UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended May 31, 2002
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Commission file number 0-28839
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AUDIOVOX CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
- ------------------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Marcus Blvd., Hauppauge, New York 11788
- ------------------------------------------------------------ ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 231-7750
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Number of shares of each class of the registrant's Common Stock outstanding as
of the latest practicable date.
Class Outstanding at July 8, 2002
---------------------------------------------------------------------
Class A Common Stock 21,525,383 Shares
Class B Common Stock 2,260,954 Shares
1
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements:
Consolidated Balance Sheets at November 30,
2001 and May 31, 2002 (unaudited) 3
Consolidated Statements of Operations for the
Three and Six Months Ended May 31, 2001
and May 31, 2002 (unaudited) 4
Consolidated Statements of Cash Flows
for the Six Months Ended May 31, 2001
and May 31, 2002 (unaudited) 5
Notes to Consolidated Financial Statements 6-18
ITEM 2 Management's Discussion and Analysis of
Financial Operations and Results of
Operations 19-46
PART II OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders 47
ITEM 6 Exhibits and Reports on Form 8-K 47-48
SIGNATURES 49
2
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
November 30, May 31,
2001 2002
--------- ---------
(unaudited)
Assets
Current assets:
Cash $ 3,025 $ 803
Accounts receivable, net 227,209 211,723
Inventory, net 225,662 264,925
Receivable from vendors 6,919 19,629
Prepaid expenses and other current assets 7,632 8,160
Deferred income taxes, net 11,997 12,281
--------- ---------
Total current assets 482,444 517,521
Investment securities 5,777 5,468
Equity investments 10,268 10,706
Property, plant and equipment, net 25,687 26,489
Excess cost over fair value of assets acquired and other intangible assets, net 4,742 5,231
Deferred income taxes, net 3,148 --
Other assets 1,302 1,090
--------- ---------
$ 533,368 $ 566,505
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 57,162 $ 156,187
Accrued expenses and other current liabilities 41,854 38,472
Income taxes payable 3,035 2,140
Bank obligations 92,213 3,605
Notes payable 5,267 5,239
--------- ---------
Total current liabilities 199,531 205,643
Bank obligations -- 9,363
Long-term debt, less current installments -- 8,122
Capital lease obligation 6,196 6,170
Deferred compensation 3,844 4,224
Deferred income taxes -- 2,426
--------- ---------
Total liabilities 209,571 235,948
--------- ---------
Minority interest 1,851 9,442
--------- ---------
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 2,500
Common stock:
Class A; 60,000,000 authorized; 20,615,846 issued at November 30, 2001
and May 31, 2002, 19,706,309 outstanding at November 30,
2001 and May 31, 2002 207 207
Class B convertible; 10,000,000 authorized; 2,260,954 issued and
outstanding 22 22
Paid-in capital 250,785 249,287
Retained earnings 82,162 82,667
Accumulated other comprehensive loss (6,344) (6,182)
Treasury stock, at cost, 909,537 Class A common stock at November 30,
2001 and May 31, 2002 (7,386) (7,386)
--------- ---------
Total stockholders' equity 321,946 321,115
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 533,368 $ 566,505
========= =========
See accompanying notes to consolidated financial statements.
3
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three and Six Months Ended May 31, 2001 and May 31, 2002
(In thousands, except share and per share data)
(unaudited)
Three Months Ended Six Months Ended
May 31, May 31,
2001 2002 2001 2002
------ ------ ------ -----
Net sales $ 276,814 $ 304,603 $ 605,117 $ 493,200
Cost of sales 266,091 280,778 567,303 451,558
------------ ------------ ------------ -------------
Gross profit 10,723 23,825 37,814 41,642
------------ ------------ ------------ -------------
Operating expenses:
Selling 7,371 7,631 14,393 14,385
General and administrative 10,577 15,856 21,711 26,508
Warehousing and assembly 5,956 5,889 11,302 11,735
------------ ------------ ------------ -------------
Total operating expenses 23,904 29,376 47,406 52,628
------------ ------------ ------------ -------------
Operating loss (13,181) (5,551) (9,592) (10,986)
------------ ------------ ------------ -------------
Other income (expense):
Interest and bank charges (1,453) (1,038) (2,459) (2,002)
Equity in income of equity investments 1,191 557 2,561 861
Gain on issuance of subsidiary shares -- 15,825 -- 15,825
Other, net 531 (246) 601 (11)
------------ ------------ ------------ -------------
Total other income, net 269 15,098 703 14,673
------------ ------------ ------------ -------------
Income (loss) before provision for (recovery of) income taxes and
cumulative effect of a change in an accounting principle (12,912) 9,547 (8,889) 3,687
Provision for (recovery of) income taxes (4,649) 5,092 (3,191) 3,422
------------ ------------ ------------ -------------
Net income (loss) before cumulative effect of a change in
accounting for negative goodwill (8,263) 4,455 (5,698) 265
Cumulative effect of a change in accounting for negative goodwill -- -- -- 240
------------ ------------ ------------ -------------
Net income (loss) $ (8,263) $ 4,455 $ (5,698) $ 505
============= ============= ============ =============
Net income (loss) per common share (basic):
Income (loss) before cumulative effect of a change in
accounting for negative goodwill $ (0.38) $ 0.20 $ (0.26) $ 0.01
Cumulative effect of a change in accounting for negative
goodwill -- -- -- 0.01
------------ ------------ ------------ -------------
Net income (loss) per common share $ (0.38) $ 0.20 $ (0.26) $ 0.02
============= ============ =========== ===========
Net income (loss) per common share (diluted):
Income (loss) before cumulative effect of a change in
accounting for negative goodwill $ (0.38) $ 0.20 $ (0.26) $ 0.01
Cumulative effect of a change in accounting for negative
goodwill -- -- -- 0.01
------------ ------------ ------------ -------------
Net income (loss) per common share $ (0.38) $ 0.20 $ (0.26) $ 0.02
============= ============ =========== ===========
Weighted average number of common shares outstanding (basic) 21,920,990 21,967,263 21,787,738 21,967,263
============= ============ =========== ===========
Weighted average number of common shares outstanding (diluted) 21,920,990 22,007,598 21,787,738 22,005,508
============= ============ =========== ===========
See accompanying notes to consolidated financial statements.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended May 31, 2001 and May 31, 2002
(In thousands)
(unaudited)
May 31,
2001 2002
------ -----
Cash flows from operating activities:
Net income (loss) $ (5,698) $ 505
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Gain on issuance of subsidiary shares -- (15,825)
Depreciation and amortization 2,119 2,314
Provision for bad debt expense 331 1,269
Equity in income of equity investments (2,561) (861)
Minority interest (382) (477)
Deferred income tax expense 124 5,290
Gain on disposal of property, plant and equipment, net (1) (12)
Cumulative effect of a change in accounting for negative goodwill -- (240)
Changes in:
Accounts receivable 80,347 16,315
Receivable from vendors (3,638) (12,710)
Inventory (96,956) (39,384)
Accounts payable, accrued expenses and other current liabilities (34,903) 101,556
Income taxes payable (6,274) (895)
Deferred compensation 1,890 380
Investment securities - trading (1,890) (380)
Prepaid expenses and other, net 733 (2,108)
-------- ---------
Net cash (used in) provided by operating activities (66,759) 54,737
-------- ---------
Cash flows from investing activities:
Proceeds from issuance of subsidiary shares -- 22,399
Purchase of acquired business -- (7,107)
Purchases of property, plant and equipment, net (1,342) (1,630)
Proceeds from distribution from equity investment 709 359
-------- ---------
Net cash (used in) provided by investing activities (633) 14,021
-------- ---------
Cash flows from financing activities:
Borrowings (repayments) of bank obligations, net 65,221 (78,856)
Proceeds from issuance of convertible subordinated debentures -- 8,107
Payment of dividend to minority shareholder of subsidiary (1,034) --
Principal payments on capital lease obligation (14) (26)
Proceeds from exercise of stock options and warrants 2,320 --
Principal payments on subordinated debentures (486) --
Repurchase of Class A common stock (1,382) --
-------- ---------
Net cash provided by (used in) financing activities 64,625 (70,775)
-------- ---------
Effect of exchange rate changes on cash (10) (205)
-------- ---------
Net decrease in cash (2,777) (2,222)
Cash at beginning of period 6,431 3,025
-------- ---------
$ 3,654 $ 803
======== =========
Cash at end of period
See accompanying notes to consolidated financial statements.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Six Months Ended May 31, 2001 and May 31, 2002 (unaudited)
(Dollars in thousands, except share and per share data)
(1) Basis of Presentation
The accompanying consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United
States of America and include all adjustments, which include only
normal recurring adjustments, which, in the opinion of management, are
necessary to present fairly the consolidated financial position of
Audiovox Corporation and subsidiaries (the Company) as of November 30,
2001 and May 31, 2002, the consolidated statements of operations for
the three and six month periods ended May 31, 2001 and May 31, 2002,
and the consolidated statements of cash flows for the six month
periods ended May 31, 2001 and May 31, 2002. The interim figures are
not necessarily indicative of the results for the year.
Accounting policies adopted by the Company are identified in Note 1 of
the Notes to Consolidated Financial Statements included in the
Company's 2001 Annual Report filed on Form 10-K.
In fiscal 2001, the Company adopted the provisions of Emerging Issue
Task Force Issue (EITF) No. 00-10, "Accounting for Shipping and
Handling Fees and Costs", which requires the Company to report all
amounts billed to a customer related to shipping and handling as
revenue. The Company includes all costs incurred for shipping and
handling as cost of sales. The Company has reclassified such billed
amounts, which were previously netted in cost of sales to net sales.
As a result of this reclassification, net sales and cost of goods sold
were increased by $503 and $809 for the three and six months ended May
31, 2001, respectively.
During the quarter ended May 31, 2002, the Company adopted the
provisions of EITF Issue No. 01-9, "Accounting for Consideration Given
by a Vendor to a Customer or a Reseller of the Vendor's Products". 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, which were previously included in selling
expenses, to net sales. As a result of this reclassification, net
sales and selling expenses were (increased) reduced by ($180) and
$2,570 for the three and six months ended May 31, 2001, respectively.
Net sales and selling expenses were increased for the three months
ended May 31, 2001 rather than reduced as a result of the adoption of
EITF 01-9 because of the reversals of previously established
co-operative advertising, market development funds and volume
incentive rebate costs exceeded the provisions for such accruals
during this period. The adoption of EITF 01-9 reduced net sales and
selling expenses by $14,093 and $16,508 for the three and six months
ended May 31, 2002, respectively.
6
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
Six Months Ended
May 31,
2001 2002
------ -----
Cash paid during the period:
Interest (excluding bank charges) $1,392 $1,152
Income taxes (net of refunds) $2,037 $ 500
During the six months ended May 31, 2001 and May 31, 2002, the Company
recorded a net unrealized holding gain (loss) relating to
available-for-sale marketable securities, net of deferred taxes, of
$420 and ($414), respectively, as a component of accumulated other
comprehensive loss.
(3) Business Acquisition
On March 15, 2002, Code Systems, Inc., a wholly-owned subsidiary of
Audiovox Electronics Corp., purchased the assets of Code-Alarm, Inc.,
an automotive security product company. The purchase price consisted
of approximately $7,100, paid in cash at the closing, and a debenture
(CSI Debenture) whose value is linked to the future earnings of Code
Systems, Inc. The payment of any amount under the terms of the CSI
Debenture is based on performance and is scheduled to occur in the
first calendar quarter of 2006. The Company accounted for the
transaction in accordance with the purchase method of accounting. As a
result of the transaction, goodwill of $212 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 for the three and six month
periods ended May 21, 2001 and 2000 were not provided as the amounts
were deemed immaterial to the consolidated financial statements of the
Company.
(4) Co-operative Advertising Allowances, Market Development Funds and
Volume Incentive Rebates
The accrual for co-operative advertising allowances, market
development funds and volume incentive rebates at November 30, 2001
and May 31, 2002 was $10,366 and $21,028, respectively, and represents
management's best estimate of amounts owed under these arrangements.
During the three and six months ended May 31, 2001, $5,762 and $8,277,
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
respectively, and, during the three and six months ended May 31, 2002,
$1,536 and $1,566, respectively, were recorded into income
representing revisions to previously established co- operative
advertising allowances, market development funds and volume incentive
rebate accruals. Due to uncertainties inherent in the estimation
process, it is at least reasonably possible that the accrual will be
further revised in the near term.
(5) Inventory
The markets in which the Company competes are characterized by
declining prices, intense competition, rapid technological change and
frequent new product introductions. The Company maintains a
significant investment in inventory and, therefore, is subject to the
risk of losses on write-downs to market and inventory obsolescence.
During the quarters ended February 28, 2002 and May 31, 2002, the
Company recorded inventory write-downs to market of $1,040 and $2,290,
respectively, as a result of the recent reduction of selling prices
primarily related to digital hand-held phones in anticipation of new
digital technologies. It is reasonably possible that additional
write-downs to market may be required in the future, however, no
estimate can be made of such losses. In addition, given the
anticipated emergence of new technologies in the wireless industry,
the Company will need to sell existing inventory quantities of current
technologies to avoid further write-downs to market. No guarantee can
be made that further reductions in the carrying value of this or other
models will not be required in the future.
At May 31, 2002, the Company had on hand 512,838 units in the amount
of $115,054, which has been recorded in inventory and accounts payable
on the accompanying consolidated balance sheet. The Company has 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.
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Net Income (Loss) Per Common Share
A reconciliation between the numerators and denominators of the basic
and diluted income (loss) per common share is as follows:
Three Months Ended Six Months Ended
May 31, May 31,
2001 2002 2001 2002
------ ------ ------ -----
Net income (loss) (numerator for basic
income per share) $ (8,263) $ 4,455 $ (5,698) $ 505
Interest on 6 1/4% convertible subordinated
debentures, net of tax -- -- 5 --
----------- ------------ ----------- -----------
Adjusted net income (loss) (numerator for
diluted income per share) $ (8,263) $ 4,455 $ (5,693) $ 505
=========== ============ =========== ===========
Weighted average common shares
(denominator for basic income per share) 21,920,990 21,967,263 21,787,738 21,967,263
Effect of dilutive securities:
6 1/4% convertible subordinated debentures -- -- -- --
Employee stock options and stock
warrants -- 40,335 -- 38,245
----------- ------------ ----------- -----------
Weighted average common and potential
common shares outstanding
(denominator for diluted income per
share) 21,920,990 22,007,598 21,787,738 22,005,508
=========== ============ =========== ===========
Net income (loss) per common share (basic):
Income (loss) before cumulative effect of
a change in accounting for negative
goodwill $ (0.38) $ 0.20 $ (0.26) $ 0.01
Cumulative effect of a change in
accounting for negative goodwill -- -- -- 0.01
----------- ------------ ----------- -----------
Net income (loss) per common share $ (0.38) $ 0.20 $ (0.26) $ 0.02
=========== ============ =========== ===========
Net income (loss) per common share (diluted):
Income (loss) before cumulative effect of
a change in accounting for negative
goodwill $ (0.38) $ 0.20 $ (0.26) $ 0.01
Cumulative effect of a change in
accounting for negative goodwill -- -- -- 0.01
----------- ------------ ----------- -----------
Net income (loss) per common share $ (0.38) $ 0.20 $ (0.26) $ 0.02
=========== ============ =========== ===========
Stock options and warrants totaling 2,789,504 and 2,177,252 for the
three and six months ended May 31, 2001, respectively, were not
included in the net loss per common share
9
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
calculation because their effect would have been anti-dilutive. Stock
options and warrants totaling 2,457,200 and 2,598,450 for the three
and
six months ended May 31, 2002, respectively, were not included in the
net income per common share calculation because their effect would have
been anti-dilutive.
(7) Comprehensive Income (Loss)
The accumulated other comprehensive loss of $6,344 and $6,182 at
November 30, 2001 and May 31, 2002, respectively, on the accompanying
consolidated balance sheets is the net accumulated unrealized loss on
the Company's available-for-sale investment securities of $1,021 and
$1,435 at November 30, 2001 and May 31, 2002, respectively, and the
accumulated foreign currency translation adjustment of $5,323 and
$4,747 at November 30, 2001 and May 31, 2002, respectively.
The Company's total comprehensive income (loss) was as follows:
Three Months Ended Six Months Ended
May 31, May 31,
2001 2002 2001 2002
------- ------- ------- -----
Net income (loss) $(8,263) $ 4,455 $(5,698) $ 505
------- ------- ------- -----
Other comprehensive income (loss):
Foreign currency translation adjustments 18 799 51 576
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during
period, net of tax 811 (65) 420 (414)
------- ------- ------- -----
Other comprehensive loss, net of tax 829 734 471 162
------- ------- ------- -----
Total comprehensive income (loss) $(7,434) $ 5,189 $(5,227) $ 667
======= ======= ======= =====
The change in the net unrealized gain (loss) arising during the
periods presented above are net of tax benefit (expense) of $497 and
($40) for the three months ended May 31, 2001 and May 31, 2002,
respectively, and $257 and ($254) for the six months ended May 31,
2001 and May 31, 2002, respectively.
(8) Segment Information
The Company has two reportable segments which are organized by
products: Wireless and Electronics. The Wireless segment primarily
markets wireless handsets and accessories through domestic and
international wireless carriers and their agents, independent
distributors and retailers. The Electronics segment sells autosound,
mobile electronics and consumer electronics, primarily to mass
merchants, power retailers, specialty retailers, new car dealers,
original equipment manufacturers (OEM), independent installers of
automotive accessories
10
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
and the U.S. military.
The Company evaluates performance of the segments based upon income
before provision for income taxes. The accounting policies of the
segments are the same as those for the Company as a whole. The Company
allocates interest and certain shared expenses, including treasury,
legal and human resources, to the segments based upon estimated usage.
Intersegment sales are reflected at cost and have been eliminated in
consolidation. A royalty fee on the intersegment sales, which is
eliminated in consolidation, is recorded by the segments and included
in other income (expense). Certain items are maintained at the
Company's corporate headquarters (Corporate) and are not allocated to
the segments. They primarily include costs associated with accounting
and certain executive officer salaries and bonuses and certain items
including investment securities, equity investments, deferred income
taxes, certain portions of excess cost over fair value of assets
acquired, jointly-used fixed assets and debt. The jointly-used fixed
assets are the Company's management information systems, which are
used by the Wireless and Electronics segments and Corporate. A portion
of the management information systems costs, including depreciation
and amortization expense, are allocated to the segments based upon
estimates made by management. During the six months ended May 31, 2001
and May 31, 2002, certain advertising costs were not allocated to the
segments. These costs pertained to an advertising campaign that was
intended to promote overall Company awareness, rather than individual
segment products. Segment identifiable assets are those which are
directly used in or identified to segment operations.
Elimin- Consolidated
Wireless Electronics Corporate ations Totals
Three Months Ended
May 31, 2001
Net sales $ 202,024 $74,790 -- - $ 276,814
Intersegment sales (purchases) (92) 92 -- - --
Pre-tax income (loss) (15,769) 3,196 $ (339) - (12,912)
Three Months Ended
May 31, 2002
Net sales $ 214,057 $90,546 -- - $ 304,603
Intersegment sales (purchases) (25) 25 -- - --
Pre-tax income (loss) (8,229) 4,622 13,154 - 9,547
11
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Elimin- Consolidated
Wireless Electronics Corporate ations Totals
Six Months Ended
May 31, 2001
Net sales $ 465,678 $139,439 -- -- $ 605,117
Intersegment sales (purchases) (213) 213 -- -- --
Pre-tax income (loss) (12,445) 5,507 $ (1,951) -- (8,889)
Total assets 326,741 125,579 367,447 $(296,934) 522,833
Six Months Ended
May 31, 2002
Net sales $ 331,649 $161,551 -- -- $ 493,200
Intersegment sales (purchases) (15) 15 -- -- --
Pre-tax income (loss) (14,775) 7,320 $ 11,142 -- 3,687
Total assets 371,777 142,650 284,959 $(232,881) 566,505
(9) Transactions With a Major Supplier
(a) Audiovox Communications Corp. Dividend
In February 2001, the Board of Directors of Audiovox
Communications Corp. (ACC), declared a dividend payable to
its shareholders, Audiovox Corporation, a then 95%
shareholder, and Toshiba Corporation (Toshiba), a then 5%
shareholder for their respective share of net income for the
previous fiscal years. ACC paid Toshiba its share of the
dividend, which approximated $1,034 in the first quarter of
2001. There were no dividends declared during 2002, due to
the net loss of ACC during 2001.
(b) Issuance of Subsidiary Shares
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.
12
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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, upon the termination of the
distribution agreement in accordance with certain terms of the
distribution agreement, Toshiba maintains a put right and Audiovox
Corp. a call right, to repurchase all of the shares held by the other
party for a price equal to the fair market value of the shares as
calculated in accordance with the agreement. Audiovox's call right is
only exercisable if Toshiba elects to terminate the distribution
agreement after its initial five (5) year term.
Additionally, ACC entered into an employment agreement with the
President and Chief Executive Officer (the Executive) of ACC through
May 29, 2007. Under the agreement, ACC is required to pay the
Executive an annual base salary of $500 in addition to an annual bonus
equal to 2% of ACC's annual earnings before income taxes. Audiovox
Corp., under the employment agreement, was required to establish and
pay a bonus of $3,200 to key employees of ACC, including the
Executive, to be allocated by the Executive. The bonus was for
services previously rendered, and, accordingly, the bonus has been
included in general and administrative expenses in the accompanying
statements of operations for the three and six months ended May 31,
2002. The Executive was required to utilize all or a portion of the
bonus allocated to him to repay the remaining outstanding principal
and accrued interest owed by the Executive to the Company pursuant to
the unsecured promissory note in favor of Audiovox Corp. Subsequent to
May 31, 2002, the Executive was paid $1,800 less the amount
outstanding under the promissory note of $651.
As a result of the issuance of ACC's shares, the Company recognized a
gain of $15,825 ($9,811 after provision for deferred taxes). The gain
on the issuance of the subsidiary's shares has been recognized in the
accompanying consolidated statements of operations.
(10) Business Combinations and Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that purchase method of accounting be
used for all future business combinations and specifies criteria
intangible assets acquired in a business combination must meet to be
recognized and reported apart from goodwill. SFAS No. 142 requires
that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least
annually in
13
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 during the six month period ended May 31,
2002, which approximated $142 during the prior six months ended May
31, 2001. 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."
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.
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.
(11) Product Return
During the quarter ended February 28, 2001, Wireless refunded
approximately $21,000 to a customer, who is a wireless carrier, for
the return of approximately 97,000 tri-mode phones. During January
2001, Wireless also purchased 93,600 of the same model of tri-mode
phone for a cost of $12.4 million. As a result of changes in the
marketplace for wireless products, the selling price of the phones has
been reduced below the original cost. The Company did not record a
write-down on these phones as they expected to receive a full refund
or partial credit from the manufacturer of the phones during the
second quarter of 2001. In April 2001, the Company received a credit
from the manufacturer of $12.4 million. The credit was applied against
the carrying value of the phones on hand which approximated 190,600
phones, which are appropriately recorded at the lower of cost or
market. All of these phones were subsequently sold.
(12) Sales/Leaseback Transaction
In April 2000, AX Japan purchased land and a building (the Property)
from Shintom Co., Ltd. (Shintom) for 770,000,000 Yen (approximately
$7,300) and entered into a leaseback
14
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
agreement whereby Shintom leased the Property from AX Japan for a
one-year period. This lease is being accounted for as an operating
lease by AX Japan. Shintom is a stockholder who owns all of the
outstanding preferred stock of the Company and is a manufacturer of
products purchased by the Company through its previously-owned equity
investee, TALK Corporation (TALK). The Company currently holds stock
in Shintom and has previously invested in Shintom convertible
debentures.
The purchase of the Property by AX Japan was financed with a
500,000,000 Yen ($4,671) subordinated loan obtained from Vitec Co.,
Ltd. (Vitec), a 150,000,000 Yen loan ($1,397) from Pearl First (Pearl)
and a 140,000,000 Yen loan ($1,291) from the Company. The land and
building have been included in property, plant and equipment, and the
loans have been recorded as notes payable on the accompanying
consolidated balance sheets as of November 30, 2001 and May 31, 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 was
payable in equal monthly installments over a six-month period
beginning six months subsequent to the date of the loans. The loans
from Vitec and Pearl are subordinated completely to the loan from the
Company, and, in liquidation, the Company receives payment first.
Upon the expiration of six months after the transfer of the title to
the Property to AX Japan, Shintom had the option to repurchase the
Property or purchase all of the shares of stock of AX Japan. This
option could be extended for one additional six month period. The
option 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.
15
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In March 2001, upon the expiration of the additional six-month period,
the Company and Shintom agreed to extend the lease for an additional
one-year period. In addition, Shintom was again given the option to
purchase the Property or shares of stock of AX Japan after the
expiration of a six-month period or extend the option for one
additional six-month period. AX Japan was also given the option to
delay the repayment of the loans for an additional six months if
Shintom extended its option for an additional six months.
In connection with this transaction, the Company received 100,000,000
Yen ($922) from Shintom for its 2,000 shares of TALK stock. The
Company had the option to repurchase the shares of TALK at a purchase
price of 50,000 Yen per share, with no expiration date. Given the
option to repurchase the shares of TALK, the Company did not surrender
control over the shares of TALK and, accordingly, had not accounted
for this transaction as a sale. In August 2000, the Company
surrendered its option to repurchase the shares of TALK. As such, the
Company recorded a gain on the sale of shares in the amount of $427 in
August 2000.
AX Japan had the option to delay the repayment of the loans for an
additional six months if Shintom extended its options to repurchase
the Property or stock of AX Japan. In September 2001, Shintom extended
its option to repurchase the Property and AX Japan delayed its
repayment of the loans for an additional six months.
In March 2002, upon the expiration of the additional six-month period,
the Company and Shintom agreed to extend the lease for an additional
one-year period. In addition, Shintom was again given the option to
purchase the Property or shares of stock of AX Japan after the
expiration of a six-month period or extend the option for one
additional six-month period. AX Japan was also given the option to
delay the repayment of the loans for an additional six months if
Shintom extended its option for an additional six months.
(13) Debt Convenants
The Company maintains a revolving credit agreement with various
financial institutions. The credit agreement contains several
convenants requiring, among other things, minimum levels of pre-tax
income and minimum levels of net worth. Additionally, the agreement
includes restrictions and limitations on payments of dividends, stock
repurchases and capital expenditures. During the year ended November
30, 2001, the Company was not in compliance with certain of its
pre-tax income covenants and had not received a waiver. Accordingly,
the Company recorded its bank obligations in current liabilities at
November 30, 2001. The Company subsequently obtained a waiver for such
violations. During the quarter ended February 28, 2002, the Company
was not in compliance with certain of its pre-tax income covenants and
obtained a waiver for the quarter ended February 28, 2002 which also
16
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
deleted reference to the pre-tax income covenant for the two
consecutive quarters ended May 31, 2002. The Company was in compliance
with all other covenants as of and for the quarter ended May 31, 2002.
(14) Income Taxes
Quarterly tax provisions are generally based upon an estimated annual
effective tax rate per taxable entity including evaluations of
possible future events and transactions and are subject to subsequent
refinement or revision. When the Company is unable to estimate a part
of its income or loss, or the related tax expense or benefit, the tax
expense or benefit applicable to that item is reported in the interim
period in which the income or loss occurs. During the quarter and six
months ended May 31, 2002, the tax benefit from certain expenses
arising during these periods could not be reasonably estimated and
additional valuation allowances were recorded for continuing losses in
certain states relating to the Wireless segment, which resulted in an
increase in the Company's annual effective tax rate for these periods.
A reconciliation of the provision for income taxes computed at the
Federal statutory rate to the reported provision for (recovery of)
income taxes is as follows:
Three Months Ended Six Months Ended
------------------------------------------------ ---------------------------------------------
May 31, May 31,
2001 2002 2001 2002
---------------------- ---------------------- ----------------------- -----------------
Tax provision at Federal
statutory rate $(4,520) (35.0%) $ 3,341 35.0% $(3,111) (35.0%) $ 1,290 35.0%
State income taxes, net of
Federal benefit 34 0.3 586 6.1 157 1.8 610 16.5
Increase (decrease) in
beginning-of-the-year
balance of the valuation
allowance for deferred
tax assets (14) (0.1) 210 2.2 165 1.9 398 10.8
Foreign tax rate
differential (57) (0.4) 49 0.5 (190) (2.2) 57 1.5
Non-deductible items 86 0.7 1,168 12.2 175 2.0 1,227 33.3
Other, net (178) (1.5) (262) (2.7) (387) (4.4) (160) (4.3)
------- ------- ------- ------- ------- ------- -------- -------
$(4,649) (36.0%) $ 5,092 53.3% $(3,191) (35.9%) $ 3,422 92.8%
======= ======== ======= ======= ======= ======= ======== =======
(15) Contingencies
The Company is a defendant in litigation arising from the normal
conduct of its affairs. The impact of the final resolution of these
matters on the Company's results of operations or liquidity in a
particular reporting period is not known. Management is of the
opinion,
17
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
however, that the litigation in which the Company is a defendant is
either subject to product liability insurance coverage or, to the
extent not covered by such insurance, will not have a material adverse
effect on the Company's consolidated financial position.
During 2001, the Company, along with other suppliers, manufacturers
and distributors of hand-held wireless telephones, was named as a
defendant in five class action lawsuits alleging damages relating to
exposure to radio frequency radiation from hand-held wireless
telephones. These class actions have been consolidated and transferred
to a Multi-District Litigation Panel before the United States District
Court of the District of Maryland. There are various procedural
motions pending and no discovery has been conducted to date. The
Company has asserted indemnification claims against the manufacturers
of the hand-held wireless telephones. The Company is vigorously
defending these class action lawsuits. The Company does not expect the
outcome of any pending litigation to have a material adverse effect on
its consolidated financial position.
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.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company markets its products under the Audiovox brand as well as
private labels through a large and diverse distribution network both
domestically and internationally. The Company operates through two marketing
groups: Wireless and Electronics. Wireless consists of Audiovox Communications
Corp. (ACC), a 75%-owned subsidiary of Audiovox, and Quintex, which is a
wholly-owned subsidiary of ACC. ACC markets wireless handsets and accessories
primarily on a wholesale basis to wireless carriers in the United States and to
carriers overseas. Quintex is a small operation for the direct sale of handsets,
accessories and wireless telephone service.
The Electronics Group consists of three wholly-owned subsidiaries, Audiovox
Electronics Corp. (AEC), American Radio Corp. and Code Systems, Inc. and three
majority-owned subsidiaries, Audiovox Communications (Malaysia) Sdn. Bhd.,
Audiovox Holdings (M) Sdn. Bhd. and Audiovox Venezuela, C.A. The Electronics
Group markets automotive sound and security systems, electronic car accessories,
home and portable sound products, FRS radios, in-vehicle video systems,
flat-screen televisions, DVD players and navigation systems. Sales are made
through an extensive distribution network of mass merchandisers, power retailers
and others. In addition, the Company sells some of its products directly to
automobile manufacturers on an OEM basis.
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission (SEC), requires all companies to include a
discussion of critical accounting policies or method used in the preparation of
financial statements. Note 1 of the Notes to the Consolidated Financial
Statements included in the Company's 2001 Annual Report filed on Form 10- K
includes a summary of the significant accounting policies and methods used in
the preparation of the Consolidated Financial Statements. The following is a
brief discussion of the more critical
19
accounting policies and methods used by the Company.
In addition, Financial Reporting Release No. 61 was recently released by
the SEC to require all companies to include a discussion to address, among other
things, liquidity, off-balance sheet arrangements, contractual obligations and
commercial commitments.
Critical Accounting Policies
General
The consolidated financial statements of the Company are prepared in
conformity with accounting principles generally accepted in the United States of
America. As such, the Company is required to make certain estimates, judgments
and assumptions that management believes are reasonable based upon the
information available. These estimates and assumptions affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. The
significant accounting policies which the Company believes are the most critical
to aid in fully understanding and evaluating the reported consolidated financial
results include the following:
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment
and passage of title to the customer. The Company also records an estimate of
returns. Management continuously monitors and tracks such product returns and
records a provision for the estimated amount of such future returns, based on
historical experience and any notification the Company receives of pending
20
returns. While such returns have historically been within management's
expectations, a significant product return was recorded in the first quarter of
2001, which was netted against revenue. The Company cannot guarantee that it
will continue to experience the same return rates that it has in the past.
Although the Company generally does not give price protection to its customers,
on occasion, the Company will offer such price protection to its customers. The
Company accrues for price protection when such agreements are entered into with
its customers, which is netted against revenue. There can be no assurances that
the Company will not need to offer price protection to its customers in the
future. Any significant price protection agreements or increase in product
returns could have a material adverse impact on the Company's operating results
for the period or periods in which such price protection is offered or returns
materialize.
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 May 31, 2002
was $7,008. 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
21
receivables and future operating results.
Trade and Promotional Allowances
The Company offers trade and promotional co-operative advertising
allowances, market development funds and volume incentive rebates to certain of
its customers. These arrangements allow customers to take deductions against
amounts owed to the Company for product purchases or entitle them to receive a
payment from the Company. The Company negotiates varying terms regarding the
amounts and types of arrangements dependant upon the products involved, customer
or type of advertising. These arrangements are made primarily on a verbal basis.
The Company initially accrues for all of its co-operative advertising
allowances, market development funds and volume incentive rebates as this
represents the Company's full obligation. With respect to the volume incentive
rebates, the customers are required to purchase a specified volume of a
specified product. The Company accrues for the rebate as product is shipped.
When specified volume levels are not achieved, and, therefore, the customer is
not entitled to the funds, the Company revises its estimate of its liability.
The accrual for co-operative advertising allowances, market development funds
and volume incentive rebates at May 31, 2002 was $21,028. The Company
continuously monitors the requests made by its customers and revises its
estimate of the liability under these arrangements based upon the likelihood of
its customers not requesting the funds. The Company's estimates of amounts
requested by its customers in connection with these arrangements may prove to be
inaccurate, in which case the Company may have understated or overstated the
provision required for these arrangements. In the future, if the liability for
these arrangements is determined to be overstated, the Company would be required
to recognize such additional operating income at the time such determination is
made. Likewise, if the liability for these arrangements is determined to be
22
understated, the Company would be required to recognize such additional
operating expenses at the time the customer makes such requests. Therefore,
although the Company makes every effort to ensure the accuracy of its estimates,
any significant unanticipated changes in the purchasing volume of its customers
could have a significant impact on the liability and the Company's reported
operating results.
Inventories
The Company values its inventory at the lower of the actual cost to
purchase and/or the current estimated market value of the inventory less
expected costs to sell the inventory. The Company regularly reviews inventory
quantities on-hand and records a provision for excess and obsolete inventory
based primarily on the Company's estimated forecast of product demand. As
demonstrated in recent years, demand for the Company's products can fluctuate
significantly. A significant sudden increase in the demand for the Company's
products could result in a short-term increase in the cost of inventory
purchases while a significant decrease in demand could result in an increase in
the amount of excess inventory quantities on-hand. In addition, the Company's
industry is characterized by rapid technological change and frequent new product
introductions that could result in an increase in the amount of obsolete
inventory quantities on-hand. In such situations, the Company generally does not
obtain price protection from its vendors, however, on occasion, the Company has
received price protection which reduces the cost of inventory. There can be no
assurances that the Company will be successful in negotiating such price
protection from its vendors in the future. Additionally, the Company's estimates
of future product demand may prove to be inaccurate, in which case the Company
may have understated or overstated the provision required for excess and
obsolete inventory. In the future, if the Company's inventory is determined to
be
23
overvalued, it would be required to recognize such costs in its cost of
goods sold at the time of such determination. Likewise, if the Company does not
properly estimate the lower of cost or market of its inventory and it is
therefore determined to be undervalued, it may have over-reported its cost of
goods sold in previous periods and would be required to recognize such
additional operating income at the time of sale. Therefore, although the Company
makes every effort to ensure the accuracy of its forecasts of future product
demand, any significant unanticipated changes in demand or technological
developments could have a significant impact on the value of the Company's
inventory and its reported operating results. During the quarters ended February
28, 2002 and May 31, 2002, the Company recorded inventory write-downs to market
of $1,040 and $2,290, respectively, as a result of the recent reduction of
selling prices primarily related to digital hand-held phones in anticipation of
new digital technologies. It is reasonably possible that additional write-downs
to market may be required in the future, however, no estimate can be made of
such losses. In addition, given the anticipated emergence of new technologies in
the wireless industry, the Company will need to sell existing inventory
quantities of current technologies to avoid further write-downs to market.
Warranties
The Company offers warranties of various lengths to its customers depending
upon the specific product. The Company's standard warranties require the Company
to repair or replace defective product returned to the Company during such
warranty period at no cost to the customer. The Company records an estimate for
warranty related costs based upon its actual historical return rates and repair
costs at the time of sale, which are included in cost of sales. The estimated
liability for future warranty expense amounted to $8,766 at May 31, 2002, which
has been included in accrued expenses and other current liabilities. While the
Company's warranty costs have historically
24
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.
25
Results of Operations
The following table sets forth for the periods indicated certain statements
of operations data for the Company expressed as a percentage of net sales:
Percentage of Net Sales
Three Months Ended Six Months Ended
May 31, May 31,
2001 2002 2001 2002
------- ------- ------- -------
Net sales:
Wireless
Wireless products 70.3% 68.1% 74.4% 64.3%
Activation commissions 2.5 2.0 2.3 2.7
Residual fees 0.1 0.2 0.2 0.2
Other 0.1 -- 0.1 --
------- ------- ------- -------
Total Wireless 73.0 70.3 77.0 67.2
------- ------- ------- -------
Electronics
Mobile electronics 13.3 18.9 11.6 19.7
Consumer electronics 8.5 6.3 6.3 7.1
Sound 5.0 4.5 4.9 5.9
Other 0.2 -- 0.2 0.1
------- ------- ------- -------
Total Electronics 27.0 29.7 23.0 32.8
------- ------- ------- -------
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 96.1 92.2 93.8 91.6
------- ------- ------- -------
Gross profit 3.9 7.8 6.2 8.4
Selling 2.7 2.5 2.4 2.9
General and administrative 3.8 5.2 3.6 5.3
Warehousing and assembly 2.2 1.9 1.9 2.4
------- ------- ------- -------
Total operating expenses 8.7 9.6 7.8 10.6
------- ------- ------- -------
Operating loss (4.8) (1.8) (1.6) (2.2)
Interest and bank charges (0.5) (0.3) (0.4) (0.4)
Equity in income in equity investments 0.4 0.2 0.4 0.2
Gain on issuance of subsidiary shares -- 5.2 -- 3.2
Other, net 0.2 (0.1) 0.1 --
------- ------- ------- -------
Income (loss) before provision for (recovery of)
income taxes (4.7) 3.2 (1.5) 0.8
Provision for (recovery of) income taxes (1.7) 1.7 (0.6) 0.7
Change in accounting principle -- -- -- --
------- ------- ------- -------
Net income (loss) (3.0%) 1.5% (0.9%) 0.1
======= ======= ======== =======
26
Consolidated Results
Three months ended May 31, 2001 compared to three months ended May 31, 2002
The net sales and percentage of net sales by marketing group and product
line for the three months ended May 31, 2001 and May 31, 2002 are reflected in
the following table:
Three Months Ended
May 31, 2001 May 31, 2002
-------------------- ------------------------
Net sales:
Wireless
Wireless products $194,631 70.3% $207,342 68.1%
Activation commissions 6,830 2.5 6,200 2.0
Residual fees 440 0.1 482 0.2
Other 123 0.1 33 --
-------- ------ -------- ------
Total Wireless 202,024 73.0 214,057 70.3
-------- ------ -------- ------
Electronics
Mobile electronics 36,864 13.3 57,626 18.9
Consumer electronics 23,389 8.5 19,075 6.3
Sound 13,970 5.0 13,583 4.5
Other 567 0.2 262 --
-------- ------ -------- ------
Total Electronics 74,790 27.0 90,546 29.7
-------- ------ -------- ------
Total $276,814 100.0% $304,603 100.0%
======== ====== ======== ======
Net sales for the second quarter of 2002 were $304,603, an increase of
$27,789, or 10.0%, from 2001. The increase in net sales was in both marketing
groups. Sales from our international subsidiaries decreased from 2001 by
approximately $513 or 8.0%. Gross margins were 7.8% in 2002 compared to 3.9% in
2001. The increase in gross margins was primarily due to a wireless inventory
write-down of $13,500 in the second quarter of 2001 as compared to $2,290 in the
second quarter of 2002. In addition, there was a change in the overall mix of
sales for wireless products to electronics products which have a higher gross
margin. Operating expenses increased to $29,376 from $23,904, respectively, a
22.9% increase. This increase was primarily in general and administrative
expenses and was related to bonuses of $3,200 paid to ACC personnel (See Note
27
9(b)). As a percentage of sales, operating expenses increased to 9.6% in
2002 from 8.7% in 2001. Operating loss for 2002 was $5,551 compared to $13,181
in 2001. Pre-tax profit was $9,547 during 2002 compared to a pre-tax loss of
$12,912 in 2001. During the second quarter of 2002, Toshiba, a major supplier of
wireless products, purchased an additional 20% of the Company's subsidiary, ACC.
ACC issued the additional shares for $23,900 and an $8,100 1 3/4% convertible
subordinated note to Toshiba for $32,000. As a result of the transaction, the
Company recognized a gain of $15,825 ($9,811 after provision for deferred taxes)
(See Note 9(b)).
Six months ended May 31, 2001 compared to six months ended May 31, 2002
The net sales and percentage of net sales by marketing group and product
line for the six months ended May 31, 2001 and May 31, 2002 are reflected in the
following table:
Six Months Ended
May 31, 2001 May 31, 2002
-------------------- ------------------------
Net sales:
Wireless
Wireless products $450,375 74.4% $317,021 64.3%
Activation commissions 14,117 2.3 13,468 2.7
Residual fees 901 0.2 1,140 0.2
Other 285 0.1 20 --
-------- ------ -------- ------
Total Wireless 465,678 77.0 331,649 67.2
-------- ------ -------- ------
Electronics
Mobile electronics 70,233 11.6 97,171 19.7
Consumer electronics 38,338 6.3 35,005 7.1
Sound 29,598 4.9 28,731 5.9
Other 1,270 0.2 644 0.1
-------- ------ -------- ------
Total Electronics 139,439 23.0 161,551 32.8
-------- ------ -------- ------
Total $605,117 100.0% $493,200 100.0%
======== ====== ======== ======
28
Net sales for the six months ended May 31, 2002 were $493,200, a decrease
of $111,917, or 18.5%, from 2001. The decrease in net sales was primarily in the
Wireless Group which was slightly offset by an increase in the Electronics
Group. Sales from our international subsidiaries decreased from 2001 by
approximately $598 or 4.9%. Gross margins were 8.4% in 2002 compared to 6.2% in
2001. The increase in gross margins was primarily due to a wireless inventory
write-down in the second quarter of 2001 that did not recur in 2002 to the same
extent and a change in the overall mix of sales for wireless products to
electronics products which have a higher gross margin. Operating expenses
increased to $52,628 from $47,406, respectively, a 11.0% increase primarily due
to bonuses of $3,200 paid to ACC personnel (See Note 9(b)). As a percentage of
sales, operating expenses increased to 10.6% in 2002 from 7.8% in 2001.
Operating loss for 2002 was $10,986 compared to $9,592 in 2001. Pre-tax income
was $3,687 during 2002 compared to a pre-tax loss of $8,889 in 2001.
During the second quarter of 2002, Toshiba, a major supplier of wireless
products, purchased an additional 20% of the Company's subsidiary, ACC. ACC
issued the additional shares and an $8,100 1 3/4% convertible subordinated note
to Toshiba for $32,000. As a result of the transaction, the Company recognized a
gain of $15,825 ($9,811 after provision for deferred taxes) (See Note 9(b)).
29
Wireless Results
Three months ended May 31, 2001 compared to three months ended May 31, 2002
The following table sets forth for the periods indicated certain statements
of operations data for the Wireless Group as expressed as a percentage of net
sales:
Three Months Ended
May 31, 2001 May 31, 2002
------------ ------------
Net sales:
Wireless products $ 194,631 96.3% $ 207,342 96.9%
Activation commissions 6,830 3.4 6,200 2.9
Residual fees 440 0.2 482 0.2
Other 123 0.1 33 --
---------- -------- ---------- --------
202,024 100.0% 214,057 100.0%
Gross profit (3,336) (1.7) 6,858 3.2
Total operating expenses 10,461 5.2 14,084 6.6
---------- -------- ---------- --------
Operating loss (13,797) (6.8) (7,226) (3.4)
Other expense (1,972) (1.0) (1,003) (0.4)
---------- -------- ---------- --------
Pre-tax loss $ (15,769) (7.8)% $ (8,229) (3.8)%
========== ======== ========== ========
Net sales were $214,057 in the second quarter of 2002, an increase of
$12,033, or 6.0%, from last year. Unit sales of wireless handsets increased by
80,000 units in 2002, or 5.8%, to approximately 1,470,000 units from 1,390,000
units in 2001. This increase was primarily due to the sales of 1X phones, which
commenced during the latter part of the second quarter. The average selling
price of handsets increased to $137 per unit in 2002 from $132 per unit in 2001.
This increase was primarily due to the introduction and sales of new digital
technologies during the latter part of the second quarter and reduction of older
analog and digital products. Gross profit margins increased to 3.2% in 2002 from
(1.7)% in 2001, primarily due to the introduction of newer, higher margined
products and an inventory write-down of $13,500 as compared to $2,290 in 2002.
Operating expenses increased to $14,084 from $10,461. Selling expenses decreased
from last year, primarily
30
in commissions. The decrease was partially offset by an increase in advertising.
General and administrative expenses increased from 2001, primarily due to
bonuses of $3,200 paid to ACC personnel (See Note 9(b)). Warehousing and
assembly expenses increased during 2002 from last year, primarily in field
warehousing expense. Operating loss for 2002 was $7,226 compared to last year's
$13,797.
Six months ended May 31, 2001 compared to six months ended May 31, 2002
The following table sets forth for the periods indicated certain statements
of operations data for the Wireless Group as expressed as a percentage of net
sales:
Six Months Ended
May 31, 2001 May 31, 2002
------------ ------------
Net sales:
Wireless products $ 450,375 96.7% $ 317,021 95.6%
Activation commissions 14,117 3.0 13,468 4.1
Residual fees 901 0.2 1,140 0.3
Other 285 0.1 20 --
---------- -------- ---------- --------
465,678 100.0% 331,649 100.0%
Gross profit 10,949 2.3 11,188 3.4
Total operating expenses 20,627 4.4 23,398 7.1
---------- -------- ---------- --------
Operating loss (9,678) (2.1) (12,210) (3.7)
Other expense (2,767) (0.6) (2,565) (0.8)
---------- -------- ---------- --------
Pre-tax loss $ (12,445) (2.7%) $ (14,775) (4.5%)
========== ======== ========== ========
Net sales were $331,649 in the second quarter of 2002, a decrease of
$134,029, or 28.8%, from last year. Unit sales of wireless handsets decreased by
789,000 units in 2002, or 25.2%, to approximately 2,345,000 units from 3,134,000
units in 2001. This decrease was primarily due to a delay in carrier approvals
of the new 1X phones during the first quarter. These phones started to sell
31
in the latter part of the second quarter. The average selling price of
handsets decreased to $131 per unit in 2002 from $137 per unit in 2001. This
decrease was primarily due to sales of older digital until the latter part of
the second quarter, when the new 1X phones were marketed. Gross profit margins
increased to 3.4% in 2002 from 2.3% in 2001, primarily due to the sales of new,
higher margined products and an inventory write-down in 2001 which did not recur
in 2002. Operating expenses increased to $23,398 from $20,627. Selling expenses
decreased from last year, primarily in commissions, partially offset by an
increase in advertising. General and administrative expenses increased from
2001, primarily due to bonuses of $3,200 paid to ACC personnel (See Note 9(b))
and bad debt expense. Warehousing and assembly expenses decreased during 2002
from last year, primarily in tooling expenses, partially offset by increases in
direct labor and temporary personnel. Operating loss for 2002 was $12,210
compared to last year's $9,678.
Management believes that the wireless industry will continue to be
extremely competitive in both price and technology. As the growth in the
wireless marketplace has slowed, carrier customer purchasing practices have
changed and pricing pressures have intensified. During the quarters ended
February 28, 2002 and May 31, 2002, the Company recorded inventory write-downs
to market of $1,040 and $2,290, respectively, as a result of the recent
reduction of selling prices primarily related to digital hand-held phones in
anticipation of new digital technologies. It is reasonably possible that
additional write-downs to market may be required in the future, however, no
estimate can be made of such losses. In addition, given the anticipated
emergence of new technologies in the wireless industry, the Company will need to
sell existing inventory quantities of current technologies to avoid further
write-downs to market. This has and could continue to affect gross margins and
the carrying value of inventories in the future. As the market for digital
products becomes more competitive, the Company may be required to further adjust
the carrying value of its inventory in the future. Industry
32
and financial market forecasts call for slower growth in the global handset
market. Currently, there is a global surplus of handsets, both at manufacturer
and carrier levels. The over-supply situation is abating, but may continue to
impact the Company in the future. There is also the potential for shortages in
the availability of certain wireless components and parts which may affect our
vendors' ability to provide handsets to us on a timely basis, which may result
in delayed shipments to our customers and decreased sales.
Electronics Results
Three months ended May 31, 2001 compared to three months ended May 31, 2002
The following table sets forth for the periods indicated certain statements
of income data and percentage of net sales by product line for the Electronics
Group:
Three Months Ended
May 31, 2001 May 31, 2002
------------ ------------
Net sales:
Mobile electronics $ 36,864 49.3% $ 57,626 63.6%
Consumer electronics 23,389 31.3 19,075 21.1
Sound 13,970 18.7 13,583 15.0
Other 567 0.7 262 0.3
-------- ------ -------- ------
Total net sales 74,790 100.0 90,546 100.0
Gross profit 14,050 18.8 16,969 18.7
Total operating expenses 10,607 14.2 12,344 13.6
-------- ------ -------- ------
Operating income 3,443 4.6 4,625 5.1
Other income (expense) (247) (0.3) (3) --
-------- ------ -------- ------
Pre-tax income $ 3,196 4.3% $ 4,622 5.1%
======== ====== ======== ======
Net sales increased $15,756 to $90,546 compared to last year's $74,790, an
increase of 21.1%. Mobile electronics sales increased 56.3% compared to last
year to $57,626, primarily due to increases in mobile video. Consumer
electronics sales decreased 18.4% from last year. Sound
33
sales decreased 2.8% from last year to $13,583. Net sales in the Company's
Malaysian subsidiary increased from last year by approximately 1.5%. The
Company's Venezuelan subsidiary experienced a decrease of 17.8% in sales from
last year primarily from OEM. Gross margins of the Electronics Group were 18.7%
in 2002 and 18.8% in 2001. Operating expenses increased $1,737 from last year to
$12,344, $888 from the addition of Code Systems (See Note 3). As a percentage of
sales, operating expenses decreased to 13.6% from 14.2%. Selling expenses
increased from last year, primarily in commissions. General and administrative
expenses increased from 2001, primarily in salaries and payroll taxes.
Warehousing and assembly expenses decreased from 2001, primarily in direct
labor, partially offset by an increase in assembly expenses. Operating income
was $4,625 compared to last year's $3,443.
Six months ended May 31, 2001 compared to six months ended May 31, 2002
The following table sets forth for the periods indicated certain statements
of income data and percentage of net sales by product line for the Electronics
Group:
Six Months Ended
May 31, 2001 May 31, 2002
------------ ------------
Net sales:
Mobile electronics $ 70,233 50.4% $ 97,171 60.1%
Consumer electronics 38,338 27.5 35,005 21.7
Sound 29,598 21.2 28,731 17.8
Other 1,270 0.9 644 0.4
--------- ------- --------- ------
Total net sales 139,439 100.0 161,551 100.0
Gross profit 26,855 19.2 30,465 18.9
Total operating expenses 20,674 14.8 23,351 14.5
--------- ------- --------- ------
Operating income 6,181 4.4 7,114 4.4
Other income (expense) (674) (0.5) 206 0.1
--------- ------- --------- ------
Pre-tax income $ 5,507 3.9% $ 7,320 4.5%
========= ======= ========= ======
34
Net sales increased $22,112 to $161,551 compared to last year's $139,439 an
increase of 15.9%. Mobile electronics sales increased 38.4% compared to last
year to $97,171 primarily due to increases in mobile video. Consumer electronics
sales decreased 8.7% from last year. Sound sales decreased 2.9% from last year
to $28,731. Net sales in the Company's Malaysian subsidiary decreased from last
year by approximately 3.0% which reflects the continuing slowing economy in the
Far East and the decline in OEM sales in Malaysia. The Company's Venezuelan
subsidiary experienced a decrease of 6.9% in sales from last year primarily from
OEM. Gross margins of the Electronics Group were 18.9% in 2002 and 19.2% in
2001. The decrease in gross profit margin was primarily in mobile and consumer
electronics, which typically have lower gross margins. Operating expenses
increased $2,677 from last year to $23,351. As a percentage of sales, operating
expenses decreased to 14.5% from 14.8%. Selling expenses increased from last
year, primarily in commissions. General and administrative expenses increased
from 2001, primarily in salaries, bad debt expense and insurance expense .
Warehousing and assembly expenses increased from 2001, primarily in assembly
expenses and tooling expenses, partially offset by a decrease in direct labor.
Operating income was $7,114 compared to last year's $6,181.
The Company believes that the Electronics Group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales. As the Company moves further into the Consumer Electronics
market, it may become susceptible to changes in overall economic conditions.
Also, certain of its products are subject to price fluctuations which could
affect the carrying value of inventories and gross margins in the future. The
Electronics Group may also experience additional competition in the mobile video
category as more distributors enter the market and from increased competition in
the Malaysian and Venezuelan markets. Global economic uncertainty could also
affect the markets for our products.
35
Other Income and Expense
Interest expense and bank charges decreased by $415 and $457 for the three
and six months ended May 31, 2002, respectively, compared to the same periods
last year. The decrease was due to lower levels of interest-bearing debt, in
addition to lower interest rates. Equity in income of equity investments
decreased $634 and $1,700 for the three and six months ended May 31, 2002,
respectively, as compared to the same periods last year. For the three and six
months ended May 31, 2001 and 2002, Audiovox Specialty Applications, LLC
represented the majority of equity in income of equity investments. The decrease
was primarily due to a sales program with one customer that did not renew in
2002. During the quarter, Toshiba purchased an additional 20% of the Company's
subsidiary, ACC, a supplier of wireless products. The Company recognized a gain
of $15,825 ($9,811 after provision for deferred taxes) in connection with the
issuance of 20% of ACC's shares to Toshiba (See Note 9(b)).
Provision for Income Taxes
The effective tax (recovery) rate for the three and six months ended May
31, 2002 was 53.3% and 92.8% compared to last year's (36.0%) and (35.9%),
respectively, for the comparable periods. During the quarter and six months
ended May 31, 2002, the tax benefit from certain expenses arising during these
periods could not be reasonably estimated and additional valuation allowances
were recorded for continuing losses in certain states relating to the Wireless
segment which resulted in an increase in the Company's annual effective tax rate
for these periods.
36
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 May 31, 2002, the Company had working capital (defined
as current assets less current liabilities) of $311,878, which includes cash of
$803 compared with working capital of $282,913 at November 30, 2001, which
includes cash of $3,025. Operating activities provided approximately $54,737,
primarily from increases in accounts payable, accrued expenses and other current
liabilities and collections of accounts receivable, partially offset by
increases in inventory and receivable from vendors. Investing activities
provided approximately $14,021, primarily from the issuance of subsidiary
shares. Financing activities used approximately $70,775, primarily from
repayments of bank obligations.
The Company's principal source of liquidity is its revolving credit
agreement which expires July 27, 2004. The credit agreement provides for
$250,000 of available credit, including $15,000 for foreign currency borrowings.
The continued availability of this financing is dependent upon the Company's
operating results which would be negatively impacted by a decrease in demand for
the Company's products.
Under the credit agreement, the Company may obtain credit through direct
borrowings and letters of credit. The obligations of the Company under the
credit agreement are guaranteed by certain of the Company's subsidiaries and is
secured by accounts receivable, inventory and the Company's shares of ACC. The
Company's ability to borrow under its credit facility is a maximum aggregate
amount of $250,000, subject to certain conditions, based upon a formula taking
into account the amount and quality of its accounts receivable and inventory.
The credit agreement also allows for commitments up to $50,000 in forward
exchange contracts. In addition, the Company guarantees the borrowings of one of
its equity investees at a maximum of $300.
37
The credit agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net worth.
Additionally, the agreement includes restrictions and limitations on payments of
dividends, stock repurchases and capital expenditures.
At November 30, 2001 and the first quarter ended February 28, 2002, the
Company was not in compliance with certain of its pre-tax income covenants. The
Company obtained a waiver for the February 28, 2002 violation, which also
deleted reference to the pre-tax income covenant for the two consecutive
quarters ended May 31, 2002, however, as of the date the Company filed its Form
10-K, the Company had not yet received a waiver for the November 30, 2001
violation related to pre-tax income. Accordingly, bank obligations of $86,525
were classified as a current liability on the accompanying consolidated balance
sheet as of November 30, 2001. The Company obtained a waiver on March 22, 2002
for the November 30, 2001 violation. Based upon the recent approvals of 1X
technology and the expected sales of such models, the Company believes that they
will not violate their covenants throughout the next year. However, there can be
no assurances that the covenants will be met as they are dependent upon the
timing of customer acceptance and shipments. While the Company was able to
obtain waivers for such violations in 2001 and for the first quarter ended
February 28, 2002, there can be no assurance that future negotiations with the
lenders would be successful, therefore, resulting in amounts outstanding to be
payable upon demand. This credit agreement has no cross covenants with the other
credit facilities described below.
The Company also has revolving credit facilities in Malaysia, Brazil and
Venezuela to finance additional working capital needs. The Malaysian credit
facility is partially secured by the Company under three standby letters of
credit and are payable upon demand or upon expiration of the standby letters of
credit. The obligations of the Company under the Malaysian credit facilities are
secured by the property and building in Malaysia owned by Audiovox
Communications Sdn. Bhd. The
38
Venezuelan and Brazilian credit facilities are secured by the Company under
standby letters of credit and are payable upon demand or upon expiration of the
standby letter of credit.
The Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At May 31,
2002, such obligations and commitments are as follows:
Payments Due By Period
--------------------------------------------------------------
Contractual Cash Less than After
Obligations Total 1 Year 1-3 Years 4-5 Years 5 years
- ------------------------ ----- -------- --------- --------- -------
Capital lease obligations $14,484 $ 555 $ 1,663 $1,147 $11,119
Operating leases 7,972 2,218 4,182 883 689
Other current
obligations 5,294 5,294 -- -- --
Long-term debt 8,122 -- 8,122 -- --
------- ------ ------- ------ -------
Total contractual cash
obligations $35,872 $8,067 $13,967 $2,030 $11,808
======= ====== ======= ====== =======
Amount of Commitment
Expiration per period
-------------------------------------------------------------------
Other Total
Commercial Amounts Less than Over
Commitments Committed 1 Year 1-3 Years 4-5 Years 5 years
----------- --------- -------- --------- --------- -------
<c> <c>
Lines of credit $12,968 $ 3,605 $9,363 - --
Standby letters
of credit 7,912 7,912 -- - --
Guarantees 300 300 -- - --
Commercial
letters of
credit 10,589 10,589 -- - --
------- ------- ------ --- -----
Total commercial
commitments $31,769 $22,406 $9,363 - --
======= ======= ====== === =====
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
39
borrowings under bank lines of credit and possible future public or private
debt and/or equity offerings. At times, the Company evaluates possible
acquisitions of, or investments in, businesses that are complementary to those
of the Company, which transaction may requires the use of cash. The Company
believes that its cash, other liquid assets, operating cash flows, credit
arrangements, access to equity capital markets, taken together, provide adequate
resources to fund ongoing operating expenditures. In the event that they do not,
the Company may require additional funds in the future to support its working
capital requirements or for other purposes and may seek to raise such additional
funds through the sale of public or private equity and/or debt financings as
well as from other sources. No assurance can be given that additional financing
will be available in the future or that if available, such financing will be
obtainable on terms favorable to the Company when required.
Related Party Transactions
The Company has entered into several related party transactions which are
described below.
Leasing Transactions
During 1998, the Company entered into a 30-year capital lease for a
building with its principal stockholder and chief executive officer, which is
the headquarters of the Wireless operation. Payments on the lease were based
upon the construction costs of the building and the then-current interest rates.
In connection with the capital lease, the Company paid certain costs on behalf
of its principal stockholder and chief executive officer in the amount of
$1,301. During 2000 and 2001, $800 was repaid to the Company.
40
During 1998, the Company entered into a sale/leaseback transaction with its
principal stockholder and chief executive officer for $2,100 of equipment, which
has been classified as an operating lease. The lease is a five-year lease with
monthly payments of $34. No gain or loss was recorded on the transaction as the
book value of the equipment equaled the fair market value.
The Company also leases certain facilities from its principal stockholder.
Rentals for such leases are considered by management of the Company to
approximately prevailing market rates. Total lease payments required under the
leases aggregate $3,898 and extend to March 31, 2009.
Amounts Due from Officers
On December 1, 2000, the Company obtained an unsecured note in the amount
of $620 for an advance to an officer/director of the Company. The note, which
bears interest at the LIBOR rate, to be adjusted quarterly, plus 1.25% per
annum, was due, principle and interest, on November 30, 2001. Subsequently, the
note was reissued for $651, including accrued interest, under the same terms and
repaid during June 2002. In addition, the Company has outstanding notes due from
various officers of the Company aggregating $235 as of November 30, 2001 and May
31, 2002, which have been included in other assets on the accompanying
consolidated balance sheet. The notes bear interest at the LIBOR rate plus 0.5%
per annum. Principle and interest are payable in equal annual installments
beginning July 1, 1999 through July 1, 2003.
Transactions with 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,
41
China, Thailand and several mid-eastern countries. Through October 2000,
the Company held a 30.8% interest in TALK. The Company no longer holds an equity
interest in TALK. Transactions with Shintom and TALK include financing
arrangements and inventory purchases. At November 30, 2001 and May 31, 2002, the
Company had recorded a receivable from TALK in the amount of $265 and $6,
respectively, a portion of which is payable with interest, which is reflected in
receivable from vendors on the accompanying consolidated financial statements.
Transactions with Toshiba
On March 31, 1999, Toshiba 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. There were no dividends declared during
2002, due to the net loss of ACC during 2001. During the second quarter of 2002,
Toshiba purchased an additional 20% ACC. Under the terms of the transaction,
Toshiba acquired, in exchange for $23,900 cash, the additional shares of ACC in
addition to an $8,100 convertible subordinated note (the Note) from ACC. The
Note bears interest at a per annum rate equal to 1 3/4% and interest is payable
annually on May 31st of each year, commencing May 31, 2003. The unpaid principle
amount shall be due and payable, together with all unpaid interest on May 31,
2007 which will automatically renew for an additional five years. In accordance
with the provisions of the Note, Toshiba may, at any time, convert the balance
of the Note into additional shares of ACC in order to maintain a 25% maximum
interest in ACC. The cost per share of the note is equal to the per share cost
for the $23,900 cash
42
payment of 20% of ACC's shares.
In connection with the transaction, ACC and Toshiba formalized into a
distribution agreement whereby ACC will be Toshiba's exclusive distributor for
the sale of Toshiba products in the United States, Canada, Mexico, and all
countries in the Caribbean and Central and South America through May 29, 2007.
Also, in accordance with the terms of the stockholders agreement, upon the
termination of the distribution agreement in accordance with certain terms of
the distribution agreement, Toshiba maintains a put right and Audiovox Corp. a
call right, to repurchase all of the shares held by the other party for a price
equal to the fair market value of the shares as calculated in accordance with
the agreement. Audiovox's call right is only exercisable if Toshiba elects to
terminate the distribution agreement after its initial five (5) year term.
Additionally in connection with the transaction, ACC entered into an
employment agreement with the President and Chief Executive Officer (the
Executive) of ACC through May 29, 2007. Under the agreement, ACC is required to
pay the Executive an annual base salary of $500 in addition to an annual bonus
equal to 2% of ACC's annual earnings before income taxes. Audiovox Corp., under
the employment agreement, was required to establish and pay a bonus of $3,200 to
key employees of ACC, including the Executive, to be allocated by the Executive.
The bonus was for services previously rendered in connection with the Toshiba
purchase of additional shares of ACC, and, accordingly, the bonus has been
included in general and administrative expenses in the accompanying statements
of operations for the three and six months ended May 31, 2002. The Executive was
required to utilize all or a portion of the bonus allocated to him to repay the
remaining outstanding principal and accrued interest owed by the Executive to
the Company pursuant to the unsecured promissory note in favor of Audiovox Corp.
Subsequent to May 31, 2002, the Executive was paid $1,800 less the amount
outstanding under the promissory note of $651.
43
As a result of the issuance of ACC's shares, the Company recognized a gain
of $15,825 ($9,811 after provision for deferred taxes). The gain on the issuance
of the subsidiary's shares has been recognized in the accompanying consolidated
statements of operations.
Inventory on hand at November 30, 2001 and May 31, 2002 purchased from
Toshiba approximated $99,816 and $145,515, 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. During the quarter ended May 31, 2002, the
Company recorded a receivable in the amount of $16,750 from Toshiba primarily
for software upgrades and price protection.
Recent 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 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.
44
Statement No. 144 requires that a long-lived asset to be abandoned,
exchanged for a similar productive asset or distributed to owners in a spin-off
to be considered held and used until it is disposed of. However, Statement No.
144 requires that management consider revising the depreciable life of such
long-lived asset. With respect to long-lived assets to be disposed of by sale,
Statement No. 144 retains the provisions of Statement No. 121 and, therefore,
requires that discontinued operations no longer be measured on a net realizable
value basis and that future operating losses associated with such discontinued
operations no longer be recognized before they occur. Statement No. 144 is
effective for all fiscal quarters of fiscal years beginning after December 15,
2001, and will thus be adopted by the Company on December 1, 2002. The Company
has not determined the effect, if any, that the adoption of Statement No. 144
will have on the Company's consolidated financial statements.
Forward-Looking Statements
Except for historical information contained herein, statements made in this
release that would constitute forward-looking statements may involve certain
risks such as our ability to keep pace with technological advances, significant
competition in the wireless, mobile and consumer electronics businesses, quality
and consumer acceptance of newly-introduced products, our relationships with key
suppliers and customers, market volatility, non-availability of product, excess
inventory, price and product competition, new product introductions, the
uncertain economic and political climate in the United States and throughout the
rest of the world and the potential that such climate may deteriorate further
and other risks detailed in the Company's Form 10-K for the fiscal year ended
November 30, 2001 and the Form 10-Q for the first quarter ended February 28,
2002. These factors, among others,
45
may cause actual results to differ materially from the results suggested in
the forward-looking statements. Forward-looking statements include statements
relating to, among other things:
o growth trends in the wireless, automotive and consumer electronic
businesses
o technological and market developments in the wireless, automotive and
consumer electronics businesses
o liquidity
o availability of key employees
o expansion into international markets
o the availability of new consumer electronic products
These forward-looking statements are subject to numerous risks,
uncertainties and assumptions about the Company including, among other things:
o the ability to keep pace with technological advances
o significant competition in the wireless, automotive and consumer
electronics businesses
o quality and consumer acceptance of newly introduced products
o the relationships with key suppliers
o the relationships with key customers
o possible increases in warranty expense
o the loss of key employees
o foreign currency risks
o political instability
o changes in U.S. federal, state and local and foreign laws
o changes in regulations and tariffs
o seasonality and cyclicality
o inventory obsolescence, availability and price volatility due to
market conditions
46
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Audiovox Corporation ("the Company")
was held on May 9, 2002 at the Smithtown Sheraton, 110 Vanderbilt Motor Parkway,
Smithtown, New York.
Proxies for the meeting were solicited pursuant to Regulation 14 of the Act
on behalf of the Board of Directors to elect a Board of nine Directors.
There was no solicitation in opposition to the Board of Directors' nominees
for election as directors as listed in the Proxy Statement and all of such
nominees were elected. Class A nominee, Paul C. Kreuch, Jr. received 16,041,467
votes and 386,045 votes were withheld. Class A nominee, Dennis F. McManus
received 16,041,587 votes and 385,925 votes were withheld. Class A nominee,
Irving Halevy received 16,038,187 votes and 389,325 votes were withheld.
Class A and Class B nominee, John J. Shalam received 37,850,457 votes and
1,186,595 votes were withheld. Class A and Class B nominee, Philip Christopher
received 37,850,390 votes and 1,186,662 votes were withheld. Class A and Class B
nominee, Charles M. Stoehr received 37,852,637 votes and 1,184,415 votes were
withheld. Class A and Class B nominee, Patrick M. Lavelle received 37,850,487
votes and 1,186,565 votes were withheld. Class A and Class B nominee, Ann M.
Boutcher, received 37,853,020 votes and 1,184,032 votes were withheld. Class A
and Class B nominee, Richard A. Maddia received 37,852,987 votes and 1,184,065
votes were withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
For the second quarter of fiscal 2002, the Company filed three reports on
Form 8-K.
47
The first report on Form 8-K dated March 15, 2002 and filed on March 19,
2002, reported that the Company had revised its' previously released results for
fiscal 2001.
The second report on Form 8-K dated March 21, 2002 and filed on April 4,
2002, reported that the Company and its Lenders had executed a Waiver to the
Company's Fourth Amended and Restated Credit Agreement. Annexed to the Form 8-K
as Exhibit 1 was a copy of the Waiver.
The third report on Form 8-K dated May 29, 2002 and filed on June 6, 2002,
reported that Toshiba Corporation had increased its minority interest in the
Company's wireless subsidiary, Audiovox Communications Corp., to 25% in
consideration of $23.9 million in cash and an $8.1 million Subordinated
Convertible Note. In addition, the Company reported that it had entered into the
Sixth Amendment and Consent to the Fourth Amended and Restated Credit Agreement.
Annexed to the Form 8-K as exhibits were the following documents: a press
release dated May 29, 2002; a Securities Purchase Agreement; a Distribution
Agreement; a Non-Negotiable Subordinated Convertible Promissory Note; an
Employment Agreement; a Trademark License Agreement; a Non- Negotiable Demand
Note; an Amended and Restated Certificate of Incorporation of Audiovox
Communications Corp.; and the Sixth Amendment and Consent to the Fourth Amended
and Restated Credit Agreement.
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUDIOVOX CORPORATION
By:s/John J. Shalam
--------------------------------
John J. Shalam
President and Chief
Executive Officer
Dated: July 15, 2002
By:s/Charles M. Stoehr
---------------------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
49