 1 3/4% and
interest is payable annually on May 31st of each year, commencing May 31, 2003.
The unpaid principal amount shall be due and payable, together with all unpaid
interest on May 31, 2007 which will automatically renew for an additional five
years. In accordance with the provisions of the Note, Toshiba may, at any time,
convert the balance of the Note into additional shares of ACC in order to
maintain a 25% maximum interest in ACC. The cost per share of the note is equal
to the per share cost for the $23,900 cash payment of 20% of ACC's shares. In
connection with the transaction, ACC and Toshiba entered into a distribution
agreement whereby ACC will be Toshiba's exclusive distributor for the sale of
Toshiba products in the United States, Canada, Mexico and all countries in the
Caribbean and Central and South America through May 29, 2007. The distribution
agreement established certain annual minimum purchase targets for ACC's purchase
of Toshiba products for each fiscal year during the entire term of the
agreement. In the event that ACC fails to meet the minimum purchase target,
Toshiba shall have the right to convert ACC's exclusive distributorship to a
non-exclusive distributorship for the remaining term of the agreement.
63
Also, in accordance with the terms of the stockholders agreement, upon the
termination of the distribution agreement in accordance with certain terms of
the distribution agreement, Toshiba maintains a put right and Audiovox Corp. a
call right, to repurchase all of the shares held by the other party for a price
equal to the fair market value of the shares as calculated in accordance with
the agreement. Pursuant to the agreement, the put right is only exercisable if
ACC terminates the distribution agreement or if another strategic investor
acquires a direct or indirect equity ownership interest in excess of 20% in the
Company. The call right is only exercisable if Toshiba elects to terminate the
distribution agreement after its initial five (5) year term.
Additionally in connection with the transaction, ACC entered into an
employment agreement with the President and Chief Executive Officer (the
Executive) of ACC through May 29, 2007. Under the agreement, ACC is required to
pay the Executive an annual base salary of $500 in addition to an annual bonus
equal to 2% of ACC's annual earnings before income taxes. Audiovox Corp., under
the employment agreement, was required to establish and pay a bonus of $3,200 to
key employees of ACC, including the Executive, to be allocated by the Executive.
The bonus was for services previously rendered in connection with the Toshiba
purchase of additional shares of ACC, and, accordingly, the bonus has been
included in general and administrative expenses in the accompanying statements
of operations for the year ended November 30, 2002. The Executive was required
to utilize all or a portion of the bonus allocated to him to repay the remaining
outstanding principal and accrued interest owed by the Executive to the Company
pursuant to the unsecured promissory note in favor of Audiovox Corp. During the
year ended November 30, 2002, the Executive was paid $1,800 less the amount
outstanding under the promissory note of $651.
As a result of the issuance of ACC's shares, the Company recognized a
gain, net of expenses of $1,735, of $14,269 ($8,847 after provision for deferred
taxes). The gain on the issuance of the subsidiary's shares has been recognized
in the accompanying consolidated statements of operations.
Inventory on hand at November 30, 2001 and November 30, 2002 purchased
from Toshiba approximated $99,816 and $138,467, respectively. During the quarter
ended November 30, 2001, the Company recorded a receivable in the amount of
$4,550 from Toshiba for upgrades that were performed by the Company in 2001 on
certain models which Toshiba manufactured. The amount was received in full
during the first quarter of 2002. At November 30, 2002, the Company recorded
receivables from Toshiba aggregating approximately $12,219 for price protection
and software upgrades. Subsequent to November 30, 2002, these amounts were paid
in full.
At November 30, 2002, the Company had on hand 504,020 units in the
amount of $91,226, which were purchased from Toshiba and have been recorded in
inventory and accounts payable on the accompanying consolidated balance sheet.
Of this accounts payable, $56,417 was subject to an arrangement with Toshiba,
which provides for, among other things, extended payment terms. This arrangement
has since been modified in an effort to enhance the Company's relationship with
Toshiba. The payment terms are such that the payable is non-interest bearing.
The remaining 34,809 of the $91,226 accounts payable is payable in accordance
with the terms established in the distribution agreement, which is 30 days.
Subsequent to November 30, 2002, the Company paid this amount in full. Under the
above arrangement, the Company is entitled to receive price protection in the
event the selling price to its customers is less than the purchase price from
Toshiba. The Company will record such price protection, if necessary, at the
time of the sale of the units. The Company had no other amounts outstanding to
Toshiba at November 30, 2002.
64
IMPACT OF INFLATION AND CURRENCY FLUCTUATION
Inflation has not had a significant impact on the Company's financial
position or operating results other than the effect of our 80%-owned Venezuelan
subsidiary ceasing to be considered a highly- inflationary economy in fiscal
2002. To the extent that the Company expands its operations into Latin America
and the Pacific Rim, the effects of inflation and currency fluctuations in those
areas could have growing significance to its financial condition and results of
operations. Fluctuations in the foreign exchange rates in Pacific Rim countries
have not had a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
While the prices that the Company pays for the products purchased from
its suppliers are principally denominated in United States dollars, price
negotiations depend in part on the relationship between the foreign currency of
the foreign manufacturers and the United States dollar. This relationship is
dependent upon, among other things, market, trade and political factors.
Inflation-related accounting adjustments of $333 were made for the
fiscal year ended November 30, 2001, related to the Company's operations in
Venezuela. Inflation-related accounting adjustments of $1,712 were made for the
fiscal year ended November 30, 2002 related to the Company's operations in
Venezuela. This increase is a result of Venezuela no longer being deemed a
hyper-inflationary economy as of the first quarter of fiscal 2002. On January
22, 2003, and as a result of the National Civil Strike, the Venezuelan
government suspended trading of the Venezuelan Bolivar and set the currency at a
stated government rate. Accordingly, until further guidance is issued, the
Company's 80% owned Venezuelan subsidiary will translate its financial
statements utilizing the stated government rate.
SEASONALITY
The Company typically experiences some seasonality in its operations.
The Company generally experiences a substantial amount of its sales during
September, October and November. December is also a key month for the Company
due to increased demand for its products during the holiday season. This
increase results from increased promotional and advertising activities from the
Company's customers to end-users.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all future business combinations
and specifies criteria intangible assets acquired in a business combination must
meet to be recognized and reported apart from goodwill. SFAS No. 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their respective estimated
useful lives and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the impairment of Long-Live Assets to be Disposed Of".
The Company early adopted the provisions of SFAS No. 141 and SFAS No.
142 as of December 1, 2001. As a result of adopting the provisions of SFAS No.
141 and 142, the Company did not record
65
amortization expense relating to its goodwill during the fiscal year ended
November 30, 2002, which approximated $9,616. The Company was not required under
SFAS No. 142 to assess the useful life and residual value of its goodwill as the
Company's goodwill is equity method goodwill and, as such, will continue to be
evaluated for impairment under SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (Statement 143). Statement 143 is effective for fiscal
years beginning after June 15, 2002, and establishes an accounting standard
requiring the recording of the fair value of liabilities associated with the
retirement of long-lived assets in the period in which they are incurred. The
Company does not expect the adoption of Statement 143 to have a significant
effect on its results of operations or its financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets" (Statement 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", while retaining
the fundamental recognition and measurement provisions of that statement.
Statement No. 144 requires that a long-lived asset to be abandoned, exchanged
for a similar productive asset or distributed to owners in a spin-off to be
considered held and used until it is disposed of. However, Statement No. 144
requires that management consider revising the depreciable life of such
long-lived asset. With respect to long-lived assets to be disposed of by sale,
Statement No. 144 retains the provisions of Statement No. 121 and, therefore,
requires that discontinued operations no longer be measured on a net realizable
value basis and that future operating losses associated with such discontinued
operations no longer be recognized before they occur. Statement No. 144 is
effective for all fiscal quarters of fiscal years beginning after December 15,
2001 and will thus be adopted by the Company on December 1, 2002. The Company
has determined that the effect of the adoption of Statement No. 144 did not have
a material effect on the Company's consolidated financial statements.
SFAS 145 "Rescission of SFAS Statements No. 4, 44, and 64, Amendment of
SFAS No. 13 and Technical Corrections". This Statement updates, clarifies and
simplifies existing accounting pronouncements by rescinding Statement 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Opinion 30 will now be used to classify
those gains and losses. This statement will have no material effect on the
Company's financial statements.
Effective March 1, 2002, the Company adopted Emerging Issues Task Force
(EITF) Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer", which codified and reconciled the following EITF Issues: Issue No.
00-14, "Accounting for Certain Sales Incentive", Issue No. 00-22, "Accounting
for Points and Certain Other Time-Based Sales Incentive Offers and Offers for
Free Products or Services to be Delivered in the Future" and Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products". Issue No. 00-14 addressed when sales incentives and
discounts should be recognized, as well as where the related revenues and
expenses should be classified in the financial statements. Upon adoption of this
Issue, the Company reclassified its sales incentives which take the form of
(co-operative advertising allowances, market development funds, volume incentive
rebates and other trade allowances) against net sales which were previously
recorded in selling expenses. Operating income has remained unchanged by this
adoption. These reclassifications have been reported in the accompanying
consolidated statements of operations retroactively for all periods reported.
66
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally
provided by SFAS No. 123, "Accounting for Stock-Based Compensation".
Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. The transitional requirements of SFAS No.
148 will be effective for all financial statements for fiscal years ending after
December 15, 2002. The disclosure requirements shall be effective for financial
reports containing condensed financial statements for interim periods beginning
after December 31, 2002. The Company expects to adopt the disclosure portion of
this statement for the fiscal quarter ending May 31, 2003. The application of
this standard will have no impact on the Company's consolidated financial
position or results of operations.
In February 2003, the EITF Issued 02-16, "Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor". This
EITF provides guidance on the income statement classification of amounts
received by a customer, including a reseller and guidance regarding timing of
recognition for volume rebates. The Company does not believe that adoption of
this new standard, which will be applied prospectively by the Company for new
arrangements, including modifications of existing arrangements, entered into
after December 31, 2002, will have a material effect on the Company's
consolidated financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantors, Including
Guarantees of Indebtedness of Others". FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company does not
expect the adoption of FIN 45 to have a material effect on its consolidated
financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51".
FIN 46 addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim period beginning
after June 15, 2003. The adoption of FIN46 is being evaluated to determine what
impact, if any, the adoption of the provisions will have on the Company's
financial condition or results of operations.
ITEM 7a - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS
The market risk inherent in the Company's market risk sensitive
instruments and positions
67
is the potential loss arising from adverse changes in marketable equity security
prices, foreign currency exchange rates and interest rates.
Marketable Securities
Marketable securities at November 30, 2002, which are recorded at fair
value of $5,405 and include net unrealized losses of $966, 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 $541 as of November 30, 2002. Actual results may differ.
Interest Rate Risk
The Company's bank loans expose earnings to changes in short-term
interest rates since interest rates on the underlying obligations are either
variable or fixed for such a short period of time as to effectively become
variable. The fair values of the Company's bank loans are not significantly
affected by changes in market interest rates.
Foreign Exchange Risk
In order to reduce the risk of foreign currency exchange rate
fluctuations, the Company hedges transactions denominated in a currency other
than the functional currencies applicable to each of its various entities. The
instruments used for hedging are forward contracts with banks. The changes in
market value of such contracts have a high correlation to price changes in the
currency of the related hedged transactions. There were no hedge transactions at
November 30, 2002. Intercompany transactions with foreign subsidiaries and
equity investments are typically not hedged. Therefore, the potential loss in
fair value for a net currency position resulting from a 10% adverse change in
quoted foreign currency exchange rates as of November 30, 2002 is not
applicable.
The Company is subject to risk from changes in foreign exchange rates
for its subsidiaries and equity investments that use a foreign currency as their
functional currency and are translated into U.S. dollars. These changes result
in cumulative translation adjustments which are included in accumulated other
comprehensive income. On November 30, 2002, the Company had translation exposure
to various foreign currencies with the most significant being the Malaysian
ringgit, Thailand baht and Canadian dollar. The Company also has a Venezuelan
subsidiary in which translation adjustments are included in net income. The
potential loss resulting from a hypothetical 10% adverse change in quoted
foreign currency exchange rates, as of November 30, 2002, amounts to $867.
Actual results may differ.
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company as of November 30,
2001 and 2002 and for each of the years in the three-year period ended November
30, 2002, together with the independent auditors' report thereon of KPMG LLP,
independent auditors, are filed under this Item 8.
The consolidated financial statements as of and for the years ended
November 30, 2001 and 2000 have been restated as described in Note 2 of the
Notes to Consolidated Financial Statements.
68
Independent Auditors' Report
The Board of Directors and Stockholders
Audiovox Corporation:
We have audited the accompanying consolidated balance sheets of Audiovox
Corporation and subsidiaries as of November 30, 2001 and 2002, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss) and cash flows for each of the years in the three-year period
ended November 30, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Audiovox Corporation
and subsidiaries as of November 30, 2001 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended November 30, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1, effective December 1, 2001, the Company adopted the
provisions of Statement of Financial Accounting Standards (Statement) No. 141,
"Business Combinations" and Statement No. 142, "Goodwill and Other Intangible
Assets".
As discussed in Note 2 to the accompanying consolidated financial statements,
the consolidated balance sheet as of November 30, 2001, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss) and cash flows for the years ended November 30, 2000 and 2001 have
been restated.
s/KPMG LLP
------------------------
KPMG LLP
Melville, New York
May 30, 2003
69
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2001 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
2001 2002
---- ----
As Restated
See Note (2)
ASSETS
Current assets:
Cash $ 3,025 $ 2,758
Accounts receivable, net 238,357 186,564
Inventory, net 225,759 290,064
Receivable from vendor 6,828 14,174
Prepaid expenses and other current assets 7,639 7,626
Deferred income taxes, net 11,965 7,653
--------- ---------
Total current assets 493,573 508,839
Investment securities 5,777 5,405
Equity investments 10,268 11,097
Property, plant and equipment, net 25,687 18,381
Excess cost over fair value of assets acquired and other intangible assets, net 4,742 6,826
Deferred income taxes, net 3,148 -
Other assets 1,302 687
--------- ---------
$ 544,497 $ 551,235
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 57,162 $ 121,127
Accrued expenses and other current liabilities 42,137 34,983
Accrued sales incentives 8,474 12,151
Income taxes payable 4,154 7,643
Bank obligations 92,213 40,248
Notes payable 5,267 -
--------- ---------
Total current liabilities 209,407 216,152
Long-term debt - 8,140
Capital lease obligation 6,196 6,141
Deferred income taxes payable - 2,704
Deferred compensation 3,844 3,969
--------- ----------
Total liabilities 219,447 237,106
--------- ----------
Minority interest 1,830 4,616
--------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 2,500
Common stock:
Class A; 60,000,000 authorized 2001 and 2002, 20,615,846 and 20,632,182
issued 2001 and 2002, respectively; 19,706,309 and 19,559,445 outstanding
2001 and 2002, respectively 207 207
Class B convertible; 10,000,000 authorized; 2,260,954 issued and outstanding 22 22
Paid-in capital 250,785 250,917
Retained earnings 83,436 69,396
Accumulated other comprehensive loss (6,344) (5,018)
Treasury stock, at cost, 909,537 and 1,072,737 Class A common stock 2001 and 2002,
respectively (7,386) (8,511)
--------- ----------
Total stockholders' equity 323,220 309,513
--------- ----------
Total liabilities and stockholders' equity $ 544,497 $ 551,235
========= ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
70
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30, 2000, 2001 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 2001 2002
---- ---- ----
AS RESTATED AS RESTATED
----------- -----------
See Note (2) See Note (2)
Net sales $ 1,670,291 $ 1,276,591 $ 1,100,382
Cost of sales 1,551,666 1,205,201 1,025,783
----------- ----------- -----------
Gross profit 118,625 71,390 74,599
----------- ----------- -----------
Operating expenses:
Selling 29,056 30,039 29,509
General and administrative 46,466 46,505 55,292
Warehousing and technical support 3,474 4,082 3,874
----------- ----------- -----------
Total operating expenses 78,996 80,626 88,675
----------- ----------- -----------
Operating income (loss) 39,629 (9,236) (14,076)
----------- ----------- -----------
Other income (expense):
Interest and bank charges (6,310) (5,922) (4,219)
Equity in income of equity investees 2,572 3,586 1,779
Gain on sale of investments 2,387 - -
Gain on hedge of available-for-sale securities 1,499 - -
Gain on issuance of subsidiary shares - - 14,269
Other, net 2,366 90 (4,156)
----------- ----------- ------------
Total other income (expense), net 2,514 (2,246) 7,673
----------- ----------- ------------
Income (loss) before provision for (recovery of) income taxes, minority
interest, extraordinary item and cumulative effect of a change in
accounting for negative goodwill 42,143 (11,482) (6,403)
Provision for (recovery of) income taxes 15,766 (3,627) 12,932
Minority interest (1,074) 657 5,055
----------- ----------- ------------
Income (loss) before extraordinary item and cumulative effect of a
change in accounting for negative goodwill 25,303 (7,198) (14,280)
Extraordinary item-gain on extinguishment of debt 2,189 - -
Cumulative effect of a change in accounting for negative goodwill - - 240
----------- ----------- ------------
Net income (loss) $ 27,492 $ (7,198) $ (14,040)
=========== =========== ============
Netincome (loss) per common share (basic) before extraordinary item and
cumulative effect of a change in accounting for negative goodwill
$ 1.19 $ (0.33) $ (0.65)
Extraordinary item-gain on extinguishment of debt 0.10 - -
Cumulative effect of a change in accounting for negative goodwill - - 0.01
---------- ----------- ------------
Net income (loss) per common share (basic) $ 1.29 $ (0.33) $ (0.64)
========== =========== ============
Net income (loss) per common share (diluted) before extraordinary
item and cumulative effect of a change in accounting for negative
goodwill
$ 1.12 $ (0.33) $ (0.65)
Extraordinary item-gain on extinguishment of debt 0.10 - -
Cumulative effect of a change in accounting for negative goodwill - - 0.01
---------- ----------- -------------
Net income (loss) per common share (diluted) $ 1.22 $ (0.33) $ (0.64)
========== =========== =============
Weighted average number of common shares outstanding (basic) 21,393,566 21,877,100 21,850,035
========== =========== =============
Weighted average number of common shares outstanding (diluted) 22,565,806 21,877,100 21,850,035
========== =========== =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
71
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED NOVEMBER 30, 2000, 2001 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
Accum-
ulated
Other Gain on
Compre- Hedge of
hensive Available
Preferred Common Paid-In Retained Income for Sale
Stock Stock Capital Earnings (Loss) Securities
--------- ------- ------- -------- ------- ----------
Balances at
November 30, 1999 2,500 201 149,278 63,142 5,165 929
Comprehensive income:
Net income, as restated - - - 27,492 - -
Other comprehensive loss, net of tax: - - - - - -
Foreign currency translation adjustment - - - - (104) -
Unrealized loss on marketable securities, net of
tax effect of $(6,202) - - - - (10,119) -
Other comprehensive loss - - - - - -
Comprehensive income - - - - - -
Exercise of stock options into 121,300 shares of comm
stock and issuance of 11,671 shares under the
Restricted Stock Plan - 1 836 - - -
Tax benefit of stock options exercised - - 1,270 - - -
Conversion of debentures into 30,170 shares - 1 534 - - -
Issuance of 2,300,000 shares in connection with stock
offering - 23 96,550 - - -
Acquisition of 141,455 common shares - - - - - -
Recognition of gain on hedge of available-for-sale
securities - - - - - (929)
----- ---- ------- -------- --------- -------
Balances at
November 30, 2000, as restated 2,500 226 248,468 90,634 (5,058) -
Comprehensive loss:
Net loss, as restated - - - (7,198) - -
Other comprehensive loss, net of tax:
Foreign currency translation adjustment - - - - (455) -
Unrealized loss on marketable securities, net of
tax effect of $(509) - - - - (831) -
Other comprehensive loss - - - - - -
Comprehensive loss - - - - - -
Exercise of stock options into 10,000 shares of
common stock - - 77 - - -
Conversion of stock warrants into 314,800 shares - 3 2,240 - - -
Acquisition of 147,045 common shares - - - - - -
----- ---- ------- -------- --------- -------
Balances at
November 30, 2001, as restated 2,500 229 250,785 83,436 (6,344) -
Comprehensive loss:
Net loss - - - (14,040) - -
Other comprehensive loss, net of tax:
Foreign currency translation adjustment - - - - 904 -
Unrealized gain on marketable securities, net of
tax effect of $260 - - - - 422 -
Other comprehensive loss - - - - - -
Comprehensive loss - - - - - -
Exercise of stock options into 16,336 shares of
common stock - - 132 - - -
Acquisition of 163,200 common shares - - - - - -
----- ---- ------- -------- --------- -------
Balances at
November 30, 2002 2,500 229 250,917 69,396 (5,018) -
===== ==== ======== ======== ========= =======
Total
Stock-
Treasury holders'
Stock Equity
----- -------
Balances at
November 30, 1999 (4,471) 216,744
Comprehensive income:
Net income, as restated - 27,492
Other comprehensive loss, net of tax: -
Foreign currency translation adjustment - (104)
Unrealized loss on marketable securities, net of
tax effect of $(6,202) - (10,119)
--------
Other comprehensive loss - (10,223)
--------
Comprehensive income - 17,269
Exercise of stock options into 121,300 shares of common
stock and issuance of 11,671 shares under the
Restricted Stock Plan - 837
Tax benefit of stock options exercised - 1,270
Conversion of debentures into 30,170 shares - 535
Issuance of 2,300,000 shares in connection with stock
offering - 96,573
Acquisition of 141,455 common shares (1,533) (1,533)
Recognition of gain on hedge of available-for-sale
securities - (929)
------- -------
Balances at
November 30, 2000, as restated (6,004) 330,766
Comprehensive loss:
Net loss, as restated - (7,198)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment - (455)
Unrealized loss on marketable securities, net of
tax effect of $(509) - (831)
--------
Other comprehensive loss - (1,286)
--------
Comprehensive loss - (8,484)
Exercise of stock options into 10,000 shares of
commmon stock - 77
Conversion of stock warrants into 314,800 shares - 2,243
Acquisition of 147,045 common shares (1,382) (1,382)
------- -------
Balances at
November 30, 2001, as restated (7,386) 323,220
Comprehensive loss:
Net loss - (14,040)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment - 904
Unrealized gain on marketable securities, net of
tax effect of $260 - 422
---------
Other comprehensive loss - 1,326
---------
Comprehensive loss - (12,714)
Exercise of stock options into 16,336 shares of
common stock - 132
Acquisition of 163,200 common shares (1,125) (1,125)
------- -------
Balances at
November 30, 2002 (8,511) 309,513
======= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
72
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2000, 2001 AND 2002
(IN THOUSANDS)
2000 2001 2002
---- ---- ----
AS RESTATED AS RESTATED
----------- -----------
See Note (2) See Note (2)
Cash flows from operating activities:
Net income (loss) $ 27,492 $ (7,198) $ (14,040)
Adjustments to reconcile net income (loss) to net cash flows (used in)
provided by operating activities
Depreciation and amortization 4,128 4,476 4,780
Provision for bad debt expense 2,519 1,936 4,884
Equity in income of equity investments (2,572) (3,586) (1,779)
Minority interest 1,074 (657) (5,055)
Gain on sale of investments (427) - -
Gain from the sale of shares of equity investment (2,387) - -
Gain on hedge of available-for-sale securities (1,499) - -
Gain on issuance of subsidiary shares - - (14,269)
Other-than-temporary decline in market value of investment security - - 1,158
Deferred income tax (benefit) expense, net (6,034) (3,332) 9,904
Extraordinary item (2,189) - -
(Gain) loss on disposal of property, plant and equipment, net (1) (18) (69)
Income tax benefit on exercise of stock options (1,270) - -
Cumulative effect of a change in accounting for goodwill - - (240)
Changes in operating assets and liabilities:
Accounts receivable (31,705) 35,797 48,555
Receivable from vendor 3,761 (1,263) (7,346)
Inventory (22,333) (67,735) (64,548)
Accounts payable, accrued expenses and other current liabilities 22,431 (29,745) 66,644
Income taxes payable 182 (2,979) 3,599
Investment securities-trading (2,211) (1,635) (125)
Prepaid expenses and other, net 4,413 1,863 (7,983)
--------- ---------- ---------
Net cash (used in) provided by operating activities (6,628) (74,076) 24,070
--------- ---------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (13,075) (2,869) (3,159)
Proceeds from the sale of property, plant and equipment 1,028 261 7,250
Net proceeds from sale of investment securities 13,227 - -
Proceeds from distribution from an equity investee 1,286 4,634 947
Net proceeds from issuance of subsidiary shares - - 22,158
Proceeds from the sale of shares of equity investment 922 - -
Purchase of acquired business, net of acquired cash - - (7,106)
--------- ---------- ---------
Net cash provided by investing activities 3,388 2,026 20,090
--------- ---------- ---------
Cash flows from financing activities:
Borrowings of bank obligations 918,785 901,628 403,043
Repayments on bank obligations (1,013,466) (832,329) (454,300)
Proceeds from issuance of convertible subordinated debentures - - 8,107
Issuance of notes payable 5,868 - -
Payment of dividend to minority shareholder of subsidiary (859) (1,034) -
Net repayments under documentary acceptances (1,994) - -
73
AUDIOVOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2000, 2001 AND 2002
(IN THOUSANDS)
2000 2001 2002
---- ---- ----
AS RESTATED AS RESTATED
----------- -----------
Principal payments on capital lease obligation (19) (29) (55)
Proceeds from exercise of stock options and warrants 837 2,317 132
Repurchase of Class A common stock (1,534) (1,382) (1,125)
Principal payments on subordinated debt - (486) -
Net proceeds from sale of common stock 96,573 - -
--------- ------- ------
Net cash provided by (used in) financing activities 4,198 68,685 (44,198)
--------- ------- -------
Effect of exchange rate changes on cash (54) (41) (229)
--------- ------- -------
Net increase (decrease) in cash 904 (3,406) (267)
Cash at beginning of period 5,527 6,431 3,025
--------- ------- -------
Cash at end of period $ 6,431 $ 3,025 $ 2,758
========= ======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
74
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2000, 2001 AND 2002
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Audiovox Corporation and its subsidiaries (the Company) design
and market a diverse line of products and provide related
services throughout the world. These products and services
include handsets and accessories for wireless communications,
automotive entertainment and security products, automotive
electronic accessories and consumer electronics.
The Company operates in two primary markets (which are also
the Company's reportable segments for accounting purposes):
(1) Wireless communications. The Wireless Group markets
wireless handsets and accessories through domestic
and international wireless carriers and their agents,
independent distributors and retailers.
(2) Mobile and consumer electronics. The Electronics
Group sells autosound, mobile electronics and
consumer electronics primarily to mass merchants,
power retailers, specialty retailers, new car
dealers, original equipment manufacturers (OEMs),
independent installers of automotive accessories and
the U.S. military.
(b) Principles of Consolidation
The consolidated financial statements include the financial
statements of Audiovox Corporation and its wholly-owned and
majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in
consolidation.
(c) Cash Equivalents
Investments with original maturities of three months or less
are considered cash equivalents. There were no cash
equivalents at November 30, 2001 and 2002.
(d) Revenue Recognition
The Company recognizes revenue from product sales at the time
of passage of title and risk of loss to the customer either at
FOB Shipping Point or FOB Destination, based upon terms
established with the customer. Any customer acceptance
provisions are satisfied prior to revenue recognition. There
are no further obligations on the part
(Continued)
75
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
of the Company subsequent to revenue recognition except for
returns of product from the Company's customers. The Company
does accept returns of products if properly requested,
authorized and approved by the Company. The Company records an
estimate of returns of products returned by its customers.
Management continuously monitors and tracks such product
returns and records the provision for the estimated amount of
such future returns, based on historical experience and any
notification the Company receives of pending returns. The
Electronic segment's selling price to its customers is a fixed
amount that is not subject to refund or adjustment or
contingent upon additional rebates. The Wireless segment has
sales agreements with certain customers that provide for a
rebate of the selling price if the particular product is
subsequently sold at a lower price. The Wireless segment
records an estimate of the rebate at the time of sale.
(e) Sales Incentives
Both of the Company's segments, Wireless and Electronics,
offer sales incentives to its customers in the form of (1)
co-operative advertising allowances; (2) market development
funds and (3) volume incentive rebates. The Electronics
segment also offers other trade allowances to its customers.
The terms of the sales incentives vary by customer and are
offered from time to time. Except for other trade allowances,
all sales incentives require the customer to purchase the
Company's products during a specified period of time. All
sales incentives require the customer to claim the sales
incentive within a certain time period. Although all sales
incentives require customers to claim the sales incentive
within a certain time period (referred to as the "claim
period"), the Wireless segment historically has settled sales
incentives claimed after the claim period has expired if a
customer demands payment. The sales incentive liabilities are
settled either by the customer claiming a deduction against an
outstanding account receivable owed to the Company by the
customer or by the customer requesting a check from the
Company. The Company is unable to demonstrate that an
identifiable benefit of the sales incentives has been received
as such, all costs associated with sales incentives are
classified as a reduction of net sales. The following is a
summary of the various sales incentive programs offered by the
Company and the related accounting policies:
Co-operative advertising allowances are offered to customers
as reimbursement towards their costs for print or media
advertising in which our product is featured on its own or in
conjunction with other companies' products (e.g., a weekly
advertising circular by a mass merchant). The amount offered
is either based upon a fixed percentage of the Company's sales
revenue to the customer or is a fixed amount per unit sold to
the customer during a specified time period. Market
development funds are offered to customers in connection with
new product launches or entering into new markets. Those new
markets can be either new geographic areas or new customers.
The amount offered for new product launches is based upon a
fixed percentage of the Company's sales revenue to the
customer or is a fixed amount per unit sold to the customer
during a specified time period. The Company accrues the cost
of co-operative advertising
(Continued)
76
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
allowances and market development funds at the later of when
the customer purchases our products or when the sales
incentive is offered to the customer.
Volume incentive rebates offered to customers require that
minimum quantities of product be purchased during a specified
period of time. The amount offered is either based upon a
fixed percentage of the Company's sales revenue to the
customer or is a fixed amount per unit sold to the customer.
Certain of the volume incentive rebates offered to customers
include a sliding scale of the amount of the sales incentive
with different required minimum quantities to be purchased.
The customer's achievement of the sales threshold and,
consequently, the measurement of the total rebate for the
Wireless segment cannot be reasonably estimated. Accordingly,
the Wireless segment recognizes a liability for the maximum
potential amount of the rebate, with the exception of certain
volume incentive rebates that include very aggressive tiered
levels of volume purchases as the underlying revenue
transactions that result in progress by the customer toward
earning the rebate or refund on a program by program basis are
recognized. The Electronics segment makes an estimate of the
ultimate amount of the rebate their customers will earn based
upon past history with the customer and other facts and
circumstances. The Electronics segment has the ability to
estimate these volume incentive rebates as there does not
exist a relatively long period of time for a particular rebate
to be claimed, the Electronics segment does have historical
experience with these sales incentive programs and the
Electronics segment does have a large volume of relatively
homogenous transactions. Any changes in the estimated amount
of volume incentive rebates are recognized immediately using a
cumulative catch-up adjustment.
With respect to the accounting for co-operative advertising
allowances, market development funds and volume incentive
rebates, there was no impact upon the adoption of EITF 01-9,
"Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of Vendor's Products)", as the Company's
accounting policy prior to March 1, 2002 was consistent with
its accounting policy after the adoption of EITF 01-9.
Other trade allowances are additional sales incentives that
the Company provides to the Electronics segment customers
subsequent to the related revenue being recognized. In
accordance with EITF 01-9, the Company records the provision
for these additional sales incentives at the later of when the
sales incentive is offered or when the related revenue is
recognized. Such additional sales incentives are based upon a
fixed percentage of the selling price to the customer, a fixed
amount per unit, or a lump-sum amount.
For the fiscal years ended November 30, 2000, 2001 and 2002,
reversals of previously established sales incentive
liabilities amounted to $9,348, $14,369 and $4,716,
respectively. These reversals include unearned sales
incentives and unclaimed sales
(Continued)
77
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
incentives. Unearned sales incentives are volume incentive
rebates where the customer did not purchase the required
minimum quantities of product during the specified time.
Volume incentive rebates for both segments are reversed into
income in the period when the customer did not purchase the
required minimum quantities of product during the specified
time. Unearned sales incentives for fiscal years ended
November 30, 2000, 2001 and 2002 amounted to $4,167, $9,051
and $1,354, respectively. Unclaimed sales incentives are sales
incentives earned by the customer but the customer has not
claimed payment of the earned sales incentive from the
Company. Unclaimed sales incentives for fiscal years ended
November 30, 2000, 2001 and 2002 amounted to $5,181, $5,318
and $3,362, respectively.
The accrual for earned but unclaimed sales incentives is
reversed by Wireless only when management is able to conclude,
based upon an individual judgement of each sales incentive,
that it is remote that the customer will claim the sales
incentive. The methodology applied for determining the amount
and timing of reversals for the Wireless segment is
disciplined, consistent and rational. The methodology is not
systematic (formula based), as the Company makes an estimate
as to when it is remote that the sales incentive will not be
claimed. Reversals by the Wireless segment of unclaimed sales
incentives have historically occurred in varying periods up to
12 months after the recognition of the accrual. In deciding on
whether to reverse the sales incentive liability into income,
the Company makes an assessment as to the likelihood of the
customer ever claiming the funds after the claim period has
expired and considers the specific facts and circumstances
pertaining to the individual sales incentive. The factors
considered by management in making the decision to reverse
accruals for unclaimed sales incentives include (i) past
practices of the customer requesting payments after the
expiration of the claim period; (ii) recent negotiations with
the customer for new sales incentives; (iii) subsequent
communications with the customer with regard to the status of
the claim; and (iv) recent activity in the customer's account.
The Electronics segment reverses earned but unclaimed sales
incentives upon the expiration of the claim period. The
Company believes that the reversal of earned but unclaimed
sales incentives for Electronics upon the expiration of the
claim period is a disciplined, rational, consistent and
systematic method of reversing unclaimed sales incentives. For
the Electronics segment, 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 accrual for sales incentives at November 30, 2001 and 2002
was $8,474 and $12,151, respectively. The Company's sales
incentive liability may prove to be inaccurate, in which case
the Company may have understated or overstated the provision
required for these arrangements. Therefore, although the
Company makes its best estimate of its sales incentive
liability, many factors, including significant unanticipated
changes
(Continued)
78
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
in the purchasing volume of its customers and the lack of
claims made by customers of offered and accepted sales
incentives, could have significant impact on the Company's
liability for sales incentives and the Company's reported
operating results.
(f) Inventory
Inventory consists principally of finished goods and is stated
at the lower of the actual cost to purchase (primarily on a
weighted moving average basis) and/or the current estimated
market value of the inventory less expected costs to sell the
inventory. The Company regularly reviews inventory quantities
on-hand and records a provision for excess and obsolete
inventory based primarily on open purchase orders from
customers and selling prices subsequent to the balance sheet
date as well as indications from customers based upon the then
current negotiations. As demonstrated in recent years, demand
for the Company's products can fluctuate significantly. A
significant sudden increase in the demand for the Company's
products could result in a short-term increase in the cost of
inventory purchases while a significant decrease in demand
could result in an increase in the amount of excess inventory
quantities on-hand. In addition, the Company's industry is
characterized by rapid technological change and frequent new
product introductions that could result in an increase in the
amount of obsolete inventory quantities on-hand. In such
situations, the Company generally does not obtain price
protection from its vendors, however, on occasion, the Company
has received price protection which reduces the cost of
inventory. Since price protection reduces the cost of
inventory, as the Company sells the inventory for which it has
received price protection, the amount is reflected as a
reduction to cost of sales. There can be no assurances that
the Company will be successful in negotiating such price
protection from its vendors in the future.
The Company has, on occasion, performed upgrades on certain
inventory on behalf of its vendors. The reimbursements the
Company receives to perform these upgrades are reflected as a
reduction to the cost of inventory and is recognized as a
reduction to cost of sales as the related inventory is sold.
Additionally, the Company's estimates of excess and obsolete
inventory may prove to be inaccurate, in which case the
Company may have understated or overstated the provision
required for excess and obsolete inventory. In the future, if
the Company's inventory is determined to be overvalued, it
would be required to recognize such costs in its cost of goods
sold at the time of such determination. Likewise, if the
Company does not properly estimate the lower of cost or market
of its inventory and it is therefore determined to be
undervalued, it may have over-reported its cost of goods sold
in previous periods and would be required to recognize such
additional operating income at the time of sale. Therefore,
although the Company makes every effort to ensure the accuracy
of its forecasts of future product demand, any significant
unanticipated changes in demand or technological developments
could have a significant impact on the value of the Company's
inventory and its reported
(Continued)
79
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
operating results.
The Company maintains a significant investment in inventory
and, therefore, is subject to the risk of losses on
write-downs to market and inventory obsolescence. During the
fourth quarter of 2000, the Company decided to substantially
exit the analog phone line of business to reflect the shift in
the wireless industry from analog to digital technology and
recorded a charge of approximately $8,152 to reduce its
carrying value of its analog inventory to estimated market
value. During the second quarter of 2001, the Company recorded
an additional charge of approximately $13,500 to further
adjust the carrying value of its analog inventory to market.
During the fourth quarter of 2001, Wireless recorded inventory
write-downs to market of $7,150 as a result of the reduction
of selling prices primarily related to digital hand- held
phones during the first quarter of 2002 in anticipation of new
digital technologies. During the year ended November 30, 2002,
Wireless recorded inventory write-downs to market of $13,823.
These write-downs were made based upon open purchase orders
from customers and selling prices subsequent to the respective
balance sheet dates as well as indications from our customers
based upon current negotiations. It is reasonably possible
that additional write-downs to market may be required in the
future given the continued emergence of new technologies,
however, no estimate can be made of such write-downs. At
November 30, 2002, Wireless had on hand 640,084 units of
previously written-down inventory, which approximated $94,264.
For certain inventory items, the Company is entitled to
receive price protection in the event the selling price to its
customers is less than the purchase price from the
manufacturer. The Company records such price protection, as
necessary, at the time of the sale of the units. As of
November 30, 2002, such price protection amounted to $32,643,
of which $27,683 was recorded as a reduction to cost of sales
as the related inventory was sold. The other $4,960 in price
protection for 2002 has been reflected as a reduction to the
remaining inventory cost.
(g) Investment Securities
The Company classifies its equity securities in one of two
categories: trading or available- for-sale. Trading securities
are bought and held principally for the purpose of selling
them in the near term. All other securities not included in
trading are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Unrealized holding gains and losses on trading
securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and
are reported as a component of accumulated other comprehensive
(Continued)
80
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
income until realized. Realized gains and losses from the sale
of available-for-sale securities are determined on a specific
identification basis.
A decline in the market value of any available-for-sale
security below cost that is deemed other-than-temporary
results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the
security is established (such a charge was recorded during
fiscal 2002 - Note 9). Dividend and interest income are
recognized when earned. The Company considers numerous
factors, on a case by case basis, in evaluating whether the
decline in market value of an available-for-sale security
below cost is other-than-temporary. Such factors include, but
are not limited to, (i)the length of time and the extent to
which the market value has been less than cost; (ii) the
financial condition and the near-term prospects of the issuer
of the investment; and (iii) whether the Company's intent to
retain the investment for the period of time is sufficient to
allow for any anticipated recovery in market value.
(h) Derivative Financial Instruments
Effective December 1, 2000, the Company adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(Statement 133), which establishes new accounting and
reporting guidelines for derivative instruments and hedging
activities. Statement 133 requires the recognition of all
derivative financial instruments as either assets or
liabilities in the statements of financial condition and
measurement of those instruments at fair value. Changes in the
fair values of those derivatives are reported in earnings or
other comprehensive income (loss) depending on the designation
of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated
with changes in the fair value of a derivative and the effect
on the consolidated financial statements will depend on its
hedge designation and whether the hedge is highly effective in
achieving offsetting changes in the fair value or cash flows
of the asset or liability hedged. Under the provisions of
Statement 133, the method that will be used for assessing the
effectiveness of a hedging derivative, as well as the
measurement approach for determining the ineffective aspects
of the hedge, must be established at the inception of the
hedged instrument. The adoption of Statement 133 had no impact
on the Company's results of operations or financial position.
The Company's evaluations of hedge effectiveness are subject
to assumptions based on the terms and timing of the underlying
exposures. For a fair value hedge, both the effective and
ineffective portions of the change in fair value of the
derivative instrument, along with an adjustment to the
carrying amount of the hedge item for fair value changes
attributable to the hedge risk, are recognized in earnings.
For a cash flow hedge, changes in the fair value of a
derivative instrument that is highly effective are deferred in
accumulated other comprehensive income or loss until the
underlying hedged item
(Continued)
81
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
is recognized in earnings. The ineffective portion is
recognized in earnings immediately. If a fair value or cash
flow hedge was to cease to qualify for hedge accounting or be
terminated, it would continue to be carried on the balance
sheet at fair value until settled, but hedge accounting would
be discontinued prospectively. If a forecasted transaction
were no longer probable of occurring, amounts previously
deferred in accumulated other comprehensive income would be
recognized immediately in earnings.
The Company, as a policy, does not use derivative financial
instruments for trading purposes. The Company conducts
business in several foreign currencies and, as a result, is
subject to foreign currency exchange rate risk due to the
effects that exchange rate movements of these currencies have
on the Company's costs. To minimize the effect of exchange
rate fluctuations on costs, the Company enters into forward
exchange rate contracts. The Company, as a policy, does not
enter into forward exchange contracts for trading purposes.
The forward exchange rate contracts are entered into as hedges
of inventory purchase commitments and of trade receivables due
in foreign currencies.
Gains and losses on the forward exchange contracts that
qualify as hedges are reported as a component of the
underlying transaction. Foreign currency transactions which
have not been hedged are marked to market on a current basis
with gains and losses recognized through income and reflected
in other income (expense). In addition, any previously
deferred gains and losses on hedges which are terminated prior
to the transaction date are recognized in current income when
the hedge is terminated.
At November 30, 2001 and 2002, the Company had no contracts to
exchange foreign currencies in the form of forward exchange
contracts. For the years ended November 30, 2000, 2001 and
2002, gains and losses on foreign currency transactions which
were not hedged were not material. For the years ended
November 30, 2000, 2001 and 2002, there were no gains or
losses as a result of terminating hedges prior to the
transaction date.
(i) Debt Issuance Costs
Costs incurred in connection with the restructuring of bank
obligations (Note 15) have been capitalized. During 2000, the
Company capitalized an additional $148 in fees associated with
the restructuring and various amendments to the Company's
credit agreement. These charges are amortized over the lives
of the respective agreements. Amortization expense of these
costs amounted to $434, $336 and $379 for the years ended
November 30, 2000, 2001 and 2002, respectively.
(Continued)
82
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(j) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Equipment
under capital lease is stated at the present value of minimum
lease payments. Depreciation is calculated on the
straight-line method over the estimated useful lives of the
assets as follows:
Buildings 20-30 years
Furniture, fixtures and displays 5-10 years
Machinery and equipment 5-10 years
Computer hardware and software 3-5 years
Automobiles 3 years
Leasehold improvements are amortized over the shorter of the
lease term or estimated useful life of the asset. Assets
acquired under capital lease are amortized over the term of
the lease.
Capitalized computer software costs obtained for internal use
are amortized on a straight- line basis.
(k) Intangible Assets
Intangible assets consist of patents, trademarks and the
excess cost over fair value of equity investments (goodwill).
In July 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 141 requires
that the purchase method of accounting be used for all future
business combinations and specifies criteria intangible assets
acquired in a business combination must meet to be recognized
and reported apart from goodwill. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at
least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective
estimated useful lives and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the impairment
of Long-Live Assets to be Disposed Of".
The Company early adopted the provisions of SFAS No. 141 and
SFAS No. 142 as of December 1, 2001. As a result of adopting
the provisions of SFAS No. 141 and 142, the Company did not
record amortization expense relating to its goodwill, which
approximated $9,616, during the fiscal year ended November 30,
2002. The Company was not required under SFAS No. 142 to
assess the useful life and residual value of its goodwill as
the Company's goodwill, at the time of adoption, was equity
method
(Continued)
83
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
goodwill and, as such, will continue to be evaluated for
impairment under Accounting Pronouncement Board No. 18, "The
Equity Method of Accounting for Investments in Common Stock",
as amended.
As required by the adoption of SFAS No. 142, the Company
reassessed the useful lives and residual values of all
acquired intangible assets to make any necessary amortization
period adjustments. Based upon that assessment, no adjustments
were made to the amortization period of residual values of
other intangible assets. The cost of other intangible assets
are amortized on a straight-line basis over their respective
lives. Accumulated amortization on the Company's intangible
assets of $8,244 and $10,337 approximated $3,502 and $3,511 as
of November 30, 2001 and 2002, respectively.
As of November 30, 2001 and November 30, 2002, the Company had
intangible assets subject to amortization of $711 and $711,
respectively, and related accumulated amortization of $692 and
$711, respectively, which pertained to trademarks and patents.
Amortization expense for intangible assets subject to
amortization amounted to $15 and $9 for the years ended
November 30, 2001 and 2002, respectively. As of November 30,
2002, all intangible assets subject to amortization have been
fully amortized. Accordingly, the estimated aggregate
amortization expense for each of the five succeeding years
ending November 30, 2007 amounts to $0. Had SFAS No. 142 been
applied retrospectively to the years ended November 30, 2000
and 2001, there would be no impact to reported net income or
loss per share, respectively.
As of November 30, 2001 and 2002, the Company had unamortized
goodwill in the amount of $4,732 and $6,826, respectively. In
accordance with SFAS No. 142, the Company wrote-off its
unamortized negative goodwill of $240 as of the date of
adoption, which has been reflected in the consolidated
statements of operations as a cumulative effect of a change in
accounting principle. During the fiscal years ended November
30, 2000 and 2001, the Company recorded $16 and $16,
respectively, for the amortization of negative goodwill. In
March 2002, in connection with the purchase of certain assets
of Code-Alarm, Inc. by Code Systems, Inc., a wholly-owned
subsidiary of Audiovox Electronics Corp., the Company recorded
$1,854 of goodwill.
(Continued)
84
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table presents adjusted net losses and loss per
share data restated to include the retroactive impact of the
adoption of SFAS No. 142:
Years Ended November 30,
------------------------
2000 2001 2002
---- ---- ----
As Restated As Restated
----------- -----------
Reported net income (loss) before extraordinary item and
accounting change $ 25,303 $ (7,198) $ (14,280)
Extraordinary item - gain on extinguishment of debt 2,189 - -
Cumulative effect of a change in accounting principle,
net of tax - - 240
---------- ----------- ----------
Reported net income (loss) 27,492 (7,198) (14,040)
Add back:
Goodwill amortization, net of tax 343 224 -
---------- ----------- ----------
Adjusted net income (loss) $ 27,835 $ (6,974) $ (14,040)
========== =========== ==========
Basic net income (loss) per common share:
Reported net income (loss) before extraordinary item and
accounting change $ 1.19 $ (0.33) $ (0.65)
Extraordinary item - gain on extinguishment of debt 0.10 - -
Cumulative effect of a change in accounting principle,
net of tax - - 0.01
---------- ----------- ----------
Net income (loss) 1.29 (0.33) (0.64)
Goodwill amortization, net of tax 0.01 0.01 -
---------- ----------- ----------
Adjusted net income (loss) $ 1.30 $ (0.32) $ (0.64)
========== =========== ==========
Diluted net income (loss) per common share:
Reported net income (loss) before extraordinary item and
accounting change $ 1.12 $ (0.33) $ (0.65)
Extraordinary item - gain on extinguishment of debt 0.10 - -
Cumulative effect of a change in accounting principle,
net of tax - - 0.01
---------- ----------- ----------
Net income (loss) 1.22 (0.33) (0.64)
Goodwill amortization, net of tax 0.01 0.01 -
---------- ----------- ----------
Adjusted net income (loss) $ 1.23 $ (0.32) $ (0.64)
========== =========== ==========
Weighted average common shares outstanding:
Basic 21,393,566 21,877,100 21,850,035
========== =========== ==========
Diluted 22,565,806 21,877,100 21,850,035
========== =========== ==========
(Continued)
85
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The change in carrying amount of goodwill is as follows:
Year Ended
November 30,
2002
------------
Net balance as of November 30, 2001 $4,732
Cumulative effect of a change in accounting for negative
goodwill 240
Goodwill acquired during the period 1,854
------
Net Balance as of November 30, 2002 $6,826
======
(l) Equity Investments
The Company has common stock investments which are accounted
for by the equity method as the Company owns between 20% and
50% of the common stock.
The Company applies the equity method of accounting to its
investments in entities where the Company has non-controlling
ownership interests. The Company's share of its equity method
investees earnings or losses is included in the consolidated
statements of operations. The Company eliminates its pro rata
share of gross profit on sales to its equity method investees
for inventory on hand at the investees at the end of the year.
A description of the Company's equity investments and the
related transactions between the Company and these investees
is discussed in Note 11.
(m) Cellular Telephone Commissions
Under various agency agreements, the Company receives an
initial activation commission for obtaining subscribers for
cellular telephone services. The agreements may contain
provisions for additional commissions based upon usage and
length of continued subscription. The agreements also provide
for the reduction or elimination of initial activation
commissions if subscribers deactivate service within
stipulated periods. The Company has provided a liability for
estimated cellular deactivations which is reflected in the
accompanying consolidated financial statements as a reduction
of accounts receivable.
The Company recognizes sales revenue for the initial
activation and residual commissions based upon usage on the
accrual basis. Such commissions approximated $32,475, $29,859
and $26,756 for the years ended November 30, 2000, 2001 and
2002, respectively. Related commissions paid to outside
selling representatives for cellular activations are included
in cost of sales in the accompanying consolidated statements
of operations and amounted to $23,186, $22,390 and $18,673 for
the years ended November 30, 2000, 2001 and 2002,
respectively.
(Continued)
86
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(n) Advertising
The Company expenses the costs of advertising as incurred,
excluding co-operative advertising (see sales incentives Note
1(e). During the years ended November 30, 2000, 2001 and 2002,
the Company had no direct response advertising.
(o) Product Warranties and Product Repair Costs
The Company generally warrants its products against certain
manufacturing and other defects. The Company provides
warranties for all of its products ranging from 90 days to the
lifetime of the product. Warranty expenses are accrued at the
time of sale based on the Company's estimated cost to repair
expected returns for products. This liability is based
primarily on historical experiences of actual warranty claims
as well as current information on repair costs. The warranty
liability of $9,165 and $9,143 is recorded in accrued expenses
in the accompanying consolidated balance sheet as of November
30, 2001 and 2002, respectively. In addition, the Company
records a reserve for product repair costs. This reserve is
based upon the quantities of defective inventory on hand and
an estimate of the cost to repair such defective inventory.
The reserve for product repair costs of $3,902 and $6,267 is
recorded as a reduction to inventory in the accompanying
consolidated balance sheet as of November 30, 2001 and 2002,
respectively. Warranty claims and product repair costs expense
for each of the fiscal years ended November 30, 2000, 2001 and
2002 were $8,256, $11,319 and $6,985, respectively.
The following table provides the changes in the Company's
product warranties and product repair costs for 2002:
December 1, 2001 $ 13,066
Liabilities accrued for warranties issued during the
period 6,985
Warranty claims paid during the period (4,641)
--------
November 30, 2002 $ 15,410
========
(p) Foreign Currency
With the exception of a subsidiary operation in Venezuela,
which was deemed a hyper inflationary economy in fiscal 2000
and 2001, assets and liabilities of those subsidiaries and
equity investees located outside the United States whose cash
flows are primarily in local currencies have been translated
at rates of exchange at the end of the period or historical
exchange rates, as appropriate. Revenues and expenses have
been translated at the weighted average rates of exchange in
effect during the period. Gains and losses resulting from
translation are accumulated in the cumulative foreign currency
translation account in accumulated other comprehensive income.
For the operation in Venezuela,
(Continued)
87
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
financial statements are translated at either current or
historical exchange rates, as appropriate. These adjustments,
along with gains and losses on currency transactions, are
reflected in the consolidated statements of operations for
fiscal 2000 and 2001. During the first quarter of fiscal 2002
(January 1, 2002), Venezuela ceased to be deemed a hyper-
inflationary economy (see Note 2).
Exchange gains and losses on intercompany balances of a
long-term nature are also recorded in the cumulative foreign
currency translation adjustment account in accumulated other
comprehensive loss. Exchange gains and losses on
available-for-sale investment securities are recorded in the
unrealized gain (loss) on marketable securities in accumulated
other comprehensive loss. Other foreign currency transaction
gains of $193, $200 and $418 for the years ended November 30,
2000, 2001 and 2002, respectively, were included in other
income.
(q) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled (Note 16). The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(r) Net Income (Loss) Per Common Share
Basic earnings (loss) per common share is based upon the
weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per common share reflects
the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted
into common stock. Dilutive net loss per common share for
fiscal 2001 and 2002 is the same as basic net loss per common
share due to the anti-dilutive effect of the exercise of stock
options.
(s) Supplementary Financial Statement Information
Interest income of approximately $1,616, $670 and $509 for the
years ended November 30, 2000, 2001 and 2002 respectively, is
included in other, net, in the accompanying consolidated
statements of operations.
(Continued)
88
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(t) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, including the allowance for doubtful accounts,
allowance for cellular deactivations, inventory valuation,
recoverability of deferred tax assets, valuation of long-lived
assets and accrued sales incentives, warranty reserves and
disclosure of the contingent assets and liabilities at the
date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(u) Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of
The Company accounts for its long-lived assets in accordance
with the provisions of SFAS No.121. Statement 121 requires
that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held
and used is measured by comparison of the carrying amount of
an asset to the future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value
of assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less cost to sell.
In October 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment of Long-Lived Assets" (Statement 144), which
addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement
supersedes Statement 121 while retaining the fundamental
recognition and measurement provisions of that statement.
Statement 144 requires that a long-lived asset to be
abandoned, exchanged for a similar productive asset or
distributed to owners in a spin-off to be considered held and
used until it is disposed of. However, Statement 144 requires
that management consider revising the depreciable life of such
long-lived asset. With respect to long-lived assets to be
disposed of by sale, Statement 144 retains the provisions of
Statement 121 and, therefore, requires that discontinued
operations no longer be measured on a net realizable value
basis and that future operating losses associated with such
discontinued operations no longer be recognized before they
occur. Statement 144 is effective for all fiscal quarters of
fiscal years beginning after December 15, 2001, and will thus
be adopted by the Company on December 1, 2002 (fiscal 2003).
The adoption of Statement 144 did not have any impact on the
Company's consolidated financial statements.
(Continued)
89
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(v) Accounting for Stock-Based Compensation
As allowed by SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company applies the intrinsic value-based
method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees",
and related interpretations, in accounting for its stock-based
compensation plans (APB No. 25).
(w) Reporting Comprehensive Income
Effective December 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (Statement 130). Statement 130 requires
that all items recognized under accounting standards as
components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence
as other annual financial statements. Other comprehensive
income may include foreign currency translation adjustments,
minimum pension liability adjustments and unrealized gains and
losses on investment securities classified as available-
for-sale and fair market value changes for cash flow hedges.
(x) New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" (Statement 143). Statement 143
is effective for fiscal years beginning after June 15, 2002,
and this will be adopted by the Company on December 1, 2003
(fiscal 2004) and establishes an accounting standard requiring
the recording of the fair value of liabilities associated with
the retirement of long-lived assets in the period in which
they are incurred. The Company does not expect the adoption of
Statement 143 to have a significant effect on its results of
operations or its financial position.
SFAS 145 "Rescission of SFAS Statements No. 4, 44, and 64,
Amendment of SFAS No. 13 and Technical Corrections". This
Statement updates, clarifies and simplifies existing
accounting pronouncements by rescinding Statement 4, which
required all gains and losses from extinguishment of debt to
be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. As a result, the
criteria in Opinion 30 will now be used to classify those
gains and losses. This statement will have no material effect
on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure".
SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value method of accounting for
stock-based employee compensation as originally provided by
SFAS No. 123, "Accounting for Stock- Based Compensation".
Additionally, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosure in both annual
and interim financial
(Continued)
90
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
statements about the method of accounting for stock-based
compensation and the effect of the method used on reported
results. The transitional requirements of SFAS No. 148 will be
effective for all financial statements for fiscal years ending
after December 15, 2002. The disclosure requirements shall be
effective for financial reports containing condensed financial
statements for interim periods beginning after December 31,
2002. The Company expects to adopt the disclosure portion of
this statement for the fiscal quarter ending February 28,
2003. The application of this standard will have no impact on
the Company's consolidated financial position or results of
operations.
In February 2003, the EITF Issued 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration
Received from a Vendor". This EITF provides guidance on the
income statement classification of amounts received by a
customer, including a reseller and guidance regarding timing
of recognition for volume rebates. The Company does not
believe that adoption of this new standard, which will be
applied prospectively by the Company for new arrangements,
including modifications of existing arrangements, entered into
after December 31, 2002, will have a material effect on the
Company's consolidated financial position or results of
operations.
In November 2002, the FASB issued Interpretation No. 45 (FIN
45), "Guarantor's Accounting and Disclosure Requirements for
Guarantors, Including Guarantees of Indebtedness of Others".
FIN 45 elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements of
FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company
does not expect the adoption of FIN 45 to have a material
effect on its consolidated financial position or results of
operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN
46), "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51". FIN 46 addresses the
consolidation by business enterprises of variable interest
entities as defined in the Interpretation. FIN 46 is effective
for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created
or acquired prior to February 1, 2003, the provisions of FIN
46 must be applied for the first interim period beginning
after June 15, 2003. The adoption of FIN 46 is being evaluated
to determine what impact, if any, the adoption of the
provisions will have on the Company's financial condition or
results of operations.
(Continued)
91
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(y) Shipping and Handling Costs
In fiscal 2001, the Company adopted the provisions of EITF
Issue No. 00-10, "Accounting for Shipping and Handling Fees
and Costs", which requires the Company to report all amounts
billed to a customer related to shipping and handling as
revenue. The Company includes all costs incurred for shipping
and handling as cost of sales. The Company has reclassified
such billed amounts, which were previously netted in cost of
sales to net sales. As a result of this reclassification, net
sales and cost of goods sold were increased by $2,162 and
$1,548 for years ended November 30, 2000 and 2001,
respectively.
(z) Issuances of Subsidiary Stock
The Company's accounting policy on the issuances of subsidiary
stock is to recognize through earnings the gain on the sale of
the shares as long as the sale of the shares is not part of a
broader corporate reorganization planned or contemplated by
the Company and realization of the gain is assured.
(aa) Reclassifications
Certain reclassifications have been made to the 2000 and 2001
consolidated financial statements in order to conform to the
2002 presentation.
(2) Restatement of Consolidated Financial Statements
The Company has restated its consolidated financial statements for the
fiscal years ended November 30, 2000 and 2001 and for the quarters
ended February 28, 2002, May 31, 2002 and August 31, 2002. In addition,
the Company has reclassified certain expenses from operating expenses
to cost of sales for fiscal 2000 and 2001 and for each of the quarters
in the nine months ended August 31, 2002. These restatement adjustments
are the result of the misapplication of generally accepted accounting
principles.
(Continued)
92
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The net effect of all of the restatement adjustments is as follows:
First Second Third
Fiscal Fiscal Quarter Quarter Quarter
2000 2001 2002 2002 2002
------ ------ ------ ------ -----
(Unaudited) (Unaudited) (Unaudited)
Increase (decrease) income/(increase)
decrease (loss) before extraordinary
item and cumulative effect of a
change in accounting for negative
goodwill $ 263 $1,011 $(1,308) $ (782) $ 751
Increase (decrease) net income/
(increase) decrease net (loss) 263 1,011 (1,308) (782) 751
Increase (decrease) net income/
(increase) decrease net (loss) per
common share - diluted $0.01 $ 0.05 $ (0.06) $(0.03) $ 0.04
The following table provides additional information regarding these
restatement adjustments:
EFFECTS OF RESTATEMENT ADJUSTMENTS ON NET INCOME OR NET LOSS
(IN THOUSANDS)
INCREASE (DECREASE) (INCREASE) DECREASE INCREASE (DECREASE)
IN NET INCOME FOR THE IN NET LOSS FOR THE IN NET INCOME FOR THE
FISCAL YEAR ENDED FISCAL YEAR ENDED NINE MONTHS ENDED
NOVEMBER 30, 2000 NOVEMBER 30, 2001 AUGUST 31, 2002
----------------- ----------------- ----------------
Unaudited
Restatement adjustments:
- ------------------------
Revenue recognition $ (779) $ 779 -
Timing of revenue (15) $ (103)
Litigation (373) 427
Foreign currency translation - - (1,491)
Inventory pricing - - 420
Sales incentives 1,884 910 847
Gain on the issuance of subsidiary shares - - (1,556)
Operating expense reclassification to cost of
sales (2) - - -
----------- --------- --------
Total adjustment to pre-tax income (loss) 1,105 1,301 (1,456)
(Provision for) recovery of income taxes (842) (310) 204
Minority interest (1) - 20 (87)
----------- --------- --------
Total effect on net income (loss) $ 263 $ 1,011 $ (1,339)
=========== ========= ========
(1) This adjustment reflects the impact of the restatement adjustments on
minority interest.
(2) This adjustment represents a reclassification of warehousing and technical
support and general
(Continued)
93
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
and administrative costs (which are components of operating expenses)
to cost of sales. This reclassification did not have any effect on
previously reported net income or (loss) for any fiscal year or period
presented herein.
See Note 26 "Unaudited Quarterly Financial Data - As Restated" for
restatement adjustments to previously reported unaudited quarterly
consolidated statements of operations data for the quarters ended
February 28, 2001 through August 31, 2002 as a result of the
restatements and reclassifications.
The following discussion addresses each of the restatement adjustments
and the reclassification adjustment for the corrections of accounting
errors. Any references to quarterly amounts are unaudited.
(a) Revenue recognition. The Company overstated net sales in each
of the third and fourth quarters of fiscal 2000 for shipments
of product that did not conform to the technical requirements
of the customer (i.e., the goods were non-conforming). The
Company did not properly evaluate this shipment of
non-conforming goods as required in accordance with Staff
Accounting Bulletin No. 101 (SAB No. 101), "Revenue
Recognition in Financial Statements", which would preclude
revenue recognition until the specific performance obligations
have been met by the Company. These product shipments resulted
in the Company overstating net sales by $19,166 and gross
profit by $779 for fiscal 2000. During the first quarter of
fiscal 2001, the Company recorded a sales return of this
fiscal 2000 non-conforming product sale. The recording of this
product return (sales reversal) resulted in the Company
understating net sales by $19,166 and gross profit by $779 for
fiscal 2001.
(b) Timing of revenue. During each of the third and fourth
quarters of fiscal 2001 and the first, second and third
quarters of fiscal 2002, the Company (overstated) understated
net sales by $(976), $857, $(4,601), $(7,757) and $10,472,
respectively, as the timing of revenue recognition was not in
accordance with the established shipping terms with certain
customers. SAB 101 specifically states that delivery generally
is not considered to have occurred unless the customer has
taken title (which is in this situation when the product was
delivered to the customer's site). Accordingly, the Company
should have deferred revenue recognition until delivery was
made to the customer's site. During each of the third and
fourth quarters of fiscal 2001 and the first, second and third
quarters of fiscal 2002, gross profit was overstated
(understated) by $34, ($19), $99, $562 and ($535),
respectively. During each of the third and fourth quarters of
fiscal 2001 and the first, second and third quarters of fiscal
2002, operating expenses were overstated (understated) by $0,
$0, $17, $136 and ($130), respectively.
(c) Litigation. During the fourth quarter of fiscal 2001 and each
of the first three quarters of fiscal 2002, the Company
overestimated its provisions for certain litigation matters,
(Continued)
94
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
thereby overstating cost of sales by $314, $176, $345 and $457
for each respective quarterly period. Also, the Company
understated operating expenses by $497 in the first quarter of
fiscal 2002 as a result of not recording a settlement offer in
the period the Company offered it.
During the second, third and fourth quarters of 2001 and the
first, second and third quarters of 2002, the Company
understated (overstated) operating expenses by $189, $302,
$196, $78 and $276 and ($300), respectively as a result of
inappropriately deferring costs related to an insurance claim.
The Company's insurance company refused to defend the Company
against a legal claim made against the Company. The Company
took legal action against the insurance company and was
unsuccessful. The Company was improperly capitalizing costs
that were not probable of recovery.
(d) Foreign currency translation. During the first three quarters
of fiscal 2002, the Company did not properly account for a
change in accounting for its Venezuelan subsidiary as
operating in a non-highly inflationary economy. In fiscal 2001
and in prior years, Venezuela was deemed to be a
highly-inflationary economy in accordance with certain
technical accounting pronouncements. Effective January 1,
2002, it was deemed that Venezuela should cease to be
considered a highly-inflationary economy, however, the Company
did not account for this change. The Company incorrectly
recorded the foreign currency translation adjustment in other
income rather than as other comprehensive income. As a result,
the Company understated other expenses, net, by $1,360 for the
first quarter of fiscal 2002, overstated other income, net, by
$71 for the second quarter of fiscal 2002 and understated
other expenses, net, by $243 for the third quarter of fiscal
2002. Also the Company overstated operating expenses by $41,
$54 and $88 for the first, second and third quarters of fiscal
2002, respectively.
(e) Inventory pricing. During the first three quarters of fiscal
2002, the Company overstated (understated) cost of sales
related to an inventory pricing error that occurred at its
Venezuelan subsidiary. The Company was not aware of this
pricing error until the fourth quarter of fiscal 2002 and,
accordingly, was not properly pricing its inventory at the
lower of cost or market in accordance with generally accepted
accounting principles. As a result, the Company overstated
(understated) cost of sales by $387, ($2) and $35, for the
first, second and third quarters of fiscal 2002, respectively.
(f) Sales incentives. During fiscal 2000 and 2001 and for the nine
months ended August 31, 2002, the Electronics segment
overestimated accruals for additional sales incentives (other
trade allowances) that were not yet offered to its customers.
As a result, for fiscal 2000 and 2001 and for the nine months
ended August 31, 2002, the Company understated net sales by
$1,884, $784 and $292, respectively.
Furthermore, during fiscal 2001 and for the nine months ended
August 31, 2002,the
(Continued)
95
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Electronics segment was also not reversing earned and
unclaimed sales incentives (i.e., cooperative advertising,
market development and volume incentive rebate funds) upon the
expiration of the established claim period. As a result, for
fiscal 2001 and for the nine months ended August 31, 2002,
the Company understated net sales by $126 and $555,
respectively.
(g) Gain on the Issuance of Subsidiary Shares. During the second
quarter of fiscal 2002, the Company overstated the gain on
issuance of subsidiary shares by $1,735 due to expenses
related to this issuance being charged to additional paid in
capital. This adjustment also reflects the impact of the other
restatement adjustments on the calculation of the gain on the
issuance of subsidiary shares of $179 that was originally
recorded by the Company in the quarter ended May 31, 2002. As
a result, the Company decreased the gain on issuance of
subsidiary shares and increased the additional paid in capital
by $1,556.
(h) Income taxes. Income taxes were adjusted for the restatement
adjustments discussed above for each period presented.
The Company also applied income taxes to minority interest
amounts during all quarters of fiscal 2000 and 2001, as well
as the first three quarters of fiscal 2002. As a result of all
these adjustments, the Company overstated (understated) the
provision for/recovery of income taxes by $(842), ($310) and
$(455) for fiscal 2000, 2001 and the nine months ended August
31, 2002, respectively.
(i) Operating expense reclassification. The Company reclassified
certain costs as operating expenses, which were included as a
component of warehousing and technical support and general and
administrative costs, which should have been classified as a
component of cost of sales. The effect of this
reclassification on fiscal 2000 and 2001 was to increase cost
of sales and decrease operating expenses by $17,962 and
$20,024, respectively. The effect of this reclassification for
the nine months ended August 31, 2002 was to understate cost
of sales and overstate operating expenses by $15,488. This
reclassification did not have any effect on previously
reported net income or loss for any fiscal year or period
presented herein. This reclassification reduced gross margin
by 1.0, 1.6 and 1.9 percentage points for fiscal years
November 30, 2000, 2001 and the nine months ended August 31,
2002, respectively.
(Continued)
96
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following represents the effect of the restatement and
reclassification adjustments in the fiscal 2000 and 2001 consolidated
statements of operations and consolidated balance sheet:
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOVEMBER 30, 2000
--------------------------------------------------------------------
RESTATEMENT RECLASSIFICATION
AS REPORTED(1) ADJUSTMENTS ADJUSTMENTS AS RESTATED
----------- ----------- ------------ -----------
Net sales $1,687,573 $ (17,282)(2)(5) - $1,670,291
Cost of sales 1,552,091 (18,387)(2) $ 17,962(3) 1,551,666
---------- ---------- ---------- ----------
Gross profit 135,482 1,105 (17,962) 118,625
---------- ---------- ---------- ----------
Operating expenses:
Selling 29,056 - - 29,056
General and administrative 49,800 - (3,334)(3) 46,466
Warehousing and technical support 18,102 - (14,628)(3) 3,474
---------- ---------- ---------- ----------
Total operating expenses 96,958 - (17,962) 78,996
---------- ---------- ---------- ----------
Operating income (loss) 38,524 1,105 - 39,629
Total other income (expense), net 2,514 - - 2,514
---------- ---------- ---------- ----------
Income (loss) before provision for (recovery of)
income taxes minority interest and
extraordinary item 41,038 1,105 - 42,143
Provision for (recovery of) income taxes 14,924 842(4) - 15,766
Minority interest (1,074) - - (1,074)
---------- ---------- ---------- -----------
Income (loss) before extraordinary item 25,040 263 - 25,303
---------- ----------
Extraordinary item-gain on extinguishment of
debt 2,189 - - 2,189
---------- ---------- ---------- ----------
Net income (loss) $ 27,229 $ 263 - $ 27,492
========== ========== ========== ==========
Net income (loss) per common share (basic)
before extraordinary item $ 1.17 $ 0.02 - $ 1.19
Extraordinary item-gain on extinguishment
of debt 0.10 - - 0.10
---------- ---------- ---------- ----------
Net income (loss) per common share (basic) $ 1.27 $ 0.02 - $ 1.29
========== ========== ========== ==========
Net income (loss) per common share (diluted)
before extraordinary item $ 1.11 $ 0.01 - $ 1.12
Extraordinary item-gain on extinguishment
of debt 0.10 - - 0.10
---------- ---------- ---------- ----------
Net income (loss) per common share (diluted) $ 1.21 $ 0.01 - $ 1.22
========== ========== ========== ==========
Weighted average number of common shares
outstanding (basic) 21,393,566 21,393,566
========== ==========
Weighted average number of common shares
outstanding (diluted) 22,565,806 22,565,806
========== ==========
(1) Includes reclassification of sales incentives (previously reported in
operating expenses) and shipping and handling costs (previously reported in
operating expenses) pursuant to EITF 01-9 and 00-10, respectively.
(Continued)
97
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) Amounts reflect adjustments for (a) revenue recognition.
(3) Amounts reflect adjustments for (i) operating expense reclassification.
(4) Amounts restated to reflect adjustments for (h) income taxes.
(5) Amounts reflect adjustments for (f) sales incentives.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOVEMBER 30, 2001
--------------------------------------------------------------------
RESTATEMENT RECLASSIFICATION
AS REPORTED(1) ADJUSTMENTS ADJUSTMENTS AS RESTATED
----------- ----------- ------------- -----------
Net sales $1,256,634 $ 19,957(2)(6) - $1,276,591
Cost of sales 1,167,208 17,969(2)(4) $ 20,024(3) 1,205,201
---------- -------- ---------- ----------
Gross profit 89,426 1,988 (20,024) 71,390
---------- -------- ---------- ----------
Operating expenses:
Selling 30,039 - - 30,039
General and administrative 46,405 687(4) (587)(3) 46,505
Warehousing and technical support 23,519 - (19,437)(3) 4,082
---------- -------- ---------- ----------
Total operating expenses 99,963 687 (20,024) 80,626
----------- -------- ---------- ----------
Operating income (loss) (10,537) 1,301 - (9,236)
Total other income (expense), net (2,246) - (2,246)
---------- ---------- ----------
Income (loss) before provision for (recovery of)
income taxes and minority interest (12,783) 1,301 - (11,482)
Provision for (recovery of) income taxes (3,937) 310(5) - (3,627)
Minority interest 637 20(7) - 657
---------- -------- ---------- ----------
Net income (loss) $ (8,209) $ 1,011 - $ (7,198)
========== ======== ========== ==========
Net income (loss) per common share (basic) $ (0.38) $ 0.05 - $ (0.33)
========== ======== ========== ==========
Net income (loss) per common share (diluted) $ (0.38) $ 0.05 - $ (0.33)
========== ======== ========== ==========
Weighted average number of common shares
outstanding (basic) 21,877,100 21,877,100
========== ==========
Weighted average number of common shares
outstanding (diluted) 21,877,100 21,877,100
========== ==========
(1) Includes reclassification of sales incentives (previously reported in
operating expenses) and shipping and handling costs (previously reported in
operating expenses) pursuant to EITF 01-9 and 00-10, respectively.
(2) Amounts reflect adjustments for (a) revenue recognition and (b) timing of
revenue .
(3) Amounts reflect adjustments for (i) operating expense reclassification.
(4) Amount reflect adjustments for (c) litigation.
(5) Amount restated to reflect adjustments for (h) income taxes.
(6) Amount reflect adjustments for (f) sales incentives.
(7) Amount reflects impact of the restatement adjustments on minority interest.
(Continued)
98
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOVEMBER 30, 2001
---------------------------
RESTATEMENT
AS REPORTED ADJUSTMENTS AS RESTATED
----------- ----------- -----------
ASSETS
Current assets:
Cash $ 3,025 - $ 3,025
Accounts receivable, net 238,476** $ (119) 238,357
Inventory, net 225,662 97 225,759
Receivable from vendor 6,919 (91) 6,828
Prepaid expenses and other current assets 7,632 7 7,639
Deferred income taxes, net 11,997 (32) 11,965
---------- -------- --------
Total current assets 493,711 (138) 493,573
Investment securities 5,777 - 5,777
Equity investments 10,268 - 10,268
Property, plant and equipment, net 25,687 - 25,687
Excess cost over fair value of assets acquired and other intangible
assets, net 4,742 - 4,742
Deferred income taxes, net 3,148 - 3,148
Other assets 1,302 - 1,302
---------- -------- --------
Total assets $ 544,635 $ (138) $544,497
========== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 57,162 - $ 57,162
Accrued expenses and other current liabilities 41,854 $ 283 42,137
Accrued sales incentives 11,267 (2,793) 8,474
Income taxes payable 3,035 1,119 4,154
Bank obligations 92,213 - 92,213
Notes payable 5,267 - 5,267
---------- -------- --------
Total current liabilities 210,798 (1,391) 209,407
Long-term debt - - -
Capital lease obligation 6,196 - 6,196
Deferred income taxes payable - - -
Deferred compensation 3,844 - 3,844
---------- -------- --------
Total liabilities 220,838 (1,391) 219,447
---------- -------- --------
Minority interest 1,851 (21) 1,830
---------- -------- --------
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 - 2,500
Common stock:
Class A 207 - 207
Class B 22 - 22
Paid-in capital 250,785 - 250,785
Retained earnings 82,162 1,274 83,436
Accumulated other comprehensive loss (6,344) - (6,344)
Treasury stock, at cost, 909,537 and 1,072,737 Class A common
stock 2001 and 2002, respectively (7,386) - (7,386)
---------- -------- --------
Total stockholders' equity 321,946 1,274 323,220
---------- -------- --------
Commitments and contingencies
Total liabilities and stockholders' equity $ 544,635 $ (138) $544,497
========== ======== ========
** The Company reclassified $11,267 of sales incentives from accounts
receivable to accrued sales incentives.
(Continued)
99
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As a result of the restatement for fiscal 2000 and 2001, there has not
been any changes to the Company's cash flows from operations, investing
activities, or financing activities from previously reported amounts.
(3) Issuance of Subsidiary Shares
On May 29, 2002, Toshiba Corporation (Toshiba) purchased an additional
20% of ACC, approximately 31 shares at approximately $774 per share,
for approximately $23,900 in cash, bringing Toshiba's total ownership
interest in Audiovox Communications Corp. (ACC) to 25%. In addition,
Toshiba paid $8,100 in exchange for an $8,100 convertible subordinated
note (the Note). The Note bears interest at a per annum rate equal to 1
3/4% and interest is payable annually on May 31st of each year,
commencing May 31, 2003. The unpaid principal amount shall be due and
payable, together with all unpaid interest, on May 31, 2007 and
automatically renews for an additional five years. In accordance with
the provisions of the Note, Toshiba may convert the balance of the Note
into additional shares of ACC in order to maintain a 25% interest in
ACC, but under no circumstances can Toshiba convert the Note to exceed
a 25% interest in ACC.
In connection with the transaction, the Company, ACC and Toshiba
entered into a stockholders agreement. The stockholders agreement
provides for the composition of the board of directors of ACC and
identifies certain items, other than in the ordinary course of
business, that ACC cannot do without prior approval from Toshiba. The
agreement does not require or preclude ACC from paying dividends on a
pro-rata basis. The agreement may be terminated upon the mutual written
agreement of the parties, if the distribution agreement is terminated
or if either party commences a bankruptcy or similar proceeding.
The Company has historically been the exclusive distributor for Toshiba
in the United States and Canada. In connection with the transaction,
ACC and Toshiba formalized this distribution arrangement whereby ACC is
Toshiba's exclusive distributor for the sale of Toshiba products in the
United States, Canada, Mexico and all countries in the Caribbean and
Central and South America through May 29, 2007. The distribution
agreement provides for 30-day payment terms. The distribution agreement
established certain annual minimum purchase targets for ACC's purchase
of Toshiba products for each fiscal year during the entire term of the
agreement. In the event that ACC fails to meet the minimum purchase
target, Toshiba shall have the right to convert ACC's exclusive
distributorship to a non-exclusive distributorship for the remaining
term of the agreement. Also, in accordance with the terms of the
stockholders agreement, upon the termination of the distribution
agreement in accordance with certain terms of the distribution
agreement, Toshiba maintains a put right and the Company a call right,
to repurchase all of the shares held by the other party for a price
equal to the fair market value of the shares as calculated in
accordance with the agreement. Pursuant to the agreement, the put right
is only exercisable if ACC terminates the distribution agreement or if
another strategic investor acquires a direct or indirect equity
ownership interest in excess of 20% in the Company. The call right is
only exercisable if Toshiba elects to terminate the distribution
agreement after its initial
(Continued)
100
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
five (5) year term.
Additionally, ACC entered into an employment agreement with the
President and Chief Executive Officer (the Executive) of ACC through
May 29, 2007. Under the agreement, ACC is required to pay the Executive
an annual base salary of $500 in addition to an annual bonus equal to
2% of ACC's annual earnings before income taxes. The Company, under the
employment agreement, was required to establish and pay a bonus of
$3,200 to key employees of ACC, including the Executive, to be
allocated by the Executive. The bonus was for services previously
rendered and, accordingly, the bonus has been included in general and
administrative expenses in the accompanying statements of operations
for the year ended November 30, 2002. The Executive was required to
utilize all or a portion of the bonus allocated to him to repay the
remaining outstanding principal and accrued interest owed by the
Executive to the Company pursuant to the unsecured promissory note in
favor of the Company. During the year ended November 30, 2002, the
Executive was paid $1,800 less an amount outstanding under a promissory
note of $651.
As a result of the issuance of ACC's shares, the Company recognized a
gain, net of expenses of $1,735, of $14,269 ($8,847 after provision
for deferred taxes) during the quarter ended May 31, 2002. The gain
represents the excess of the sale price per share over the carrying
amount per share multiplied by the number of shares issued to Toshiba.
The gain on the issuance of the subsidiary's shares has been recognized
in the accompanying consolidated statements of operations for the year
ended November 30, 2002 in accordance with the Company's policy on the
recognition of such transactions, which is an allowable method under
Staff Accounting Bulleting Topic 5.H.
Toshiba's minority interest income (expense) in ACC included in the
years ended November 30, 2000, 2001 and 2002 was ($1,094), $501 and
$4,741 , respectively. Minority interest is included in the pre-tax
income (loss) in the segment data.
(4) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
For the Years Ended November 30,
--------------------------------
2000 2001 2002
---- ---- ----
Cash paid during the years for:
Interest, excluding bank charges $ 4,870 $ 3,883 $ 1,303
Income taxes $21,069 $ 3,550 $ 2,478
Non-cash Transactions:
During 2000, the Company exercised its option to convert 800,000
Japanese yen (approximately
(Continued)
101
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
$7,595) of Shintom Co. Ltd. (Shintom) convertible debentures (Shintom
debentures) into approximately 33,900,000 shares of Shintom common
stock, respectively (Note 9).
During the years ended November 30, 2000, 2001 and 2002, the Company
recorded an unrealized holding gain (loss) relating to
available-for-sale marketable equity securities, net of deferred income
taxes, of $(10,119), $(831) and $422, respectively, as a separate
component of accumulated other comprehensive income (loss) (Note 19).
During 2000, $535 of its $65,000 6 1/4% subordinated debentures were
converted into 30,170 shares of Class A common stock (Note 15).
During 2001, 314,800 warrants were exercised and converted into 314,800
shares of common stock (Note 18(d)).
(5) Transactions With Major Suppliers
(a) ACC Dividend
In February 2001, the board of directors of ACC declared a
dividend payable to its shareholders, Audiovox Corporation, a
then 95% shareholder, and Toshiba, a then 5% shareholder for
their respective share of net income for the previous fiscal
years. ACC paid Toshiba its share of the dividend, which
approximated $1,034 in the first quarter of 2001. There were
no dividends declared during fiscal 2002.
(b) Sale/Leaseback Transaction
In April 2000, AX Japan purchased land and a building (the
Property) from Shintom Co., Ltd. (Shintom) for 770,000,000 Yen
(approximately $7,300) and entered into a leaseback agreement
whereby Shintom leased the Property from AX Japan for a
one-year period. This lease is being accounted for as an
operating lease by AX Japan. Shintom is a stockholder who owns
all of the outstanding preferred stock of the Company and is a
manufacturer of products purchased by the Company through its
previously-owned equity investee, TALK Corporation (TALK). The
Company currently holds stock in Shintom and has previously
invested in Shintom convertible debentures (Note 9).
The purchase of the Property by AX Japan was financed with a
500,000,000 Yen ($4,671) subordinated loan obtained from Vitec
Co., Ltd. (Vitec), a 150,000,000 Yen loan ($1,397) from Pearl
First (Pearl) and a 140,000,000 Yen loan ($1,291) from the
Company. The land and building have been included in property,
plant and equipment, and the loans have been recorded as notes
payable on the accompanying consolidated balance sheet as of
November 30, 2001 . Changes arising from the fluctuations in
the Yen exchange rate have been reflected as a component of
accumulated other comprehensive loss on the accompanying
consolidated balance sheets. Vitec is a major supplier to
Shintom,
(Continued)
102
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
and Pearl is an affiliate of Vitec. The loans bear interest at
5% per annum, and principle is payable in equal monthly
installments over a six-month period beginning six months
subsequent to the date of the loans. The loans from Vitec and
Pearl are subordinated completely to the loan from the Company
and, in liquidation, the Company receives payment first.
Upon the expiration of six months after the transfer of the
title to the Property to AX Japan, Shintom had the option to
repurchase the Property or purchase all of the shares of stock
of AX Japan. This option could be extended for one additional
six month period. The option to repurchase the building is at
a price of 770,000,000 Yen plus the equity capital of AX Japan
(which in no event can be less than 60,000,000 Yen) and can
only be made if Shintom settles any rent due AX Japan pursuant
to the lease agreement. The option to purchase the shares of
stock of AX Japan is at a price not less than the aggregate
par value of the shares and, subsequent to the purchase of the
shares, AX Japan must repay the outstanding loan due to the
Company. If Shintom does not exercise its option to repurchase
the Property or the shares of AX Japan, or upon occurrence of
certain events, AX Japan can dispose of the Property as it
deems appropriate. The events which result in the ability of
AX Japan to be able to dispose of the Property include Shintom
petitioning for bankruptcy, failing to honor a check, failing
to pay rent, etc. If Shintom fails, or at any time becomes
financially or otherwise unable to exercise its option to
repurchase the Property, Vitec has the option to repurchase
the Property or purchase all of the shares of stock of AX
Japan under similar terms as the Shintom options.
AX Japan had the option to delay the repayment of the loans
for an additional six months if Shintom extended its options
to repurchase the Property or stock of AX Japan. In September
2000, Shintom extended its option to repurchase the Property
and AX Japan delayed its repayment of the loans for an
additional six months.
In March 2001, upon the expiration of the additional six-month
period, the Company and Shintom agreed to extend the lease for
an additional one-year period. In addition, Shintom was again
given the option to purchase the Property or shares of stock
of AX Japan after the expiration of a six-month period or
extend the option for one additional six-month period. AX
Japan was also given the option to delay the repayment of the
loans for an additional six months if Shintom extended its
option for an additional six months.
In October 2002, the Company sold all of its shares in AX
Japan to RMS Co., Ltd., an unrelated party to the Company. The
purchase price of the shares was 60,000 Yen. As a result of
this transaction, the purchaser repaid in full 113,563 Yen
which represented the full balance of amounts then owed to the
Company by AX Japan. The agreement required the purchaser to
immediately change the name of AX Japan to RMS Co., Ltd., and
the Company resigned from all officer and board of directors
positions. The
(Continued)
103
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Company has no further relationship or obligations, whether
contingent or direct to RMS Co., Ltd., formerly known as AX
Japan.
As a result of the completion of this transaction, all assets
and liabilities of Audiovox Japan have been removed from the
accompanying consolidated balance sheet as of November 30,
2002, specifically the land and the building and the notes
payable for the Vitec Co., Ltd (Vitec) 150,000 Yen loan and
the Pearl First (Pearl) a 140,000 Yen loan. As a result of
this transaction, the Company recovered in Yen its initial
investment in AX Japan as well as its loan to finance the
purchase of the land and building. However, the Company
recognized a $338 loss on the sale of its shares in AX Japan,
as the sales price was less than the value of the net assets
of AX Japan sold to Vitec. Contributing to the loss on sale
were foreign currency loss and other expenses that will not be
recovered. The loss on the sale of the shares of AX Japan has
been included in other net on the accompanying consolidated
statements of operations for the year ended November 30, 2002.
In connection with the April 2000 transaction, the Company
received 100,000,000 Yen ($922) from Shintom for its 2,000
shares of TALK stock. The Company had the option to repurchase
the shares of TALK at a purchase price of 50,000 Yen per
share, with no expiration date. Given the option to repurchase
the shares of TALK, the Company did not surrender control over
the shares of TALK and, accordingly, had not accounted for
this transaction as a sale. In August 2000, the Company
surrendered its option to repurchase the shares of TALK. As
such, the Company recorded a gain on the sale of shares in the
amount of $427 in August 2000.
(c) Inventory Purchases - Shintom and TALK
The Company engages in transactions with Shintom and TALK.
TALK, which holds world-wide distribution rights for product
manufactured by Shintom, has given the Company exclusive
distribution rights on all wireless personal communication
products for all countries except Japan, China, Thailand and
several mid-eastern countries. Through October 2000, the
Company held a 30.8% interest in TALK. The Company no longer
holds an equity interest in TALK.
Transactions with Shintom and TALK include financing
arrangements and inventory purchases which approximated 7%,
1.5% and 0.7% for the years ended November 30, 2000, 2001 and
2002, respectively, of total inventory purchases. At November
30, 2000, 2001 and 2002, the Company had recorded $1, $331 and
$13, respectively, of liability due to TALK for inventory
purchases included in accounts payable. There were no
documentary acceptance obligations payable to TALK as of
November 30, 2000, 2001 and 2002. At November 30, 2000, 2001
and 2002, the Company had recorded a receivable from TALK in
the amount of $3,823, $265 and $0, respectively, a portion of
which is payable with interest (Note 8), which is reflected in
receivable from vendors
(Continued)
104
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
on the accompanying consolidated financial statements.
(d) Inventory Purchases - Other
Inventory purchases from two major suppliers approximated 72%,
75% and 67% of total inventory purchases for the years ended
November 30, 2000, 2001 and 2002, respectively. Although there
are a limited number of manufacturers of its products,
management believes that other suppliers could provide similar
products on comparable terms. A change in suppliers, however,
could cause a delay in product availability and a possible
loss of sales, which would affect operating results adversely.
(6) Business Acquisition
On March 15, 2002, Code Systems, Inc. (Code), a wholly-owned subsidiary
of Audiovox Electronics Corp., purchased certain assets of Code-Alarm,
Inc., an automotive security product company. The 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, however, in accordance with the terms of the agreement, the
CSI debenture has an initial estimated value of $40,000. The payment of
any amount under the terms of the CSI Debenture is based on performance
and is scheduled to occur in the first calendar quarter of 2006. The
Company accounted for the transaction in accordance with the purchase
method of accounting. As a result of the transaction, goodwill of
$1,854 was recorded. The allocation of the purchase price is pending
the final determination of certain acquired balances. Any payments made
under the terms of the CSI Debenture in the future will be reflected as
a component of goodwill. Proforma results of operations were not
provided as the amounts were deemed immaterial to the consolidated
financial statements of the Company.
Simultaneous with this business acquisition, the Company entered into a
purchase and supply agreement with a third party. Under the terms of
this agreement, the third party will purchase or direct its suppliers
to purchase certain products from the Company. In exchange for entering
into this agreement, the Company issued 50 warrants in its subsidiary,
Code, which vest immediately. These warrants were deemed to have
minimal value based upon the 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 these warrants, no recognition was given to these contingent
warrants in the accompanying consolidated financial statements.
(Continued)
105
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) Accounts Receivable
Accounts receivable is comprised of the following:
November 30,
-------------------------
2001 2002
---- ----
As Restated
-----------
Trade accounts receivable and other $245,289 $195,228
Less:
Allowance for doubtful accounts 4,715 6,829
Allowance for cellular deactivations 2,035 1,628
Allowance for cash discounts 182 207
-------- --------
$238,357 $186,564
======== ========
(8) Receivable from Vendor
The Company recorded receivable from vendor in the amount of $6,828 and
$14,174 as of November 30, 2001 and 2002, respectively. Receivable from
vendor represents prepayments on product shipments, defective product
reimbursements and interest receivable at a rate of 4.03% at November
30, 2001, on amounts due from TALK (Note 5) and $4,550 at November 30,
2001 for reimbursements for costs incurred by the Company for upgrades
that were performed by the Company in 2001 on certain models which
Toshiba manufactured. At November 30, 2002, the Company recorded
receivables from Toshiba aggregating approximately $12,219 for price
protection and software upgrades. Subsequent to November 30, 2002 the
receivables from Toshiba were paid in full.
(9) Investment Securities
As of November 30, 2001, the Company's investment securities consist of
$1,933 of available-for- sales marketable securities, which consist
primarily of 1,530,000 shares of CellStar Common Stock and 1,904,000
shares of Shintom common stock and trading securities of $3,844, which
consist of mutual funds that are held in connection with the deferred
compensation plan. As of November 30, 2002, the Company's investment
securities consist of $1,455 of available-for- sales marketable
securities, which relates to 306,000 shares (after a 5 for 1 reverse
stock split) of CellStar Common Stock, 1,904,000 shares of Shintom
Common Stock and trading securities of $3,949 which consist of mutual
funds that are held in connection with the deferred compensation plan.
During the fourth quarter of fiscal 2002, the Company recorded a $1,158
other-than-temporary impairment of its Shintom common stock.
(Continued)
106
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The cost, gross unrealized gains and losses and aggregate fair value of
the investment securities available-for-sale as of November 30, 2001
and 2002 were as follows:
2001 2002
---------------------------------------- --------------------------------------------------------
Gross Gross Other-than-
Unrealized Aggregate Unrealized Temporary Aggregate
Holding Fair Holding Impairment Fair
Cost Gain (Loss) Value Cost Gain (Loss) Charge Value
---- ----------- ------- ---- ----------- ------- ------
CellStar Common
Stock $ 2,401 $ (1,055) $ 1,346 $ 2,401 $ (966) - $ 1,435
Shintom Common
Stock 1,179 (592) 587 1,179 - $ (1,158) 21
------- --------- ------- ------- ------- --------- -------
$ 3,580 $ (1,647) $ 1,933 $ 3,580 $ (966) $ (1,158) $ 1,456
======= ========= ======= ======= ======= ========= =======
Related deferred tax assets of $626 and $599 were recorded at November
30, 2001 and 2002, respectively, as a reduction to the unrealized
holding loss included in accumulated other comprehensive loss.
During 2000, the Company exercised its option to convert 800,000
Japanese yen of Shintom debentures into shares of Shintom common stock.
The Company sold the Shintom common stock, yielding net proceeds of
$12,376 and a gain of $1,850.
During 2000, the Company sold 200,000 shares of its CellStar common
stock yielding net proceeds of $851 and a gain of $537.
During the fourth quarter of fiscal 2002, the Company recorded a $1,158
other-than-temporary impairment of its Shintom common stock.
During 2001 and 2002, the net unrealized holding loss on trading
securities that has been included in earnings is $779 and $558,
respectively.
(Continued)
107
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) Property, Plant and Equipment
A summary of property, plant and equipment, net, is as follows:
November 30,
--------------------------
2001 2002
---- ----
Land $ 4,493 $ 363
Buildings 4,168 1,605
Property under capital lease 7,246 7,142
Furniture, fixtures and displays 2,129 2,404
Machinery and equipment 6,590 8,204
Computer hardware and software 13,108 14,467
Automobiles 658 769
Leasehold improvements 4,117 4,305
--------- --------
42,509 39,259
Less accumulated depreciation and amortization (16,822) (20,878)
--------- ---------
$ 25,687 $ 18,381
========= ========
The amortization of the property under capital lease is included in
depreciation and amortization expense.
Computer software includes approximately $2,396 and $1,450 of
unamortized costs as of November 30, 2001 and 2002, respectively,
related to the acquisition and installation of management information
systems for internal use.
Depreciation and amortization of plant and equipment amounted to
$3,426, $4,174 and $4,768 for the years ended November 30, 2000, 2001
and 2002, respectively. Included in accumulated depreciation and
amortization is amortization of computer software costs of $702, $776
and $850 for the years ended November 30, 2000, 2001 and 2002,
respectively. Included in accumulated depreciation and amortization is
amortization of property under capital lease of $240 for each of the
years ended November 30, 2000, 2001 and 2002, respectively.
(11) Equity Investments
As of November 30, 2002, the Company's 72% owned subsidiary, Audiovox
Communications Sdn. Bhd., had a 29% ownership interest in Avx Posse
(Malaysia) Sdn. Bhd. (Posse) which monitors car security commands
through a satellite based system in Malaysia. In addition, the Company
had a 20% ownership interest in Bliss-tel which distributes cellular
telephones and accessories in Thailand, and the Company had 50%
non-controlling ownership interests in three other entities: Protector
Corporation (Protector) which acts as a distributor of chemical
protection treatments; ASA which acts as a distributor to specialized
markets for RV's and van conversions, of televisions and other
automotive sound, security and accessory products;
(Continued)
108
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
and G.L.M. Wireless Communications, Inc. (G.L.M.) which is in the
cellular telephone, pager and communications business in the New York
metropolitan area.
During 2000, the Company entered into an agreement to cease the
operations of its 50% owned investment in Audiovox Pacific Pty.,
Limited, which was a former distributor of cellular telephones and
automotive sound and security products in Australia and New Zealand.
Also during fiscal 2000, the Company entered into an agreement to
transfer to the other equity partner its 50% ownership equity in
Quintex West, which is in the cellular telephone and related
communication products business, as well as the automotive after-market
products business. No consideration was given or no gain or loss was
recorded in connection with either of the above transactions as both
equity investments had been previously written down, and the Company
had no on-going obligations to the entities or the other equity
partner.
The Company previously held a 30.8% investment in TALK which was
disposed of during fiscal 2000 (Notes 5 and 8).
The Company's net sales to the equity investees amounted to $3,233,
$2,656 and $3,504 for the years ended November 30, 2000, 2001 and 2002,
respectively. The Company's purchases from the equity investees
amounted to $119,444, $5,592 and $1,883 for the years ended November
30, 2000, 2001 and 2002, respectively. The Company recorded $1,432,
$746 and $644 of outside representative commission expenses for
activations and residuals generated by G.L.M. on the Company's behalf
during fiscal year 2000, 2001 and 2002, respectively.
Included in accounts receivable at November 30, 2001 and 2002 are trade
receivables due from its equity investments aggregating $561 and $817,
respectively. At November 30, 2001 and 2002, included in accounts
payable and other accrued expenses were obligations to equity
investments aggregating $13 and $6, respectively.
For the years ended November 30, 2000, 2001 and 2002, interest income
earned on equity investment notes and other receivables approximated
$602, $157 and $2, respectively. Interest expense on documentary
acceptances payable to TALK approximated $11 in 2000.
(Continued)
109
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following summary financial information reflects the interest of
ASA. Such summary financial information has been provided herein based
upon the individual significance of this unconsolidated equity
investment to the consolidated financial information of the Company.
Furthermore, based upon the lack of significance to the consolidated
financial information of the Company, no summary financial information
for the Company's other equity investments has been provided herein:
As of November 30,
2001 2002
---- ----
Current assets $18,225 $20,533
Non-current assets 2,395 2,332
Current liabilities 2,794 3,447
Non-current liabilities - -
Members' equity 17,826 19,418
Twelve Months Ended
November 30,
2000 2001 2002
---- ---- ----
Net sales $54,875 $63,336 $44,168
Operating income 2,617 5,581 216
Net income 4,011 6,908 3,486
The Company's share of income from this unconsolidated equity
investment for the fiscal years ended November 30, 2000, 2001 and 2002
was $2,006, $3,454 and $1,743, respectively.
(12) Unearned Revenue
As of November 30, 2001 and 2002, included in accrued expenses and
other current liabilities on the accompanying consolidated balance
sheet, is $8,314 and $0, respectively, of which represents prepayments
for future product shipments. The Company recognized the revenue as
product shipments were made.
(13) Financing Arrangements
(a) Bank Obligations
The Company maintains a revolving credit agreement with
various financial institutions which expires July 27, 2004. As
of November 30, 2002, the credit agreement provided for
$250,000 of available credit (which was subsequently amended
on March 13, 2003 to provide for $200,000 of available
credit), including $15,000 for foreign currency borrowings.
(Continued)
110
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Under the credit agreement, the Company may obtain credit
through direct borrowings and letters of credit. The
obligations of the Company under the credit agreement are
guaranteed by certain of the Company's subsidiaries and is
secured by accounts receivable, inventory and the Company's
shares of ACC. As of November 30, 2002, availability of credit
under the credit agreement was a maximum aggregate amount of
$250,000, subject to certain conditions, based upon a formula
taking into account the amount and quality of its accounts
receivable and inventory. At November 30, 2002, the amount of
unused available credit is $102,491. The credit agreement also
allows for commitments of $50,000 in forward exchange
contracts.
Outstanding short-term obligations under the credit agreement
at November 30, 2001 and 2002 were as follows:
November 30,
------------------------
2001 2002
---- ----
Revolving Credit Notes $13,525 $16,883
Eurodollar Notes 73,000 20,000
-------- -------
$86,525 $36,883
======= =======
Interest rates are as follows: revolving credit notes at Prime
Rate at November 30, 2000, 0.25% above the Prime Rate at
November 30, 2001 and 0.50% above the Prime Rate at November
30, 2002 which was 9.5%, 5.5% and 4.8% at November 30, 2000,
2001 and 2002, respectively. Eurodollar Notes at 1.25% above
Libor at November 30, 2000, 1.75% above Libor at November 30,
2001 and 2.50% above Libor at November 30, 2002 which was
6.8%, 3.4% and 3.9% at November 30, 2000, November 30, 2001
and November 30, 2002, respectively. The Company pays a
commitment fee on the unused portion of the credit line.
The credit agreement contains several covenants requiring,
among other things, minimum levels of pre-tax income and
minimum levels of net worth. Additionally, the agreement
includes restrictions and limitations on payments of
dividends, stock repurchases and capital expenditures.
At May 31, 2001, November 30, 2001 and 2002, and the first
quarter ended February 28, 2002, the Company was not in
compliance with certain of its pre-tax income covenants.
Furthermore, as of November 30, 2002, the Company was also not
in compliance with the requirement to deliver audited
financial statements 90 days after the Company's fiscal year-
end, and as of February 28, 2003, the requirement to deliver
unaudited quarterly financial statements 45 days after the
Company's quarter end. The Company received a waiver for the
November 30, 2001 pre-tax income violation subsequent to its
issuance of the November 30, 2001 financial statements. In
addition, the Company received waivers for the May 31, 2001
and February 28, 2002 violations.
(Continued)
111
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company has not received waivers for the November 30, 2002
violation of a particular pre-tax income covenant or delivery
of audited financial statements 90 days after the Company's
fiscal year-end. Accordingly, as of November 30, 2001 and
2002, the Company's outstanding domestic obligations of
$86,525 and 36,883, have been classified as current on the
accompanying consolidated financial statements, respectively.
Management is in the process of requesting a waiver for the
November 30, 2002 and February 28, 2003 violations. While the
Company was able to obtain waivers for such violations in 2001
and the first quarter ended February 28, 2002, 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. Subsequent to November 30, 2002, the
Company repaid its obligation of $36,883 in full resulting in
bank obligations outstanding at May 15, 2003 of $0. This
credit agreement has no cross covenants with the other credit
facilities described below.
The Company also has revolving credit facilities in Malaysia
(Malaysian Credit Agreement) to finance additional working
capital needs. As of November 30, 2002, the available line of
credit for direct borrowing, letters of credit, bankers'
acceptances and other forms of credit approximated $5,000. The
credit facilities are partially secured by three standby
letters of credit of $1,300, $800 and $800 and are payable
upon demand or upon expiration of the standby letters of
credit on January 15, 2003, August 31, 2003 and August 31,
2003, respectively. The obligations of the Company under the
Malaysian Credit Agreement are also secured by the property
and building owned by Audiovox Communications Sdn. Bhd.
Outstanding obligations under the Malaysian Credit Agreement
at November 30, 2001 and 2002 were approximately $3,514 and
$3,317, respectively. At November 30, 2001, interest on the
credit facility ranged from 6.5% to 7.0%. At November 30,
2002, interest on the credit facility ranged from 4.75% to
6.0%.
As of November 30, 2001 and 2002, Audiovox Venezuela had notes
payable of approximately 1,622,834 and 0 Venezuelan Bolivars
($2,074 and $0 at November 30, 2001 and 2002) outstanding to a
bank. Interest on the notes payable was 10.7%. The notes
payable were secured by a standby letter of credit in the
amount of $3,500 by the Company and was payable upon demand or
upon expiration of the standby letter of credit on May 31,
2002. The Company has not extended this line of credit as of
November 30, 2002.
The Company also has a revolving credit facility in Brazil to
finance additional working capital needs. The Brazilian credit
facility is secured by the Company under a standby letter of
credit in the amount of $200, which expires on December 9,
2002 and is payable on demand or upon expiration of the
standby letter of credit. At November 30, 2001 and 2002,
outstanding obligations under the credit facility were 254 and
172 Brazilian
(Continued)
112
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Bolivars ($100 and $48), respectively, and interest on the
credit facility ranged from 19% to 29%.
At November 30, 2001, the Company had additional outstanding
standby letters of credit aggregating $640 which expire on
various dates from May 2003 to July 2003.
The maximum month-end amounts outstanding under all bank
borrowing facilities during the years ended November 30, 2000,
2001 and 2002 were $156,854, $94,291 and $59,222,
respectively. Average borrowings during the years ended
November 30, 2000, 2001 and 2002 were $52,010, $49,692 and
$21,747, respectively, and the weighted average interest rates
were 8.9%, 8.2% and 9.1%, respectively.
(b) Documentary Acceptances
The Company had various unsecured documentary acceptance lines
of credit available with suppliers to finance inventory
purchases. The Company does not have written agreements
specifying the terms and amounts available under the lines of
credit. There were no documentary acceptances outstanding at
November 30, 2001 and 2002.
The maximum month-end documentary acceptances outstanding and
average borrowings during the year ended November 30, 2002 was
$0 and $85,473, respectively.
(14) Notes Payable
A summary of notes payable follows:
November 30,
--------------------
2001 2002
---- ----
Note payable due to Vitec (Note 5(b)) $ 4,051 -
Note payable due to Pearl (Note 5(b)) 1,216 -
------- -----
$ 5,267 -
======= =====
The notes bear interest at 5% and are payable in equal monthly
installments over a six-month period beginning in October 2000. As a
result of the extension of Shintom's option to repurchase the Property
or purchase all of the shares of stock of AX Japan (Note 5(b)), the
commencement of repayment was delayed to April 2001 and again to March
2002. Accordingly, the notes payable have been classified as current in
the accompanying consolidated balance sheet as of November 30, 2001. In
connection with the sale of the shares of Audiovox Japan, the notes
have been eliminated from the accompanying consolidated balance sheet
as of November 30, 2002.
(Continued)
113
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) Long-Term Debt
On March 15, 1994, the Company completed the sale of $65,000, 6 1/4%
subordinated debentures due 2001 and entered into an indenture
agreement. The subordinated debentures were convertible into shares of
the Company's Class A common stock, par value $.01 per share at an
initial conversion price of $17.70 per share, subject to adjustment
under certain circumstances. The indenture agreement contained various
covenants. The bonds were subject to redemption by the Company in
whole, or in part, at any time after March 15, 1997, at certain
specified amounts. On May 9, 1995, the Company issued warrants to
certain beneficial holders of these subordinated debentures.
During fiscal 2000, holders of the Company's $65,000, 6 1/4%
subordinated convertible debentures exercised their option to convert
$534 debentures for 30,170 shares of the Company's Class A common
stock. As a result of this conversion and the conversions that took
place prior to 2000, the remaining subordinated debentures of $486 was
included as current installments of long-term debt at November 30,
2000. During 2001, the Company paid $486 to the remaining holders of
the Company's subordinated convertible debentures as such there is no
convertible debentures outstanding at November 30, 2001 or 2002.
On October 20, 1994, the Company issued a note payable for 500,000
Japanese Yen to finance its investment in TALK (Note 4(c)). The note
was scheduled to be repaid on October 20, 2004 and bore interest at
4.1%. The note could be repaid by cash payment or by giving 10,000
shares of its TALK investment to the lender. The lender had an option
to acquire 2,000 shares of TALK held by the Company in exchange for
releasing the Company from 20% of the face value of the note at any
time after October 20, 1995. In October 2000, the Company exercised its
option to repay the note by returning the 10,000 shares of its TALK
investment to the lender. In connection with the transaction, the
Company recognized an extraordinary gain in the amount of $2,189
representing the difference between the loan, which approximated
$4,578, and the Company's recorded investment in TALK, which
approximated $2,389, at the time of the transaction.
On May 29, 2002, Toshiba purchased an additional 20% of ACC. In
connection with the transaction, an $8,100 convertible subordinated
note (the Note) was issued to Toshiba. The Note bears interest at a per
annum rate equal to 1 3/4% and interest is payable annually on May 31st
of each year, commencing May 31, 2003. The unpaid principle amount
shall be due and payable, together with all unpaid interest, on May 31,
2007 and automatically renews for an additional five years. In
accordance with the provisions of the Note, Toshiba may convert the
balance of the Note into additional shares of ACC in order to maintain
a maximum 25% interest in ACC.
(Continued)
114
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16) Income Taxes
The components of income (loss) before the provision for (recovery of)
income taxes are as follows:
November 30,
-----------------------------------------
2000 2001 2002
---- ---- ----
As Restated As Restated
----------- -----------
Domestic Operations $39,317 $ (11,535) $(7,584)
Foreign Operations 2,826 53 1,181
------- --------- -------
$42,143 $ (11,482) $(6,403)
======= ========= =======
Total income tax expense (benefit) was allocated as follows:
November 30,
------------------------------------
2000 2001 2002
---- ---- ----
As Restated As Restated
----------- -----------
Statement of operations $15,766 $ (3,627) $12,932
Stockholders' equity:
Unrealized holding gain (loss) on
investment securities recognized
for financial reporting purposes (6,202) (509) 260
Unrealized holding gain (loss) on
equity collar recognized for
financial reporting purposes 570 - -
Income tax benefit of employee stock
option exercises (1,270) - (17)
------- -------- -------
Total income tax expense
(benefit) $ 8,864 $ (4,136) $13,175
======= ======== =======
(Continued)
115
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The provision for (recovery of) income taxes is comprised of:
Federal Foreign State Total
------- ------- ----- -----
2000:
As Restated
Current $ 19,210 $ 656 $ 1,934 $ 21,800
Deferred (4,481) (704) (849) (6,034)
-------- -------- -------- --------
$ 14,729 $ (48) $ 1,085 $ 15,766
======== ======== ======== ========
2001:
As Restated
Current $ (1,751) $ 359 $ 1,097 $ (295)
Deferred (2,407) 153 (1,078) (3,332)
-------- -------- -------- --------
$ (4,158) $ 512 $ 19 $ (3,627)
======== ======== ======== ========
2002:
Current $ (525) $ 1,604 $ 1,949 $ 3,028
Deferred 8,645 180 1,079 9,904
-------- -------- -------- --------
$ 8,120 $ 1,784 $ 3,028 $ 12,932
======== ======== ======== ========
A reconciliation of the provision for income taxes computed at the
Federal statutory rate to income (loss) before income taxes and
minority interest and the actual provision for income taxes is as
follows:
November 30,
------------------------------------------------------------------------------
2000 2001 2002
---------------------- ------------------------- ---------------------------
As Restated As Restated
---------------------- -------------------------
Tax provision at Federal statutory
rates $14,750 35.0% $(4,019) (35.0)% $(2,241) (35.0)%
State income taxes, net of Federal
benefit 705 1.7 12 0.1 338 5.3
Increase (decrease) in beginning-
of-the-year balance of the
valuation allowance for
deferred tax assets (1,041) (2.5) (227) (2.0) 13,090 204.4
Foreign tax rate differential (59) (0.1) 448 4.0 1,372 21.4
Permanent and other, net 1,411 3.3 159 1.3 373 5.9
------- ----- ------- ------- ------- -----
$15,766 37.4% $(3,627) (31.6)% $12,932 202.0%
======= ===== ======= ======= ======= =====
(Continued)
116
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The significant components of deferred income tax (recovery) expense
for the years ended November 30, 2001 and 2002 are as follows:
November 30,
---------------------------
2001 2002
---- ----
As Restated
-----------
Deferred tax expense (recovery) (exclusive of the
effect of other components listed below) $ (3,105) $ (3,186)
Increase (decrease) in beginning-of-the-year balance of
the valuation allowance for deferred tax assets (227) 13,090
--------- ----------
$ (3,332) $ 9,904
========= ==========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred liabilities are presented
below:
November 30,
---------------------------
2001 2002
---- ----
As Restated
-----------
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts and cellular deactivations $ 1,971 $ 1,723
Inventory, principally due to additional costs
capitalized for tax purposes pursuant to the Tax
Reform Act of 1986 1,043 1,617
Inventory, principally due to valuation reserve 5,421 7,521
Accrual for future warranty costs 3,241 3,249
Plant, equipment and certain intangibles, principally
due to depreciation and amortization 1,442 1,863
Net operating loss carryforwards, federal, state and
foreign 870 4,926
Foreign tax credits - 1,347
Accrued liabilities not currently deductible and other 746 520
Investment securities 463 719
Deferred compensation plans 1,492 1,537
-------- --------
Total gross deferred tax assets 16,689 25,022
Less: valuation allowance (116) (13,206)
-------- ---------
Net deferred tax assets 16,573 11,816
-------- --------
Deferred tax liabilities:
Issuance of subsidiary shares (1,460) (6,867)
-------- ---------
Total gross deferred tax liabilities (1,460) (6,867)
-------- ---------
Net deferred tax asset $ 15,113 $ 4,949
======== ========
(Continued)
117
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The net change in the total valuation allowance for the year ended
November 30, 2002 was an increase of $13,090, primarily resulting from
a valuation allowance recorded on certain of ACC's deferred tax assets.
After this valuation allowance, the net deferred tax assets remaining
on the consolidated balance sheet represent deferred tax assets
generated from the Electronics Group.
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.
Based on the Electronics Group's ability to carry back future reversals
of deferred tax assets to taxes paid in current and prior years and the
Electronics Group's historical taxable income record, adjusted for
unusual items, management believes it is more likely than not that the
Electronics Group will realize the benefit of the net deferred tax
assets existing at November 30, 2002. Further, management believes the
existing net deductible temporary differences will reverse during
periods in which the Electronics Group generates net taxable income.
There can be no assurance, however, that the Company will generate any
earnings or any specific level of continuing earnings in the future.
The amount of the deferred tax asset considered realizable by the
Electronics Group, therefore, could be reduced in the near term if
estimates of future taxable income during the carryforward period are
reduced.
At November 30, 2002, the Wireless Group had a net operating loss
carryforward for federal income tax purposes of approximately $7,468,
which is available to offset future taxable income, if any, which will
expire through the year ended November 30, 2022.
(17) Capital Structure
The Company's capital structure is as follows:
Voting
Rights
Par Shares Per Liquidation
Security Value Shares Authorized Outstanding Share Rights
-------- ----- ------------------------------ ------------------------------ ----- ------
November 30, November 30,
------------------------------ ------------------------------
2001 2002 2001 2002
---- ---- ---- ----
$50 per
Preferred Stock $50.00 50,000 50,000 50,000 50,000 - share
Series Preferred Stock 0.01 1,500,000 1,500,000 - - - -
Ratably
with
Class A Common Stock 0.01 60,000,000 60,000,000 19,706,309 19,559,445 One Class B
Ratably
with
Class B Common Stock 0.01 10,000,000 10,000,000 2,260,954 2,260,954 Ten Class A
(Continued)
118
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The holders of Class A and Class B common stock are entitled to receive
cash or property dividends declared by the Board of Directors. The Board
can declare cash dividends for Class A common stock in amounts equal to
or greater than the cash dividends for Class B common stock. Dividends
other than cash must be declared equally for both classes. Each share of
Class B common stock may, at any time, be converted into one share of
Class A common stock.
The 50,000 shares of non-cumulative Preferred Stock outstanding are owned
by Shintom (see Notes 5 and 9) and have preference over both classes of
common stock in the event of liquidation or dissolution.
The Company's Board of Directors approved the repurchase of 1,563,000
shares of the Company's Class A common stock in the open market under a
share repurchase program (the Program). As of November 30, 2001 and 2002,
909,537 and 1,072,737 shares, respectively, were repurchased under the
Program at an average price of $8.12 and $7.93 per share, respectively,
for an aggregate amount of $7,386 and $8,511, respectively.
As of November 30, 2001 and 2002, 2,916,653 and 2,900,317 shares of the
Company's Class A common stock are reserved for issuance under the
Company's Stock Option and Restricted Stock Plans. There were no
convertible securities or warrants outstanding for the Company at
November 30, 2001 and 2002 (Notes 15 and 18(d)). Warrants are outstanding
that may be converted into shares of Code (Note 6).
In February 2000, the Company sold, pursuant to an underwritten public
offering, 2,300,000 shares of its Class A common stock at a price of
$45.00 per share. The Company received $96,573 in net proceeds after
deducting underwriting commission and offering expenses. The net proceeds
from the offering were used to repay a portion of amounts outstanding
under the revolving credit facility.
On April 6, 2000, the stockholders approved a proposal to amend the
Company's Certificate of Incorporation to increase the number of
authorized shares of Class A common stock, par value $.01, from
30,000,000 to 60,000,000.
Undistributed earnings from equity investments included in retained
earnings amounted to $3,742 and $4,496 at November 30, 2001 and 2002,
respectively.
(18) Stock-Based Compensation and Retirement Plans
(a) Stock Options
The Company has stock option plans under which employees and
non-employee directors may be granted incentive stock options
(ISO's) and non-qualified stock options (NQSO's)
(Continued)
119
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
to purchase shares of Class A common stock. Under the plans, the
exercise price of the ISO's will not be less than the market value
of the Company's Class A common stock or greater than 110% of the
market value of the Company's Class A common stock on the date of
grant. The exercise price of the NQSO's may not be less than 50% of
the market value of the Company's Class A common stock on the date
of grant. The options must be exercisable no later than ten years
after the date of grant. The vesting requirements are determined by
the Board of Directors at the time of grant.
Compensation expense is recorded with respect to the options based
upon the quoted market value of the shares and the exercise
provisions at the date of grant. No compensation expense was
recorded for the years ended November 30, 2001 and 2002.
Information regarding the Company's stock options is summarized
below:
Weighted
Average
Number Exercise
of Shares Price
--------- -----
Outstanding at November 30, 1999 2,871,200 11.41
Granted - -
Exercised (121,300) 6.84
Canceled - -
---------- ------
Outstanding at November 30, 2000 2,749,900 11.61
Granted - -
Exercised (10,000) 7.69
Canceled - -
--------- ------
Outstanding at November 30, 2001 2,739,900 11.62
========= ======
Granted - -
Exercised (16,336) 7.69
Canceled (12,500) 13.75
--------- ------
Outstanding at November 30, 2002 2,711,064 11.64
========= ======
Options exercisable at November 30, 2002 2,711,064 11.64
========= ======
At November 30, 2001 and 2002, 176,753 and 189,253 shares,
respectively, were available for future grants under the terms of
these plans.
There were no options granted during 2000, 2001 and 2002.
The Company applies APB No. 25 in accounting for its stock option
grants and, accordingly, no compensation cost has been recognized
in the financial statements for its stock options which have an
exercise price equal to or greater than the fair value
(Continued)
120
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
of the stock on the date of the grant. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under Statement 123, the Company's net income (loss)
and net income (loss) per common share would have been reduced to
the pro-forma amounts indicated below:
2000 2001 2002
-------- --------- ----------
Restated Restated
-------- --------
Net income (loss):
As reported $27,492 $ (7,198) $(14,040)
Stock based compensation expense 4,434 2,287 864
------- --------- --------
Pro-forma $23,058 $ (9,485) $(14,904)
======= ========= ========
Net income (loss) per common share (basic):
As reported $ 1.29 $ (0.33) $ (0.64)
Pro-forma 1.08 (0.43) (0.68)
Net income (loss) per common share (diluted):
As reported $ 1.22 $ (0.33) $ (0.64)
Pro-forma 1.02 (0.43) (0.68)
Pro-forma net income (loss) reflect only options granted after
November 30, 1995. Therefore, the full impact of calculating
compensation cost for stock options under Statement 123 is not
reflected in the pro-forma net income (loss) amounts presented
above because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior to
December 1, 1995 was not considered. Therefore, the pro-forma net
income (loss) may not be representative of the effects on reported
net income (loss) for future years.
Summarized information about stock options outstanding as of
November 30, 2002 is as follows:
Outstanding Exercisable
-------------------------------------------------- -----------------------------
Weighted Weighted
Average Average Weighted
Exercise Exercise Life Number Average
Price Number Price Remaining of Price
Range of Shares of Shares In Years Shares of Shares
------------------ -------------- -------------- -------------- ------------ -------------
$4.63 - $8.00 1,122,864 $ 7.21 4.21 1,122,864 $ 7.21
$8.01 - $13.00 108,200 $11.61 2.34 108,200 $11.61
$13.01 - $15.00 1,480,000 $15.00 6.78 1,480,000 $15.00
(Continued)
121
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(b) Restricted Stock Plan
The Company has restricted stock plans under which key
employees and directors may be awarded restricted stock. Total
restricted stock outstanding, granted under these plans, at
November 30, 1999 was 13,750. There were no restricted stock
outstanding at November 30, 2000. Awards under the restricted
stock plan may be performance- accelerated shares or
performance-restricted shares. During fiscal 2000, 6,825
performance-accelerated shares and 4,846 performance-
restricted shares were granted. During fiscal 2000, 1,979
performance-restricted shares lapsed (were not earned). There
were no performance-restricted accelerated shares or
performance-restricted shares granted in 2001 and 2002.
Compensation expense for the performance-accelerated shares is
recorded based upon the quoted market value of the shares on
the date of grant. Compensation expense for the performance-
restricted shares is recorded based upon the quoted market
value of the shares on the balance sheet date. Compensation
expense (income) for these grants for the year ended November
30, 2000 was $40.
(c) Employee Stock Purchase Plan
In April 2000, the stockholders approved the 2000 Employee
Stock Purchase Plan. The stock purchase plan provides eligible
employees an opportunity to purchase shares of the Company's
Class A common stock through payroll deductions at a minimum
of 2% and a maximum of 15% of base salary compensation.
Amounts withheld are used to purchase Class A common stock on
the open market. The cost to the employee for the shares is
equal to 85% of the fair market value of the shares on or
about the quarterly purchase date (December 31, March 31, June
30 or September 30). The Company bears the cost of the
remaining 15% of the fair market value of the shares as well
as any broker fees. This Plan provides for purchases of up to
1,000,000 shares.
The Company's employee stock purchase plan is a compensatory
plan, in accordance with APB No. 25, "Accounting for Stock
Issued to Employees", for which the related expense is
recorded in the consolidated statement of operations.
Accordingly, there would be no impact to the Company's
proforma information in accordance with SFAS 123, "Accounting
for Stock-Based Compensation" (Note 18(a)).
(d) Stock Warrants
At November 30, 2000, 344,800 warrants, convertible into Class
A Common Stock at $7 1/8, subject to adjustment under certain
circumstances, were outstanding. During 2001, 314,800 warrants
were exercised and converted into 314,800 shares of common
stock. The remaining 30,000 warrants expired in 2001.
(Continued)
122
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(e) Stock Appreciation Units
In May 2002, the Company granted seven stock appreciation
units in ACC to its Chief Executive Officer. Each unit has a
value of approximately $774, which was based upon the then
fair value per share of ACC based upon the value of shares
sold to Toshiba (Note 3).
Each stock appreciation unit equals the value of one ACC
share. All of these units vested upon the date of grant,
however, all of these units are contingent upon the following
future events (i) an initial public offering of ACC or (ii) a
change of control of ACC as defined. Further, as these
specified events were not considered probable at the grant
date, fixed award accounting was followed.
(f) Profit Sharing Plans
The Company has established two non-contributory employee
profit sharing plans for the benefit of its eligible employees
in the United States and Canada. The plans are administered by
trustees appointed by the Company. Accruals for contributions
of $1,000 and $300 were recorded by the Company for the United
States plan in fiscal 2000 and 2001, respectively. No accruals
for contributions were recorded by the Company in fiscal 2002.
Contributions required by law to be made for eligible
employees in Canada were not material.
(g) Deferred Compensation Plan
Effective December 1, 1999, the Company adopted a Deferred
Compensation Plan (the Plan) for a select group of management.
The Plan is intended to provide certain executives with
supplemental retirement benefits as well as to permit the
deferral of more of their compensation than they are permitted
to defer under the Profit Sharing and 401(k) Plan. The Plan
provides for a matching contribution equal to 25% of the
employee deferrals up to $20. The Plan is not intended to be a
qualified plan under the provisions of the Internal Revenue
Code. All compensation deferred under the Plan is held by the
Company in an investment trust which is considered an asset of
the Company. The investments, which amounted to $3,949 at
November 30, 2002, have been classified as trading securities
and are included in investment securities on the accompanying
consolidated balance sheet as of November 30, 2002. The return
on these underlying investments will determine the amount of
earnings credited to the employees. The Company has the option
of amending or terminating the Plan at any time. The deferred
compensation liability is reflected as a long-term liability
on the accompanying consolidated balance sheet as of November
30, 2002. Compensation expense and investment income are
recorded in the accompanying consolidated statement
(Continued)
123
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
of operations in connection with this deferred compensation
plan.
(19) Accumulated Other Comprehensive Income (Loss)
The change in net unrealized gain (loss) on marketable securities of
$(10,119), $(831) and $422 for the years ended November 30, 2000, 2001
and 2002 is net of tax of $(6,202), $(509) and $260, respectively. A
reclassification adjustment, net of tax, of $1,480 is included in the
net unrealized gain (loss) on marketable securities for the year ended
November 30, 2000 and was transferred from other comprehensive income
(loss) to gain on sale of investments on the accompanying consolidated
statement of operations. There were no reclassification adjustments for
the year ended November 30, 2001 and 2002.
The currency translation adjustments are not adjusted for income taxes
as they relate to indefinite investments in non-U.S. subsidiaries and
equity investments.
(20) Net Income (Loss) Per Common Share
A reconciliation between the numerators and denominators of the basic
and diluted earnings (loss) per common share is as follows:
For the Years Ended
November 30,
---------------------------------------------
2000 2001 2002
---- ---- ----
As Restated As Restated
----------- -----------
Net income (loss) (numerator for net income per
common share, basic) $ 27,492 $ (7,198) $ (14,040)
Interest on 6 1/4% convertible subordinated debentures,
net of tax 28 5 -
----------- ------------ -----------
Adjusted net income (loss) (numerator for net income
per common share, diluted) $ 27,520 $ (7,203) $ (14,040)
=========== ============ ==========
Weighted average common shares (denominator for net
income (loss) per common share, basic) 21,393,566 21,877,100 21,850,035
Effect of dilutive securities:
Employee stock options and stock warrants 1,129,896 - -
Employee stock grants - - -
Convertible debentures 42,344 - -
----------- ------------ -----------
Weighted average common and potential common
shares outstanding (denominator for net income (loss)
per common share, diluted) 22,565,806 21,877,100 21,850,035
=========== ============ ===========
Net income (loss) per common share before
extraordinary item and cumulative effect:
Basic $ 1.19 $ (0.33) $ (0.65)
=========== ============ ===========
Diluted $ 1.12 $ (0.33) $ (0.65)
=========== ============ ===========
Net income (loss) per common share:
Basic $ 1.29 $ (0.33) $ (0.64)
=========== ============ ===========
Diluted $ 1.22 $ (0.33) $ (0.64)
=========== ============ ===========
(Continued)
124
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Employee stock options and stock warrants totaling 2,173,000 and
2,595,108 for the years ended November 30, 2001 and 2002 were not
included in the net income (loss) per common share calculation because
their effect would have been anti-dilutive.
(21) Lease Obligations
During 1998, the Company entered into a 30-year lease for a building
with its principal stockholder and chief executive officer. A
significant portion of the lease payments, as required under the lease
agreement, consists of the debt service payments required to be made by
the principal stockholder in connection with the financing of the
construction of the building. For financial reporting purposes, the
lease has been classified as a capital lease, and, accordingly, a
building and the related obligation of approximately $6,340 was
recorded (Note 24). The effective interest rate on the capital lease
obligation is 8.0%.
During 1998, the Company entered into a sale/lease back transaction
with its principal stockholder and chief executive officer for $2,100
of equipment. No gain or loss on the transaction was recorded as the
book value of the equipment equaled the fair market value. The lease is
for five years with monthly rental payments of $34. The lease has been
classified as an operating lease.
At November 30, 2002, the Company was obligated under non-cancelable
capital and operating leases for equipment and warehouse facilities for
minimum annual rental payments as follows:
Capital Operating
Lease Leases
2003 $ 554 $ 1,983
2004 553 1,246
2005 552 1,113
2006 561 821
2007 577 628
Thereafter 11,409 889
------- -------
Total minimum lease payments 14,206 $ 6,680
=======
Less: amount representing interest 8,010
-------
Present value of net minimum lease
payments 6,196
Less: current installments included in accrued
expenses and other current liabilities 55
-------
Long-term obligation $ 6,141
=======
Rental expense for the above-mentioned operating lease agreements and
other leases on a month- to-month basis approximated $2,642, $2,958 and
$3,191 for the years ended November 30,
(Continued)
125
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2000, 2001 and 2002, respectively.
The Company leases certain facilities and equipment from its principal
stockholder and several officers. Rentals for such leases are
considered by management of the Company to approximate prevailing
market rates. At November 30, 2002, minimum annual rental payments on
these related party leases, in addition to the capital lease payments,
which are included in the above table, are as follows:
2003 $ 961
2004 307
2005 322
2006 333
2007 343
Thereafter 473
(22) Financial Instruments
(a) Off-Balance Sheet Risk
Commercial letters of credit are issued by the Company during
the ordinary course of business through major domestic banks
as requested by certain suppliers. The Company also issues
standby letters of credit principally to secure certain bank
obligations of Audiovox Communications Sdn. Bhd. and Audiovox
Venezuela (Note 13(a)). The Company had open commercial
letters of credit of approximately $37,635 and $8,129, of
which $16,834 and $3,740 were accrued for purchases incurred
as of November 30, 2001 and 2002, respectively. The terms of
these letters of credit are all less than one year. No
material loss is anticipated due to nonperformance by the
counter parties to these agreements. The fair value of these
open commercial and standby letters of credit is estimated to
be the same as the contract values based on the nature of the
fee arrangements with the issuing banks.
The Company is a party to joint and several guarantees on
behalf of G.L.M. which aggregate $300. There is no market for
these guarantees and they were issued without explicit cost.
Therefore, it is not practicable to establish its fair value.
(b) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company
to concentrations of credit risk, consist principally of trade
receivables. The Company's customers are located principally
in the United States and Canada and consist of, among others,
wireless carriers and service providers, distributors, agents,
mass merchandisers, warehouse clubs and independent retailers.
(Continued)
126
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At November 30, 2001 and 2002, one customer, a wireless
carrier and service provider, accounted for approximately 28%
and 27% of accounts receivable, respectively.
During the years ended November 30, 2000, 2001 and 2002, one
customer accounted for approximately 50.5%, 35% and 24% of the
Company's 2000, 2001 and 2002 sales, respectively.
The Company generally grants credit based upon analyses of its
customers' financial position and previously established
buying and payment patterns. The Company establishes
collateral rights in accounts receivable and inventory and
obtains personal guarantees from certain customers based upon
management's credit evaluation.
A portion of the Company's customer base may be susceptible to
downturns in the retail economy, particularly in the consumer
electronics industry. Additionally, customers specializing in
certain automotive sound, security and accessory products may
be impacted by fluctuations in automotive sales.
(c) Fair Value
The carrying value of all financial instruments classified as
a current asset or liability is deemed to approximate fair
value because of the short term maturity of these instruments.
The estimated fair value of the Company's financial
instruments is as follows:
November 30, 2001 November 30, 2002
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ------------- ------------- -------------
Investment securities $ 5,777 $ 5,777 $ 5,405 $ 5,405
Long-term obligations $86,525 $86,525 $36,883 $36,883
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate that value:
Investment Securities
The carrying amount represents fair value, which is based upon
quoted market prices at the reporting date (Note 9).
Long-Term Obligations
The carrying amount of bank debt under the Company's revolving
credit agreement approximates fair value because the interest
rate on the bank debt is reset every quarter
(Continued)
127
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
to reflect current market rates.
Limitations
Fair value estimates are made at a specific point in time,
based on relevant market information and information about the
financial instrument. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
(23) Segment Information
The Company has two reportable segments which are organized by
products: Wireless and Electronics. The Wireless segment markets
wireless handsets and accessories through domestic and international
wireless carriers and their agents, independent distributors and
retailers. The Electronics segment sells autosound, mobile electronics
and consumer electronics, primarily to mass merchants, specialty
retailers, new car dealers, original equipment manufacturers (OEM),
independent installers of automotive accessories and the U.S. military.
The Company evaluates performance of the segments based upon income
before provision for income taxes. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies (Note 1). The Company allocates interest and
certain shared expenses, including treasury, legal and human resources,
to the segments based upon estimated usage. Intersegment sales are
reflected at cost and have been eliminated in consolidation. A royalty
fee on the intersegment sales, which is eliminated in consolidation, is
recorded by the segments and included in other income (expense).
Certain items are maintained at the Company's corporate headquarters
(Corporate) and are not allocated to the segments. They primarily
include costs associated with accounting and certain executive officer
salaries and bonuses and certain items including investment securities,
equity investments, deferred income taxes, certain portions of excess
cost over fair value of assets acquired, jointly-used fixed assets and
debt. The jointly-used fixed assets are the Company's management
information systems, which is jointly used by the Wireless and
Electronics segments and Corporate. A portion of the management
information systems costs, including depreciation and amortization
expense, are allocated to the segments based upon estimates made by
management. Segment identifiable assets are those which are directly
used in or identified to segment operations.
During the year ended November 30, 2000, one customer of the Wireless
segment accounted for approximately 50.5% of the Company's 2000 sales.
During the year ended November 30, 2001, one customer of the Wireless
segment accounted for approximately 35.0% of the Company's 2001 sales.
During the year ended November 30, 2002, one customer of the Wireless
segment accounted for approximately 24% of the Company's consolidated
2002 sales. No customers in the Electronics segment exceeded 10% of
consolidated sales in fiscal 2000, 2001 or 2002.
(Continued)
128
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Consolidated
Wireless Electronics Corporate Totals
-------- ----------- --------- ------
2000, As Restated
- -----------------
Net sales 1,393,820 276,471 - 1,670,291
Intersegment sales (purchases), net 302 (302) - -
Interest income 198 104 1,314 1,616
Interest expense 7,752 2,551 (4,729) 5,574
Depreciation and amortization 789 1,285 2,054 4,128
Income (loss) before provision for (recovery of)
income tax, minority interest, and extraordinary
item 30,219 16,632 (4,708) 42,143
Extraordinary item - - 2,189 2,189
Total assets 312,593 138,827 66,166 517,586
Goodwill, net - 426 4,648 5,074
Non-cash items:
Provision for bad debt expense 1,946 758 (185) 2,519
Deferred income tax (benefit) - - 6,034 (6,034)
Minority interest - - 3,555 3,555
Capital expenditures 1,241 1,890 9,944 13,075
2001, As Restated
- -----------------
Net sales 978,888 297,703 - 1,276,591
Interest income 138 91 441 670
Interest expense 7,711 2,039 (4,575) 5,175
Depreciation and amortization 878 1,408 2,190 4,476
Income (loss) before provision for (recovery of)
income tax, minority interest, and extraordinary
item (17,656) 13,623 (7,449) (11,482)
Total assets 347,393 138,779 58,325 544,497
Goodwill, net - 370 4,362 4,732
Non-cash items:
Provision for bad debt expense 629 1,091 216 1,936
Deferred income tax (benefit) - - (3,332) (3,332)
Minority interest - - 1,830 1,830
Capital expenditures 1,082 992 795 2,869
2002
- ----
Net sales 727,658 372,724 - 1,100,382
Interest income 81 169 259 509
Interest expense 3,984 1,605 (2,409) 3,180
Depreciation and amortization 1,114 1,571 2,095 4,780
Income (loss) before provision for (recovery of)
income tax, minority interest, and cumulative
effect (24,906) 17,415 1,088 (6,403)
Total assets 304,337 209,231 37,667 551,235
Goodwill, net - 2,224 4,602 6,826
Non-cash items:
Provision for bad debt expense 3,482 1,402 - 4,884
Deferred income tax expense - - 9,904 9,904
Minority interest - - 4,616 4,616
Capital expenditures 1,093 1,321 745 3,159
129
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In accordance with SFAS No. 142, Corporate wrote-off its unamortized
negative goodwill of $240 as of the date of adoption, which has been
reflected in the consolidated statements of operations as a cumulative
effect of a change in accounting principle for the year ended November
30, 2002. The implementation of SFAS No. 142 was immaterial to the
segments.
Goodwill in the amount of $284 was acquired in March 2002 in connection
with the purchase of certain assets of Code-Alarm, Inc. by Code
Systems, Inc., a wholly-owned subsidiary of Audiovox Electronics Corp.
(Note 6).
Net sales and long-lived assets by location for the years ended
November 30, 2000, 2001 and 2002 were as follows.
Net Sales Long-Lived Assets
------------------------------------------------- ------------------------------------------------
2000 2001 2002 2000 2001 2002
---- ---- ---- ---- ---- ----
As Restated As Restated
----------- -----------
United States $1,424,077 $1,061,853 $ 867,154 $43,541 $34,820 $40,506
Canada 68,004 85,796 143,368 - - -
Argentina 17,888 2,684 985 - - -
Peru - 4,148 313 - - -
Portugal 7,679 - - - - -
Japan - - - 7,387 6,545 -
Malaysia 15,294 12,570 11,637 849 1,220 1,038
Venezuela 15,264 22,422 16,744 644 8,339 852
Mexico, Central
America and
Caribbean 100,599 77,134 28,655 - - -
Chile 15,794 1,077 21,711 - - -
Other foreign
countries 5,692 8,907 9,815 - - -
---------- ---------- ---------- ------- ------- --------
Total $1,670,291 $1,276,591 $1,100,382 $52,421 $50,924 $ 42,396
========== ========== ========== ======= ======= ========
(24) Related Party Transactions
During 2000, the Company advanced $620 to an officer/director of the
Company which has been included in prepaid expenses and other current
assets on the accompanying consolidated balance sheet as of November
30, 2001 and obtained an unsecured note. The note was paid in full
during fiscal 2002. In addition, the Company has outstanding notes due
from various officers of the Company aggregating $235 as of November
30, 2002, which have been included in prepaid and other current assets
on the accompanying consolidated balance sheet. The notes bear interest
at the LIBOR rate plus 0.5% per annum. Principle and interest are
payable in equal annual installments beginning July 1, 1999 through
July 1, 2003.
(Continued)
130
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company also leases certain facilities and equipment from its
principal stockholder and several officers (Note 21).
In April 2000, the Company entered into a sale/leaseback transaction
with Shintom (Note 5(b)).
Toshiba was a 5% stockholder in ACC (Note 5). During the years ended
November 30, 2000, 2001 and 2002, 48%, 34% and 38% of the Company's
purchases, respectively, were from Toshiba (Note 5). During the quarter
ended November 30, 2001, the Company recorded a receivable in the
amount of $4,550 from Toshiba for upgrades that were performed by the
Company in 2001 on certain models which Toshiba manufactured.
Subsequent to November 30, 2001, the amount was received in full. At
November 30, 2002, the Company recorded receivables from Toshiba
aggregating approximately $12,219 for price protection and software
upgrades. Subsequent to November 30, 2002, the amounts were paid in
full.
At November 30, 2002, the Company had on hand 504,200 units in the
amount of $91,226, which has been recorded in inventory and accounts
payable on the accompanying consolidated balance sheet. Of this
accounts payable, $56,417 is subject to an arrangement with the
manufacturer of the phones, which provides for, among other things,
extended payment terms. The payment terms are such that the payable is
non-interest bearing, and the Company is not required to pay for the
phones until shipment has been made to the Company's customers. The
remaining $34,809 of the $91,226 accounts payable is payable in
accordance with the terms established in a distribution agreement with
the vendor, which is 30 days. For certain inventory items, the Company
is entitled to receive price protection in the event the selling price
to its customers is less than the purchase price from the manufacturer.
The Company records such price protection, as necessary, at the time of
the sale of the units. As of November 30, 2002, such price protection
amounted to $32,643, of which $27,683 was recorded as a reduction to
cost of sales as the related inventory was sold. The other $4,960 in
price protection for 2002 has been reflected as a reduction to the
remaining inventory cost.
On May 29, 2002, Toshiba purchased an additional 20% of ACC for $23,900
in cash, bringing Toshiba's total ownership interest in ACC to 25%. In
addition, an $8,100 convertible subordinated note (the Note) was issued
to Toshiba. The Note bears interest at a per annum rate equal to 1 3/4%
and interest is payable annually on May 31st of each year, commencing
May 31, 2003. The unpaid principle amount shall be due and payable,
together with all unpaid interest, on May 31, 2007 and automatically
renews for an additional five years. In accordance with the provisions
of the Note, Toshiba may convert the balance of the Note into
additional shares of ACC in order to maintain a maximum 25% interest in
ACC.
In connection with the transaction, ACC and Toshiba formalized a
distribution agreement whereby ACC will be Toshiba's exclusive
distributor for the sale of Toshiba products in the United States,
Canada, Mexico and all countries in the Caribbean and Central and South
America through May 29, 2007. Also, in accordance with the terms of the
stockholders agreement,
(Continued)
131
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
upon the termination of the distribution agreement in accordance with
certain terms of the distribution agreement. Pursuant to the agreement,
the put right is only exercisable if ACC terminates the distribution
agreement or if another strategic investor acquires a direct or
indirect equity ownership interest in excess of 20% in the Company.
Toshiba maintains a put right and the Company a call right, to
repurchase all of the shares held by the other party for a price equal
to the fair market value of the shares as calculated in accordance with
the agreement. Audiovox's call right is only exercisable if Toshiba
elects to terminate the distribution agreement after its initial five
(5) year term.
The Company engages in transactions with Shintom and TALK (Note 5).
(25) Commitments and Contingencies
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. For one such
patent claim, the Company has recorded an accrual of approximately $496
which represents a settlement offer that has been put forward by the
Company to settle this matter. However, the Company can give no
assurances that this particular legal matter can be settled for this
amount. On November 6, 2002, Audiovox Electronics Corporation ("AEC")
was served with a summons and complaint in an action for patent
infringement that was instituted by a certain party against AEC in the
United State District Court for the Southern District of New York. The
complaint seeks equitable relief and damages for alleged infringement
of a patent. AEC has meritorious defenses to this claim and intends to
vigorously defend this action. However, the Company cannot be certain
of the outcome of this matter.
Subsequent to November 30, 2002, 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. There are
various procedural motions pending and no discovery has been conducted
to date. These lawsuits have been consolidated and transferred to the
United States District Court for the Northern District of Illinois. 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.
Also, subsequent to November 30, 2002, the Company was named in a class
action lawsuit alleging non-compliance with emergency 911 call
processing capabilities. The Company intends to defend itself
vigorously in this matter. However, no assurances regarding the outcome
of
(Continued)
132
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
this matter can be given at this time.
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. It is anticipated that the appeal will be
heard in late 2003 or early 2004.
There are various procedural motions pending and no discovery has been
conducted to date. The Company has asserted indemnification claims
against the manufacturers of the hand-held wireless telephones. The
Company is vigorously defending these class action lawsuits.
In July 2002, Audiovox Communications Corp. instituted suit against
Northcoast Communications, LLC in the Supreme Court of the State of New
York, County of Suffolk seeking recovery of the sum of $1,818 as the
balance due it for cellular telephones sold and delivered. In its
answer Northcoast interposed counterclaims including fraud, negligent
misrepresentation and breach of contract seeking damages in excess of
$10,000. The parties have recently served discovery demands and no
depositions have been taken to date. Based on discussions with
management and review of Audiovox's documents, Northcoast's
counterclaims appear to be without merit and interposed to avoid
payment of the underlying indebtedness.
The Company is the subject of an administrative agency investigation
involving alleged reimbursement of a fixed nominal amount of federal
campaign contributions during the years 1995 through 1996. The Company
has fully cooperated with the investigation and believes that it has
committed no wrongdoing.
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.
Commitments
The Company has guaranteed a $300 line of credit with a financial
institution on behalf of one of its equity investments and has
established standby letters of credit to guarantee the bank obligations
of Audiovox Communications Sdn. Bhd. and Audiovox Venezuela (Note
13(a)).
(Continued)
133
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(26) Unaudited Quarterly Financial Data - As Restated
Selected unaudited, quarterly financial data of the Company for the
years ended November 30, 2001 and 2002 appears below:
QUARTER ENDED
(Dollars in thousands, except per share data) Feb. 28 May 31 Aug. 31 Nov. 30
------- ------ ------- -------
(As Restated) (As Restated) (As Restated) (As Restated)
2001
- ----
Net sales 348,047 276,581 310,811 341,152
Gross profit 23,861 5,393 24,001 18,135
Operating expenses 18,913 18,997 21,470 21,246
Income (loss) before provision for (recovery
of) income taxes and minority interest 5,552 (13,891) 1,248 (4,393)
Provision for (recovery of) income taxes 2,029 (5,024) 540 (1,169)
Minority interest income (expense) (170) 562 121 147
Net income (loss) 3,353 (8,305) 829 (3,077)
Net income (loss) per common share:
Basic 0.15 (0.38) 0.04 (0.14)
Diluted 0.15 (0.38) 0.04 (0.14)
QUARTER ENDED
(Dollars in thousands, except per share data) Feb. 28 May 31 Aug. 31 Nov. 30
------- ------ ------- -------
(As Restated) (As Restated) (As Restated)
2002
- ----
Net sales 184,269 297,267 301,992 316,853
Gross profit 13,723 18,653 27,468 14,755
Operating expenses 18,946 24,089 21,283 24,356
Income (loss) before provision for (recovery
of) income taxes, minority interest, and
cumulative effect (7,554) 7,993 4,985 11,571
Provision for (recovery of) income taxes (1,500) 4,320 2,416 7,696
Minority interest income (expense) 557 257 49 4,193
Income (loss) before cumulative effect (5,497) 3,673 2,618 (15,074)
Cumulative effect 240 - - -
Net income (loss) (5,257) 3,673 2,618 (15,074)
Net income (loss) per common share before
cumulative effect:
Basic (0.25) 0.17 0.12 (0.69)
Diluted (0.25) 0.17 0.12 (0.69)
Net income (loss)
Basic (0.24) 0.17 0.12 (0.69)
Diluted (0.24) 0.17 0.12 (0.69)
134
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following selected unaudited, quarterly financial data of the
Company for all quarters in fiscal 2001 and the first three quarters of
fiscal 2002 have been restated (see Note 2).
FISCAL 2001
FOR THE QUARTER ENDED FEBRUARY 28,
------------------------------------------------------------------------
RESTATEMENT RECLASSIFICATION
AS REPORTED (1) ADJUSTMENTS ADJUSTMENTS AS RESTATED
----------- ----------- ----------- -----------
Net sales $ 328,302 $ 19,745(2)(5) - $ 348,047
Cost of sales 301,212 18,387(2) $ 4,587(3) 324,186
----------- ----------- ----------- ----------
Gross profit 27,090 1,358 (4,587) 23,861
----------- ----------- ----------- -----------
Operating expenses:
Selling 7,021 - - 7,021
General and administrative 11,134 - (144)(3) 10,990
Warehousing and technical support 5,345 - (4,443)(3) 902
----------- ----------- ----------- ----------
Total operating expenses 23,500 - (4,587) 18,913
----------- ----------- ----------- ----------
Operating income 3,590 1,358 - 4,948
Total other income (expense), net 604 - - 604
----------- ----------- ----------- ----------
Income before provision for income taxes
and minority interest 4,194 1,358 - 5,552
Provision for income taxes 1,458 571(4) - 2,029
Minority interest (170) - - (170)
----------- ----------- ----------- ----------
Net income $ 2,566 $ 787 - $ 3,353
=========== =========== =========== ==========
Net income per common share (basic) $ 0.12 $ 0.03 - $ 0.15
=========== =========== =========== ==========
Net income per common share (diluted) $ 0.12 $ 0.03 - $ 0.15
=========== =========== =========== ==========
Weighted average number of common
shares outstanding (basic) 21,654,486 21,654,486
========== ==========
Weighted average number of common
shares outstanding (diluted) 22,034,838 22,034,838
========== ==========
Refer to Note (2) for details of restatement adjustments.
(1) Includes reclassification of sales incentives (previously reported in
operating expenses) and shipping and handling costs (previously reported in
operating expenses) pursuant to EITF 01-9 and 00-10, respectively.
(2) Amounts reflect adjustments for (a) revenue recognition.
(3) Amounts reflect adjustments for (i) operating expense reclassification.
(4) Amounts reflect adjustments for (h) income taxes.
(5) Amounts reflect adjustments for (f) sales incentives.
135
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FISCAL 2001
FOR THE QUARTER ENDED MAY 31,
---------------------------------------------------------------------
RESTATEMENT RECLASSIFICATION
AS REPORTED(1) ADJUSTMENTS ADJUSTMENTS AS RESTATED
----------- ----------- ----------- -----------
Net sales $ 276,814 $ (233)(4) - $ 276,581
Cost of sales 266,090 - $ 5,098(2) 271,188
---------- ------- ----------- -----------
Gross profit 10,724 (233) (5,098) 5,393
---------- ------- ----------- -----------
Operating expenses:
Selling 7,372 - - 7,372
General and administrative 10,577 190 (147)(2) 10,620
Warehousing and technical support 5,956 - (4,951)(2) 1,005
---------- ------- ----------- -----------
Total operating expenses 23,905 190 (5,098) 18,997
---------- ------- ----------- -----------
Operating income (loss) (13,181) (423) - (13,604)
Total other income (expense), net (287) - - (287)
---------- ------- ----------- -----------
Income (loss) before provision for (recovery of)
income taxes and minority interest (13,468) 423(5) - (13,891)
Provision for (recovery of) income taxes (4,649) (375)(3) - (5,024)
Minority interest 556 6(5) - 562
---------- ------- ----------- -----------
Net income (loss) $ (8,263) $ (42) - $ (8,305)
========== ======= =========== ===========
Net income (loss) per common share (basic) $ (0.38) $ 0.00 - $ (0.38)
========== ======= =========== ===========
Net income (loss) per common share (diluted) $ (0.38) $ 0.00 - $ (0.38)
========== ======= =========== ===========
Weighted average number of common shares
outstanding (basic) 21,920,990 21,920,990
========== ==========
Weighted average number of common shares
outstanding (diluted) 21,920,990 21,920,990
========== ==========
Refer to Note (2) for details of restatement adjustments.
(1) Includes reclassification of sales incentives (previously reported in
operating expenses) and shipping and handling costs (previously reported in
operating expenses) pursuant to EITF 01-9 and 00-10, respectively.
(2) Amounts reflect adjustments for (i) operating expense reclassification.
(3) Amounts reflect adjustments for (h) income taxes.
(4) Amounts reflect adjustments for (f) sales incentives.
(5) Amount reflects impact of the restatement adjustments on minority interest.
136
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FISCAL 2001
FOR THE QUARTER ENDED AUGUST 31,
--------------------------------------------------------------------
RESTATEMENT RECLASSIFICATION
AS REPORTED(1) ADJUSTMENTS ADJUSTMENTS AS RESTATED
-------------- ----------- ----------- -----------
Net sales $ 311,715 $ (904)(2)(5) - $ 310,811
Cost of sales 282,745 (942)(2) $ 5,007(3) 286,810
---------- -------- ---------- ----------
Gross profit 28,970 38 (5,007) 24,001
---------- -------- ---------- ----------
Operating expenses:
Selling 8,018 - - 8,018
General and administrative 12,261 303 (149)(3) 12,415
Warehousing and technical support 5,895 - (4,858)(3) 1,037
---------- -------- ---------- ----------
Total operating expenses 26,174 303 (5,007) 21,470
---------- -------- ---------- ----------
Operating income (loss) 2,796 (265) - 2,531
Total other income (expense), net (1,283) - - (1,283)
---------- -------- ---------- ----------
Income (loss) before provision for (recovery of)
income taxes and minority interest 1,513 (265) - 1,248
Provision for (recovery of) income taxes 618 (78)(4) - 540
Minority interest 111 10(6) - 121
---------- -------- ---------- ----------
Net income (loss) $ 1,006 $ (177) - $ 829
========== ======== ========== ==========
Net income (loss) per common share (basic) $ 0.05 $ (0.01) - $ 0.04
========== ======== ========== ==========
Net income (loss) per common share (diluted) $ 0.05 $ (0.01) - $ 0.04
========== ======== ========== ==========
Weighted average number of common shares
outstanding (basic) 21,966,461 21,966,461
========== ==========
Weighted average number of common shares
outstanding (diluted) 22,170,039 22,170,039
========== ==========
Refer to Note (2) for details of restatement adjustments.
(1) Includes reclassification of sales incentives (previously reported in
operating expenses) and shipping and handling costs (previously reported in
operating expenses) pursuant to EITF 01-9 and 00-10, respectively.
(2) Amounts reflect adjustments for (b) timing of revenue.
(3) Amounts reflect adjustments for (i) operating expense reclassification.
(4) Amounts reflect adjustments for (h) income taxes.
(5) Amounts reflect adjustments for (f) sales incentives.
(6) Amount reflects impact of the restatement adjustments on minority interest.
137
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FISCAL 2001
FOR THE QUARTER ENDED NOVEMBER 30,
-----------------------------------------------------------------------
RESTATEMENT RECLASSIFICATION
AS REPORTED(1) ADJUSTMENTS ADJUSTMENTS AS RESTATED
-------------- ----------- ----------- -----------
Net sales $ 339,803 $ 1,349(2)(6) - $ 341,152
Cost of sales 317,160 524(2)(5) $ 5,333(3) 323,017
---------- --------- ---------- ----------
Gross profit 22,643 825 (5,333) 18,135
---------- --------- ---------- ----------
Operating expenses:
Selling 7,628 - - 7,628
General and administrative 12,433 196(5) (148)(3) 12,481
Warehousing and technical support 6,322 - (5,185)(3) 1,137
----------- --------- ---------- -----------
Total operating expenses 26,383 196 (5,333) 21,246
---------- --------- ---------- ----------
Operating income (loss) (3,740) 629 - (3,111)
Total other income (expense), net (1,282) - - (1,282)
---------- --------- ---------- ----------
Income (loss) before provision for (recovery
of) income taxes and minority interest (5,022) 629 - (4,393)
Provision for (recovery of) income taxes (1,364) 195(4) - (1,169)
Minority interest 140 7(7) - 147
------------ --------- ---------- ----------
Net income (loss) $ (3,518) $ 441 $ (3,077)
========== ========= ========== ==========
Net income (loss) per common share (basic) $ (0.16) $ 0.02 - $ (0.14)
========== ========= ========== ==========
Net income (loss) per common share (diluted) $ (0.16) $ 0.02 - $ (0.14)
========== ========= ========== ==========
Weighted average number of common shares
outstanding (basic) 21,966,461 21,966,461
========== ==========
Weighted average number of common shares
outstanding (diluted) 21,966,461 21,966,461
========== ==========
Refer to Note (2) for details of restatement adjustments.
(1) Includes reclassification of sales incentives (previously reported in
operating expenses) and shipping and handling costs (previously reported in
operating expenses) pursuant to EITF 01-9 and 00-10, respectively.
(2) Amounts reflect adjustments for (b) timing of revenue.
(3) Amounts reflect adjustments for (i) operating expense reclassification.
(4) Amounts reflect adjustments for (h) income taxes.
(5) Amounts reflect adjustments for (c) litigation.
(6) Amounts reflect adjustments for (f) sales incentives.
(7) Amount reflects impact of the restatement adjustments on minority interest.
138
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FISCAL 2002
FOR THE QUARTER ENDED FEBRUARY 28,
-----------------------------------------------------------------------
RESTATEMENT RECLASSIFICATION
AS REPORTED (1) ADJUSTMENTS ADJUSTMENTS AS RESTATED
----------- ----------- ----------- -----------
Net sales $ 188,597 $ (4,328)(2)(8) - $ 184,269
Cost of sales 170,781 (5,058)(2)(6)(7) $ 4,823 170,546
------------ ------------ ------------ ------------
Gross profit 17,816 730 (4,823) 13,723
------------ ------------ ------------ ------------
Operating expenses:
Selling 6,754 (3)(2) - 6,751
General and administrative 10,651 542(2)(5)(6) (140)(3) 11,053
Warehousing and technical support 5,846 (21)(2) (4,683)(3) 1,142
------------ ------------ ------------ ------------
Total operating expenses 23,251 518 (4,823) 18,946
------------ ------------ ------------ ------------
Operating income (loss) (5,435) 212 - (5,223)
Total other income (expense), net (981) (1,350)(5) - (2,331)
------------ ------------ ------------ ------------
Loss before provision for (recovery of) income
taxes, minority interest and before cumulative
effect of a change in accounting for negative
goodwill (6,416) (1,138) - (7,554)
Provision for (recovery of) income taxes (1,670) 170(4) - (1,500)
Minority interest 557 - - 557
------------ ============ ============ ------------
Loss before cumulative effect of a change in
accounting for negative goodwill (4,189) (1,308) - (5,497)
Cumulative effect of a change in accounting for
negative goodwill 240 - - 240
------------ ------------ ============ ------------
Net loss $ (3,949) $ (1,308) - $ (5,257)
============ ============ ============ ============
Net loss per common share (basic) before
cumulative effect of a change in accounting for
negative goodwill $ (0.19) $ (0.06) - $ (0.25)
Cumulative effect of a change in accounting for
negative goodwill 0.01 - - 0.01
------------ ------------ ------------ ------------
Net loss per common share (basic) $ (0.18) $ (0.06) - $ (0.24)
============ ============ ============ ============
Net loss per common share (diluted) before (0.25)
cumulative effect of a change in accounting for
negative goodwill $ (0.19) $ (0.06) - (0.25)
Cumulative effect of a change in accounting for
negative goodwill 0.01 - - 0.01
------------ ------------ ------------ ------------
Net loss per common share (diluted) $ (0.18) $ (0.06) - $ (0.24)
============ ============ ============ ============
Weighted average number of common shares
outstanding (basic) 21,967,263 21,967,263
============ ============
Weighted average number of common shares
outstanding (diluted) 21,967,263 21,967,263
============ ============
Refer to Note (2) for details of restatement adjustments.
(1) Includes reclassification of sales incentives (previously reported in
operating expenses) pursuant to EITF 01-9.
(2) Amounts reflect adjustments for (b) timing of revenue.
(3) Amounts reflect adjustments for (i) operating expense reclassification.
(4) Amounts reflect adjustments for (h) income taxes.
(5) Amounts reflect adjustments for (d) foreign currency translation.
(6) Amounts reflect adjustments for (c)litigation.
(7) Amounts reflect adjustments for (e) inventory pricing.
(8) Amounts reflect adjustments for (f) sales incentives.
139
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Fiscal 2002
For the Quarter Ended May 31,
----------------------------------------------------------------------
Restatement Reclassification
As Reported Adjustments Adjustments As Restated
----------- ----------- ----------- -----------
Net sales $ 304,603 $ (7,336)(1)(7) - $ 297,267
Cost of sales 280,778 (7,537)(1)(5)(6) $ 5,373(2) 278,614
----------- --------- ------------ -----------
Gross profit 23,825 201 (5,373) 18,653
----------- --------- ------------ -----------
Operating expenses:
Selling 7,631 (10)(1) - 7,621
General and administrative 15,856 245(1)(4) (148)(2) 15,953
Warehousing and technical support 5,889 (149)(1)(4) (5,225)(2) 515
----------- --------- ------------ -----------
Total operating expenses 29,376 86 (5,373) 24,089
----------- --------- ------------ -----------
Operating income (loss) (5,551) 115 - (5,436)
Total other income (expense), net 14,843 (1,627)(4)(9) - 13,216
----------- --------- ----------- -----------
Income before provision for income taxes and
minority interest 9,292 (1,512) - 7,780
Provision for income taxes 5,092 (772)(3) - 4,320
Minority interest 255 (42)(8) 213
----------- --------- ----------- -----------
Net income $ 4,455 $ (782) - $ 3,673
=========== ========= =========== ===========
Net income per common share (basic) $ 0.20 $ (0.03) - $ 0.17
=========== ========= =========== ===========
Net income per common share (diluted) $ 0.20 $ (0.03) - $ 0.17
=========== ========= =========== ==========
Weighted average number of common shares
outstanding (basic) 21,967,263 21,967,263
=========== ==========
Weighted average number of common shares
outstanding (diluted) 22,007,598 22,007,598
=========== ==========
Refer to Note (2) for details of restatement adjustments.
(1) Amounts reflect adjustments for (b) timing of revenue.
(2) Amounts reflect adjustments for (i) operating expense reclassification.
(3) Amounts reflect adjustments for (h) income taxes.
(4) Amounts reflect adjustments for (d) foreign currency translation.
(5) Amounts reflect adjustments for (c)litigation.
(6) Amounts reflect adjustments for (e) inventory pricing.
(7) Amounts reflect adjustments for (f) sales incentives.
(8) Amounts reflect adjustments for (g) gain on issuance of subsidiary shares.
(9) Amounts reflect impact of the restatement adjustments on minority interest.
140
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FISCAL 2002
FOR THE QUARTER ENDED AUGUST 31,
-------------------------------------------------------------------------
RESTATEMENT RECLASSIFICATION
AS REPORTED ADJUSTMENTS ADJUSTMENTS AS RESTATED
----------- ----------- ----------- -----------
Net sales $ 291,367 $ 10,625(1)(7) - $ 301,992
Cost of sales 259,791 9,441(1)(5)(6) $ 5,292(2) 274,524
------------- ----------- ----------- ----------
Gross profit 31,576 1,184 5,292) 27,468
------------- ----------- ----------- ----------
Operating expenses:
Selling 7,486 11(1) - 7,497
General and administrative 13,208 (372)(1)(4)(5) (150)(2) 12,686
Warehousing and technical support 6,138 104(1)(4) (5,142)(2) 1,100
------------- ----------- ----------- ----------
Total operating expenses 26,832 (257) (5,292) 21,283
------------- ----------- ----------- ----------
Operating income (loss) 4,744 1,441 - 6,185
Total other income (expense), net (953) (247)(4) - (1,200)
------------- ----------- ----------- ----------
Income before provision for income taxes and
minority interest 3,791 1,194 - 4,985
Provision for income taxes 2,018 398(3) - 2,416
Minority interest 94 (45)(8) - 49
------------- ----------- ----------- ----------
Net income $ 1,867 $ 751 - $ 2,618
============= =========== =========== ==========
Net income per common share (basic) $ 0.09 $ 0.03 - $ 0.12
=========== =========== =========== ==========
Net income per common share (diluted) $ 0.08 $ 0.04 - $ 0.12
=========== =========== =========== ==========
Weighted average number of common shares
outstanding (basic) 21,947,573 21,947,573
=========== ==========
Weighted average number of common shares
outstanding (diluted) 21,982,803 21,982,803
=========== ==========
Refer to Note (2) for details of restatement adjustments.
(1) Amounts reflect adjustments for (b) timing of revenue.
(2) Amounts reflect adjustments for (i) operating expense reclassification.
(3) Amounts reflect adjustments for (h) income taxes.
(4) Amounts reflect adjustments for (d) foreign currency translation.
(5) Amounts reflect adjustments for (c)litigation.
(6) Amounts reflect adjustments for (e) inventory pricing.
(7) Amounts reflect adjustments for (f) sales incentives.
(8) Amount reflects impact of the restatement adjustments on minority interest.
141
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FISCAL 2002
FOR THE QUARTER ENDED
NOVEMBER 30,
--------------------------
Net sales $ 316,853
Cost of sales 302,098
-----------
Gross profit 14,755
-----------
Operating expenses:
Selling 7,639
General and administrative 15,600
Warehousing and technical support 1,117
-----------
Total operating expenses 24,356
-----------
Operating loss (9,601)
Total other income (expense), net (1,970)
-----------
Loss before provision for income taxes and minority interest (11,571)
Provision for income taxes 7,696
Minority interest 4,193
-----------
Net loss $ (15,074)
===========
Net loss per common share (basic) $ (0.69)
===========
Net loss per common share (diluted) $ (0.69)
===========
Weighted average number of common shares outstanding (basic) 21,809,903
===========
Weighted average number of common shares outstanding (diluted) 21,809,903
===========
(27) Fourth Quarter Adjustments
During the fourth quarter of fiscal 2002, the Company recorded the
following adjustments to its statement of operations (i) a $13,090
valuation allowance for deferred tax assets that were considered more
likely than not to be unrecoverable related to the Wireless segment
(note 16); (ii) an inventory obsolescence charge of $7,665 and $2,725
for the Wireless Group and Electronics Group, respectively, relating to
inventory (Note 1(f)); (iii) a $1,158 other-than- temporary impairment
charge related to investment securities (Note 9); (iv) a $2,091 bad
debt reserve related to certain customers whose financial condition and
ability to pay their outstanding receivables became doubtful during the
fourth quarter; and (v) the reversal of unearned sales incentives of
$763 and $947 for the Wireless Group and Electronics Group,
respectively. The Company has determined that none of these
adjustments relate to prior quarters.
(28) Accrued Sales Incentives
During the quarter ended May 31, 2002, the Company adopted the
provisions of EITF 01-9.
142
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As a result of adopting EITF 01-9 in 2002, the Company has reclassified
co-operative advertising, market development funds and volume incentive
rebate costs (collectively sales incentives), which were previously
included in selling expenses, to net sales as the Company does not
receive an identifiable benefit in connection with these costs. As a
result of this reclassification, net sales and selling expenses, after
restatement, were reduced by $15,388 and $11,100 for the years ended
November 30, 2000 and 2001, respectively. There was no further impact
on the Company's consolidated financial statements as a result of the
adoption of EITF 01-9 as the Company's historical accounting policy
with respect to the recognition and measure of sales incentives is
consistent with EITF 01-9.
A summary of the activity with respect to sales incentives for the last
three years on a segment and consolidated basis is provided below:
Wireless
--------
Fiscal Fiscal Fiscal
2000 2001 2002
---- ---- ----
As Restated As Restated
----------- -----------
Opening balance $ 7,771 $ 11,700 $ 5,209
Accruals 21,240 19,680 31,186
Payments (9,046) (13,616) (25,654)
Reversals for unearned incentives (3,197) (7,535) (570)
Reversals for unclaimed incentives (5,068) (5,020) (2,646)
--------- ---------- ----------
Ending balance $ 11,700 $ 5,209 $ 7,525
========= ========== ==========
Electronics
-----------
Fiscal Fiscal Fiscal
2000 2001 2002
---- ---- ----
As Restated As Restated
----------- -----------
Opening balance $ 3,366 $ 2,894 $ 3,265
Accruals 3,496 5,789 7,665
Payments (2,885) (3,604) (4,804)
Reversals for unearned incentives (970) (1,516) (784)
Reversals for unclaimed incentives (113) (298) (716)
----------- ----------- -----------
Ending balance $ 2,894 $ 3,265 $ 4,626
========== ========== ==========
143
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Consolidated
------------
Fiscal Fiscal Fiscal
2000 2001 2002
---- ---- ----
As Restated As Restated
----------- -----------
Opening balance $ 11,137 $ 14,594 $ 8,474
Accruals 24,736 25,469 38,851
Payments (11,931) (17,220) (30,458)
Reversals (9,348) (14,369) (4,716)
--------- --------- ----------
Ending balance $ 14,594 $ 8,474 $ 12,151
========= ========== =========
The majority of the reversals of previously established sales incentive
liabilities pertain to sales recorded in prior periods.
(29) Subsequent Events
In May 2003, the Company entered into an asset purchase agreement to
buy certain assets of Recoton Corporation. In accordance with the
agreement, the Company made a deposit of $2,000, which is currently
being held in escrow. The Company is awaiting final approval of this
purchase from a bankruptcy court. This purchase would amount to
approximately $40,000 plus the assumption of $5,000 in debt, not
including related acquisition costs.
144
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
See the information set forth in the section entitled "Directors and
Executive Officers of the Registrant" in Part I, Item 4(d) of this Form 10-K.
Section 16(a) of the Exchange Act requires our executive officers,
directors and persons who own more than ten percent of a registered class of our
equity securities ("Reporting Persons") to file reports of ownership and changes
in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission
(the "SEC") and the Nasdaq Stock Market (the "Nasdaq"). These Reporting Persons
are required by SEC regulation to furnish us with copies of all Form 3, 4 and 5
they file with the SEC and Nasdaq. Based solely upon our review of the copies of
the forms it has received, we believe that all Reporting Persons complied on a
timely basis with all filing requirements applicable to them with respect to
transactions during fiscal 2002.
ITEM 11 - EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation
earned by each individual who served as the Company's Chief Executive Officer
during fiscal year 2002 and the four other most highly compensated executive
officers who were serving as such as of November 30,2002 (collectively, the
"Named Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation (1)
-----------------------------------------------
All Other
Name and Principal Position Year Salary(2) Bonus Compensation(3)
- --------------------------- ---- --------- ----- ---------------
John J. Shalam
President and CEO 2002 450,677 128,669 11,025
2001 450,000 122,000 9,185
2000 450,000 1,273,000 16,616
Philip Christopher
Executive Vice President 2002 476,419(4) 1,800,000 2,762
2001 450,000 117,000 8,234
2000 450,000 897,000 8,721
Charles M. Stoehr
Senior Vice President and
CFO 2002 326,418 242,890 4,253
2001 325,000 41,000 8,234
145
Annual Compensation (1)
-----------------------------------------------
All Other
Name and Principal Position Year Salary(2) Bonus Compensation(3)
- --------------------------- ---- --------- ----- ---------------
2000 325,000 449,000 10,902
Patrick M. Lavelle
Senior Vice President 2002 201,277 1,204,508 1,980
2001 200,000 655,636 7,998
2000 200,000 781,365 8,709
Richard A. Maddia
Vice President,
Information Systems 2002 176,209 37,500 1,213
2001 175,000 65,000 7,409
2000 150,500 52,500 8,313
- -------------
(1) No other annual compensation was paid and no restricted stock awards or
options were granted to the named individuals in 2002, 2001 and 2000
and the "Other Annual Compensation", "Restricted Stock" and "Securities
Underlying Options" columns have been omitted.
(2) For fiscal 2002, salary includes: for Mr. Shalam $677 in 401(k) Company
matching contributions; for Mr. Christopher $1,419 in 401(k) Company
matching contributions; for Mr. Lavelle $1,277 in 401(k) Company
matching contributions; and for Mr. Maddia $709 in 401(k) Company
matching contributions.
(3) For fiscal 2002, this only includes executive life insurance premiums
paid for the benefit of the named executive.
(4) Mr. Christopher's base salary for the first six (6) months of fiscal
2002 was $450,000. Effective May 29, 2002, Mr. Christopher's base
salary was increased to $500,000 pursuant to an employment agreement
(see discussion below under caption "Employment Agreements").
EMPLOYMENT AGREEMENTS
Effective May 29, 2002, Audiovox Communications Corporation ("ACC")
entered into an employment agreement with Philip Christopher (the "Agreement").
The Agreement, unless terminated earlier, shall continue until May 29, 2007 and
thereafter shall automatically extend by consecutive twelve-month periods unless
terminated by ACC on written notice.
Pursuant to the Agreement, Mr. Christopher receives a base salary of
$500,000, subject to annual Consumer Price Index increases, and an annual bonus
equal to two (2%) percent of ACC's annual earnings before income taxes.
The Agreement further provides for equity incentives, vesting of stock
options, reimbursement of reasonable business expenses and use of an automobile.
The Agreement also provided for a bonus pool of $3.2 million, of which Mr.
Christopher received $1.8 million (See Bonus disclosure in the Executive
Compensation Table).
In the event ACC terminates Mr. Christopher's employment without cause
or if Mr. Christopher resigns his employment within ninety (90) days after: a
significant adverse change in his authority
146
and responsibilities; a reduction in his base salary; nonpayment of his bonus;
or a material breach by ACC of any obligation under this Agreement, Mr.
Christopher is entitled to receive a separation payment equal to his salary for
the remainder of the contract term, plus an average annual bonus plus a cash
payment of one million dollars. Mr. Christopher will not be entitled to a
separation payment if his employment with ACC is terminated for any reason after
the fifth anniversary of the effective date.
The Agreement also contains non-competition and non-solicitation
covenants that are effective for one year following termination of employment
for any reason.
OPTION GRANTS IN LAST FISCAL YEAR (2002)
No options were granted in the fiscal year ended November 30, 2002.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option exercises
in fiscal year 2002 and option holdings as of November 30, 2002 with respect to
each of the Named Officers. No stock appreciation rights were outstanding at the
end of that year.
Number of Value* of
Securities In-the-money
Shares Underlying Options at
Acquired Value Options at November 30,
Name on Exercise Realized($) November 30, 2002 2002
---- ------------- ----------- ----------------- -----
Exercisable/ Exercisable/
Unexercisable Unexercisable
------------- -------------
John J. Shalam N/A N/A 525,000/0 $1,945,125/$0
Philip Christopher N/A N/A 1,011,000/0 $1,158,538/$0
Charles M. Stoehr N/A N/A 172,500/0 $ 193,538/$0
Patrick M. Lavelle N/A N/A 245,700/0 $ 217,253/$0
Richard A. Maddia N/A N/A 40,000/0 $ 62,050/$0
- -------------
* Based on the fair market value of the Company's Common Stock at November 30,
2002 less the exercise price payable for such shares.
147
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Number of Shares, Performance or Other Period
Name Units of Other Rights(1) Until Maturation or Payout
---- ------------------------ --------------------------
John J. Shalam 7.1428571364 Units(2) An initial public offering by Audiovox
Communications Corp. ("ACC") or an
acquisition of a controlling interest in ACC
Philip Christopher 7.1428571364 Units(2) An initial public offering by ACC - or the
plan termination date, May 28, 2007.
Charles M. Stoehr N/A N/A
Patrick M. Lavelle N/A N/A
Richard A. Maddia N/A N/A
- -------------
(1) The awards relate to the Class A Common Stock of Audiovox
Communications Corp., (the "Stock") a subsidiary of Audiovox
Corporation, which has 146.666666 shares issued and outstanding.
Audiovox Corporation owns 75% of those shares. Each unit is equivalent
to one share of stock.
(2) The value of these appreciation units shall be equivalent to the value
of one outstanding share of stock at such time that the performance
criteria is achieved.
COMPENSATION OF DIRECTORS
For their service, members of the Board of Directors who are not our salaried
employees receive an annual retainer of $15,000 and $500 for each meeting
attended.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
RESPONSIBILITIES OF THE COMMITTEE
The Compensation Committee of the Board of Directors reviews and approves
compensation for Audiovox's executive officers and oversees and administers
Audiovox's stock option and restricted stock plans. The Compensation Committee
recommends compensation for the Chief Executive Officer subject to the Board of
Directors approval of such recommendations. The Chief Executive Officer submits
recommended compensation levels for other executive officers of Audiovox to the
Compensation Committee for its review and approval, subject to applicable
employment agreements. Each member of the Compensation Committee is a
non-employee Director of Audiovox. The Compensation Committee of the Board of
Directors has furnished the following report on executive compensation for
fiscal 2002.
WHAT IS AUDIOVOX'S PHILOSOPHY OF EXECUTIVE OFFICER COMPENSATION?
Our compensation programs are designed to attract and retain talented executives
and motivate them to achieve corporate and business objectives that will
increase stockholder value. To attain both
148
near and long term corporate goals, it is our policy to provide incentives to
senior management and reward outstanding performance and contributions to
Audiovox's businesses. Consequently, Audiovox's compensation program for its
executives includes a competitive base salary, a performance-based annual bonus
and stock-based compensation. This approach to executive compensation enables
Audiovox to attract and retain executives of outstanding ability while ensuring
that our executives' compensation advances the interests of our shareholders.
Consequently, a large proportion of our executives' compensation, the annual
bonus, is dependent in significant part on Audiovox's performance. Although
Audiovox does not have employment agreements with any of its executive officers,
Mr. Philip Christopher's compensation is governed by an employment agreement
with Audiovox Communications Corp.
BASE SALARY
Salaries for the executive officers are designed to attract and retain qualified
and dedicated executive officers. Annually, the Committee reviews salary
recommendations made by Audiovox's Chief Executive Officer and evaluates
individual responsibility levels, experience, performance and length of service.
Base salaries for Audiovox's executive officers are fixed at levels commensurate
with competitive amounts paid to senior executives with comparable
qualifications at companies engaged in the same or similar businesses.
ANNUAL BONUS
Bonus compensation provides Audiovox with a means of rewarding performance based
upon attainment of corporate profitable during the fiscal year. For fiscal 2002,
the Compensation Committee established bonus compensation formulas for its
executives based upon the pre-tax earnings of the Company. The annual bonus paid
to Mr. Lavelle is based upon the achievement of fiscal goals within Audiovox
Electronics Corp. Mr. Christopher's annual bonus for fiscal 2002 was paid
pursuant to his employment agreement.
STOCK OPTIONS
During fiscal 2002, no stock options were granted to the Company's employees,
including the Company's executive officers.
HOW IS THE CHIEF EXECUTIVE OFFICER COMPENSATED?
The Compensation Committee has fixed the base salary of the Chief Executive
Officer based on competitive compensation data, the Committee's assessment of
Mr. Shalam's past performance and its expectation as to his future contributions
in guiding and directing Audiovox and its business. Mr. Shalam's 8 bonus for
fiscal 2002 was calculated on Audiovox's pre-income tax profit before
extraordinary items, other non-recurring transactions and income taxes of the
Company in accordance with Audiovox's Executive Officer Bonus Plan that was
approved by the shareholders in 2000.
HOW IS AUDIOVOX ADDRESSING INTERNAL REVENUE CODE LIMITS ON DEDUCTIBILITY OF
COMPENSATION?
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction
to public corporations for compensation over $1,000,000 paid for any fiscal year
to the corporation's chief executive
149
officer and four other most highly compensated executive officers as of the end
of any fiscal year. However, the statute exempts qualifying performance-based
compensation from the deduction limit if certain requirements are met. The
Compensation Committee currently intends to structure performance- based
compensation, including stock option grants and annual bonuses, to executive
officers who may be subject to Section 162(m) in a manner that satisfies those
requirements. The Board and the Compensation Committee reserve the authority to
award non-deductible compensation in other circumstances as they deem
appropriate. Further, because of ambiguities and uncertainties as to the
application and interpretation of Section 162(m) and the regulations issued
thereunder, no assurance can be given, notwithstanding the Company's efforts,
that compensation intended by the Company to satisfy the requirements for
deductibility under Section 162(m) does in fact do so.
Members of the Compensation Committee
PAUL C. KREUCH, JR.
DENNIS F. MCMANUS
IRVING HALEVY
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is currently comprised of two independent directors,
Paul C. Kreuch, Jr. and Dennis McManus.
PERFORMANCE GRAPH
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, INDUSTRY INDEX AND BROAD MARKET
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG AUDIOVOX CORPORATION,
NASDAQ MARKET INDEX AND SIC CODE INDEX
[GRAPH OMITTED]
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
AUDIOVOX CORPORATION 100.00 73.05 337.59 109.20 81.82 122.44
SIC CODE INDEX 100.00 75.93 84.07 64.27 64.72 55.98
NASDAQ MARKET INDEX 100.00 123.61 202.45 168.13 125.82 98.47
ASSUMES $100 INVESTED ON NOV. 28, 1997
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING NOV. 30, 2002
The annual changes for the five year period are based on the assumption
that $100 had been invested on December 1, 1997, and that all quarterly
dividends were reinvested. The total cumulative dollar returns shown on the
graph represent the value that such investments would have had on November 30,
2002.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 30, 2003, certain information with
respect to shares beneficially owned by (i) each person who is known by the
Company to be the beneficial owner of more than five percent (5%) of the
Company's outstanding shares of Common Stock, (ii) each of the Company's
directors and the executive officers named in the Summary Compensation Table
below and (iii) all current directors and executive officers as a group.
Beneficial ownership has been determined in accordance with Rule 13d-3 under the
Exchange Act. Under this rule, certain shares may be deemed to be beneficially
owned by more than one person (if, for example, persons share the power to vote
or the power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire shares
(for example, upon exercise of an option or warrant) within sixty (60) days of
the date as of which the information is provided. In computing the percentage
ownership of any person, the number of shares is deemed
150
to include the number of shares beneficially owned by such person (and only such
person) by reason of such acquisition rights. As a result, the percentage of
outstanding shares of any person as shown in the following table does not
necessarily reflect the person's actual voting power at any particular date.
Sole Voting or Percent of
Investment Outstanding
Name and Address (1) Power Shares
- -------------------- ----- ------
John J. Shalam................................................ 4,590,577(3) 21.7%
Philip Christopher............................................ 983,474 4.6%
Patrick M. Lavelle............................................ 183,078 *
Charles M. Stoehr............................................. 144,549 *
Richard Maddia................................................ 37,040 *
Ann M. Boutcher............................................... 16,323 *
Paul C. Kreuch, Jr............................................ 13,000 *
Dennis F. McManus............................................. 11,000 *
Irving Halevy................................................. - *
Peter Lesser.................................................. - *
All directors and officers as a group (10 persons)............ 5,979,041 26.8%
Name and Address of Other 5% Holders of Common Stock
Dimensional Fund Advisors, Inc. (4)........................... 1,245,721 6.0%
1299 Ocean Ave, 11th Floor
Santa Monica, CA 90401
Kahn Brothers & Co., Inc. (5)................................. 1,340,265 6.5%
1299 Ocean Ave, 11th Floor
Santa Monica, CA 90401
- -----------
* Represents less than 1%
(1) The address of each person, unless otherwise noted, is c/o Audiovox
Corporation, 150 Marcus Blvd., Hauppauge, NY 11788. In presents shares
beneficially owned and in calculating each holder's percentage ownership,
only options exercisable by that person within 60 days of February 1, 2003
and no options exercisable by any other person are deemed to be
outstanding.
(2) The number of shares stated as "beneficially owned" includes stock options
currently exercisable as follows: Mr. Shalam - 525,000, Mr. Christopher -
779,000, Mr. Lavelle - 165,700, Mr. Stoehr - 132,500, Mr. Maddia - 32,000,
Ms. Boutcher - 11,000, Mr. Kreuch - 11,000 and Mr. McManus - 11,000.
(3) Includes 2,144,152 shares of Class B common stock held by Mr. Shalam that
he may convert into Class A common stock at any time. Excludes 116,802
shares of Class B common stock and 2,002 shares of Class A common stock
that are held in irrevocable trusts for the benefit of Mr. Shalam's three
sons.
151
(4) Information reported is derived from a Schedule 13G dated February 3, 2003
of Dimensional Fund Advisors Inc. and filed with the Securities and
Exchange Commission on February 11, 2003.
(5) Information reported is derived from a Schedule 13G of Kahn Brothers &
Co., Inc. filed with the Securities and Exchange Commission on February 6,
2003.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
We lease some of our equipment, office, warehouse and distribution
facilities from entities in which our executive officers own controlling
interests. The following table identifies leases that result in payments in
excess of $60,000 to any of the related entities.
RENT PAID
DURING
REAL PROPERTY FISCAL
LOCATION EXPIRATION DATE OWNER OF PROPERTY YEAR 2002
-------- --------------- ----------------- ---------
150 Marcus Blvd. November 30,
Hauppauge, NY 2008 150 Marcus Blvd. Realty LLC (1) $530,000
16808 Marquardt Avenue
Cerritos, CA June 30, 2008 Marquardt Associates (2) 563,399
555 Wireless Blvd.
Hauppauge, NY December 1, 2026 Wireless Blvd. Realty, LLC (3) 589,340
110 Marcus Blvd.
Hauppauge, NY May 31, 2006 110 Marcus Blvd. Realty LLC (4) 113,220
EQUIPMENT
LOCATION
--------
555 Wireless Blvd.
Hauppauge, NY March 31, 2003 Wireless Blvd. Realty, LLC (3) 410,640
- -------------
(1) Property owned by 150 Marcus Blvd. Realty LLC, a New York limited
liability company, of which John J. Shalam owns 1% and Mr. Shalam's three
sons own the remaining 99%.
(2) Property owned by Marquardt Associates, a California partnership, owned
60% by John J. Shalam and 40% by Ardama Capital LLC, a New York limited
liability company owned by Mr. Shalam's three sons.
(3) Property owned or leased by Wireless Blvd. Realty, LLC, a New York limited
liability company, owned 98% by the Shalam Long Term Trust, 1% by John J.
Shalam and 1% by Mr. Shalam's three sons. The Shalam Long Term Trust is a
grantor trust of which Mr. Shalam is the Grantor and his three sons are
the beneficiaries.
(4) Property owned or leased by 110 Marcus Blvd. Realty, LLC, a Ne York
limited liability company,
152
of which John J. Shalam owns 1% and Mr. Shalam's sons own the remaining
99%.
We believe that the terms of each of the leases are no less favorable
to us than those that could have been obtained from unaffiliated third parties.
To the extent that conflicts of interest arise between us and such persons in
the future, such conflicts will be resolved by a committee of disinterested
directors.
PART IV
ITEM 14 - CONTROLS AND PROCEDURES
Within the 90-day period immediately preceding the filing of this
Report, the Company's Chief Executive Officer and Principal Financial Officer
has each evaluated the effectiveness of the Company's "Disclosure Controls and
Procedures" and has concluded that they were effective. As such term is used
above, the Company's Controls and Procedures are controls and other procedures
of the Company that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Security Exchange Commission's rules
and forms. Disclosure Controls and Procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by the Company in such reports is accumulated and communicated to the
Company's management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect such controls subsequent to the
date that the Company's Chief Executive Officer and Principal Financial Officer
conducted their evaluations of the Disclosure Controls and Procedures, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
ITEM 15 - EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1)
The following are included in Item 8 of this Report:
Independent Auditors' Report
Consolidated Balance Sheets of Audiovox Corporation and Subsidiaries as of
November 30, 2001 and 2002.
Consolidated Statements of Operations of Audiovox Corporation and Subsidiaries
for the Years Ended November 30, 2000, 2001 and 2002.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
of Audiovox Corporation and Subsidiaries for the Years Ended November 30, 2000,
2001 and 2002.
Consolidated Statements of Cash Flows of Audiovox Corporation and Subsidiaries
for the Years Ended
153
November 30, 2000, 2001 and 2002.
Notes to Consolidated Financial Statements.
(a) (2)
Financial Statement Schedules of the Registrant for the Years Ended November 30,
2000, 2001 and 2002.
Independent Auditors' Report on Financial Statement Schedules
Schedule Page
Number Description Number
------ ----------- ------
Valuation and Qualifying Accounts 160
II
All other financial statement schedules not listed are omitted because they are
either not required or the information is otherwise included.
154
Independent Auditors' Report
The Board of Directors and Stockholders
Audiovox Corporation:
Under the date of May 30, 2003 we reported on the consolidated balance sheets of
Audiovox Corporation and subsidiaries as of November 30, 2001 and 2002, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss) and cash flows for each of the years in the
three-year period ended November 30, 2002, which are included in the Company's
2002 annual report on Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule in the 2002 annual report on Form
10-K. This consolidated financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1, effective December 1, 2001, the Company adopted the
provisions of Statement of Financial Accounting Standards (Statement) No. 141,
"Business Combinations" and Statement No. 142, "Goodwill and Other Intangible
Assets".
As discussed in Note 2 to the accompanying consolidated financial statements,
the consolidated balance sheet as of November 30, 2001, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss) and cash flows for the years ended November 30, 2000 and 2001 have
been restated.
/s/ KPMG LLP
--------------
KPMG LLP
Melville, New York
May 30, 2003
155
(3) Exhibits
See Item 15(c) for Index of Exhibits.
(b) Reports on Form 8-K
During the fourth quarter, the Company filed one report on Form 8-K,
dated October 21, 2002 and filed on October 22, 2002. The Form 8-K
reported that on October 21, 2002, Audiovox Corporation submitted to
the Securities and Exchange Commission (SEC) the Statements under Oath
of the Principal Executive Officer and the Principal Financial Officer
in accordance with the SEC's June 27, 2002 Order requiring the filing
of sworn statements pursuant to Section 21(a)(1) of the Securities
Exchange Act of 1934.
(c) Exhibits
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of the Company (incorporated by
reference to the Company's Registration Statement on Form S-1;
No. 33-107, filed May 4, 1987).
3.1a Amendment to Certificate of Incorporation (incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended November 30, 1993).
3.1b Amendment to Certificate of Incorporation (incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended November 30, 2000).
3.2 By-laws of the Company (incorporated by reference to the
Company's Registration Statement on Form S-1; No. 33-10726,
filed May 4, 1987).
10.1 The Fourth Amended and Restated Credit Agreement among the
Registrant and the several banks and financial institutions
dated as of July 28, 1999 (incorporated by reference to the
Company's Form 8-K filed via EDGAR on October 27, 1999).
10.2 First Amendment, dated as of October 13, 1999, to the Fourth
Amended and Restated Credit Agreement among the Registrant and
the several banks and financial institutions (incorporated by
reference to the Company's Form 8-K filed via EDGAR on October
27, 1999).
10.3 Second Amendment, dated as of December 20, 1999, to the Fourth
Amended and Restated Credit Agreement among the Registrant and
the several banks and financial institutions (incorporated by
reference to the Company's Form 8-K filed via EDGAR on January
13, 2000).
10.4 Securities Purchase Agreement made and entered into as of May
29, 2002, by and among Toshiba Corporation, Audiovox
Communications Corp. and Audiovox Corporation (incorporated by
reference to the Company's Form 8-K filed via EDGAR on June 6,
2002).
156
Exhibit
Number Description
------ -----------
10.5 Stockholders Agreement made and entered into as of May 29,
2002, by and among Toshiba Corporation, Audiovox
Communications Corp. and Audiovox Corporation (incorporated by
reference to the Company's Form 8-K filed via EDGAR on June 6,
2002).
10.6 Distribution Agreement made and entered into as of May 29,
2002, by and between Toshiba Corporation and Audiovox
Communications Corp.(incorporated by reference to the
Company's Form 8-K filed via EDGAR on June 6, 2002).
10.7 Non-Negotiable Subordinated Convertible Promissory Note dated
May 31, 2002 by Audiovox Communications Corp. in favor of
Toshiba Corporation (incorporated by reference to the
Company's Form 8-K filed via EDGAR on June 6, 2002).
10.8 Employment Agreement effective as of May 29, 2002 by and among
Audiovox Communications Corp., Philip Christopher and Audiovox
Corporation (incorporated by reference to the Company's Form
8-K filed via EDGAR on June 6, 2002).
10.9 Trademark License Agreement made as of May 29, 2002 between
Audiovox Corporation and Audiovox Communications
Corp.(incorporated by reference to the Company's Form 8-K
filed via EDGAR on June 6, 2002).
10.10 Non-Negotiable Demand Note dated May 29, 2002 by Audiovox
Communications Corp. in favor of Audiovox Corporation
(incorporated by reference to the Company's Form 8-K filed via
EDGAR on June 6, 2002).
10.11 Sixth Amendment and Consent, dated as of May 28, 2002 to the
Fourth Amended and Restated Credit Agreement, dated as of July
28, 1999 (as amended) among Audiovox Corporation, the several
banks and other financial institutions from time to time
parties thereto (collectively the "Lenders") and JPMorgan
Chase Bank, as administrative and collateral agent for the
Lenders (incorporated by reference to the Company's Form 8-K
filed via EDGAR on June 6, 2002).
10.12 Long Term Incentive Compensation Award to John J. Shalam
(filed herewith).
10.13 Long Term Incentive Compensation Award to Philip Christopher
(filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23 Independent Auditors' Consent (filed herewith).
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith).
(d) All other schedules are omitted because the required information is
shown in the financial statements or notes thereto or because they are
not applicable.
157
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AUDIOVOX CORPORATION
June 2, 2003 BY:/s/ /John J. Shalam
-----------------------------
John J. Shalam, President
and Chief Executive Officer
158
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
President;
/s/ John J. Shalam Chief Executive Officer
- ------------------ (Principal Executive Officer June 2, 2003
John J. Shalam and Director
/s/ Philip Christopher Executive Vice President and
- ---------------------- Director June 2, 2003
Philip Christopher
Senior Vice President,
Chief Financial Officer
(Principal Financial and June 2, 2003
/s/ Charles M. Stoehr Accounting Officer) and
- --------------------- Director
Charles M. Stoehr
/s/ Patrick M. Lavelle Director June 2, 2003
- ----------------------
Patrick M. Lavelle
/s/ Ann Boutcher Director June 2, 2003
- -----------------
Ann Boutcher
/s/ Richard A. Maddia Director June 2, 2003
- ---------------------
Richard A. Maddia
/s/ Paul C. Kreuch, Jr. Director June 2, 2003
- -----------------------
Paul C. Kreuch, Jr.
/s/ Dennis McManus Director
- ------------------
Dennis McManus June 2, 2003
/s/ Irving Halevy Director
- -----------------
Irving Halevy June 2, 2003
159
SCHEDULE II
AUDIOVOX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended November 30, 2000, 2001 and 2002
(In thousands)
Column A Column B Column C Column D Column E
-------- --------- --------------------------------- ----------------- --------
Gross
Amount Reversals of
Balance at Charged to Previously Balance
Beginning Costs and Established At End
Description Of Year Expenses Accruals Deductions (a) Of Year
----------- --------- --------- ---------- ---------- --------
2000 - As Restated
- ------------------
Allowance for doubtful accounts $ 5,645 $ 2,519 - $ 1,867 $ 6,297
Cash discount allowances 219 - - 24 195
Accrued sales incentives 11,137 24,736 $ (9,348) 11,931 14,594
Allowance for cellular deactivations 1,261 - - 7 1,254
Reserve for warranties and product
repair costs 7,771 8,256 - 3,653 12,374
------- ------- --------- --------- -------
$26,033 $35,511 $ (9,348) $ 17,482 $34,714
======= ======= ========== ========= =======
2001 - As Restated
- ------------------
Allowance for doubtful accounts $ 6,297 $ 1,936 - $ 3,518 $ 4,715
Cash discount allowances 195 - - 13 182
Accrued sales incentives 14,594 25,469 $ (14,369) 17,220 8,474
Allowance for cellular deactivations 1,254 - - (781) 2,035
Reserve for warranties and product
repair costs 12,374 11,319 - 10,627 13,066
------- ------- --------- --------- -------
$34,714 $38,724 $ (14,369) $ 30,597 $28,472
======= ======= ========= ========= =======
2002
- ----
Allowance for doubtful accounts $ 4,715 $ 4,884 - $ 2,770 $ 6,829
Cash discount allowances 182 - - (25) 207
Accrued sales incentives 8,474 38,851 $ (4,716) 30,458 12,151
Allowance for cellular deactivations 2,035 - - 407 1,628
Reserve for warranties and product
repair costs 13,066 6,985 - 4,641 15,410
------- ------- --------- --------- -------
$28,472 $50,720 $ (4,716) $ 38,251 $36,225
======= ======= ========== ========= =======
(a) For the allowance for doubtful accounts, cash discount allowances and
accrued sales incentives, deductions represent payments made or credits
issued to customers. For the allowance for cellular deactivations,
deductions represent credits taken against accounts receivable by carrier
customers for deactivations of previously activated wireless customers. For
the reserve for warranties and product repair costs, deductions represent
payments for labor and parts made to service centers and vendors for the
repair of units returned under warranty.
160
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, John J. Shalam, certify that:
1. I have reviewed this annual report on Form 10-K of Audiovox Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and,
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial date and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 2, 2003
/s/ John J. Shalam
- ------------------------------------
John J. Shalam,
Chief Executive Officer
161
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Charles M. Stoehr, certify that:
1. I have reviewed this annual report on Form 10-K of Audiovox Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and,
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial date and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 2, 2003
/s/ Charles M. Stoehr
- -----------------------------------------
Charles M. Stoehr
Chief Financial Officer
162