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, 2003
Commission file number 0-28839
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 231-7750
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 126 of the Exchange Act)
Yes X No
------ ------
1
Number of shares of each class of the registrant's Common Stock
outstanding as of the latest practicable date.
[GRAPHIC OMITTED]
Class Outstanding at June 23, 2003
Class A Common Stock 20,651,374 Shares
Class B Common Stock 2,260,954 Shares
2
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements:
Consolidated Balance Sheets at November 30,
2002 and May 31, 2003 (unaudited) 3
Consolidated Statements of Operations for the
Three and Six Months Ended May 31, 2002 (unaudited),
as restated, and May 31, 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended
May 31, 2002 (unaudited), as restated, and May 31, 2003
(unaudited) 5
Notes to Consolidated Financial Statements 6 - 28
ITEM 2 Management's Discussion and Analysis of
Financial Conditions and Results of
Operations 29 - 57
ITEM 4 Controls and Procedures 57
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 58
SIGNATURES 59
Certifications Pursuant to Section 302 of the Sarbanes Oxley 60 - 63
3
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
November 30, May 31,
2002 2003
----------- ----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,758 $ 24,122
Accounts receivable, net 186,564 160,735
Inventory, net 290,064 172,684
Receivable from vendor 14,174 11,446
Prepaid expenses and other current assets 7,626 10,843
Deferred income taxes, net 7,653 6,823
--------- ---------
Total current assets 508,839 386,653
Investment securities 5,405 5,898
Equity investments 11,097 11,665
Property, plant and equipment, net 18,381 15,616
Excess cost over fair value of assets acquired and other intangible assets, net 6,826 7,512
Other assets, net 687 3,307
--------- ---------
$ 551,235 $ 430,651
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 121,127 $ 34,033
Accrued expenses and other current liabilities 34,983 34,628
Accrued sales incentives 12,151 8,245
Income taxes payable 7,643 10,099
Bank obligations 40,248 3,245
--------- ---------
Total current liabilities 216,152 90,250
Long-term debt 8,140 8,132
Capital lease obligation 6,141 6,111
Deferred income tax payable, net 2,704 1,983
Deferred compensation 3,969 4,293
--------- ---------
Total liabilities 237,106 110,769
--------- ---------
Minority interest 4,616 5,359
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 2,500
Common stock:
Class A; 60,000,000 authorized; 20,632,182 and 20,645,882 issued at
November 30, 2002 and May 31, 2003, respectively; 19,559,445
outstanding at November
30, 2002 and 19,573,145 outstanding at May 31, 2003, respectively 207 207
Class B convertible; 10,000,000 authorized; 2,260,954 issued and outstanding 22 22
Paid-in capital 250,917 251,031
Retained earnings 69,396 72,679
Accumulated other comprehensive loss (5,018) (3,405)
Treasury stock, at cost, 1,072,737 Class A common stock at November 30, 2002 and
May 31, 2003, respectively (8,511) (8,511)
--------- ---------
Total stockholders' equity 309,513 314,523
--------- ---------
Total liabilities and stockholders' equity $ 551,235 $ 430,651
========= =========
See accompanying notes to consolidated financial statements.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three and Six Months Ended May 31, 2002 and May 31, 2003
(In thousands, except share and per share data)
(unaudited)
Three Months Ended Six Months Ended
May 31, May 31, May 31, May 31,
2002 2003 2002 2003
------------ ------------ ------------ ------------
As Restated As Restated
See Note 2 See Note 2
Net sales $ 297,267 $ 301,010 $ 481,536 $ 597,828
Cost of sales 278,614 275,398 449,160 546,748
------------ ------------ ------------ ------------
Gross profit 18,653 25,612 32,376 51,080
------------ ------------ ------------ ------------
Operating expenses:
Selling 7,621 8,275 14,372 15,577
General and administrative 15,953 12,889 27,006 25,195
Warehousing and technical support 515 1,394 1,657 2,793
------------ ------------ ------------ ------------
Total operating expenses 24,089 22,558 43,035 43,565
------------ ------------ ------------ ------------
Operating income (loss) (5,436) 3,054 (10,659) 7,515
------------ ------------ ------------ ------------
Other income (expense), net:
Interest and bank charges (1,038) (1,013) (2,001) (2,118)
Equity in income of equity investments 557 743 861 1,114
Gain on issuance of subsidiary shares, net 14,269 -- 14,269 --
Other, net (572) 571 (2,244) (527)
------------ ------------ ------------ ------------
Total other income (expense), net 13,216 301 10,885 (1,531)
------------ ------------ ------------ ------------
Income (loss) before provision for (recovery of) income
taxes, minority interest and cumulative effect of a
change in accounting for negative goodwill 7,780 3,355 226 5,984
Provision for income taxes 4,320 918 2,820 1,958
Minority interest 213 (363) 770 (743)
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of a change in
accounting fornegative goodwill 3,673 2,074 (1,824) 3,283
Cumulative effect of a change in accounting for negative goodwill -- -- 240 --
------------ ------------ ------------ ------------
Net income (loss) $ 3,673 $ 2,074 $ (1,584) $ 3,283
============ ============ ============ ============
Net income (loss) per common share (basic):
Income (loss) before cumulative effect of a change in accounting
for negative goodwill $ 0.17 $ 0.10 $ (0.08) $ 0.15
Cumulative effect of a change in accounting for negative goodwill -- -- 0.01 --
------------ ------------ ------------ ------------
Net income (loss) per common share $ 0.17 $ 0.10 $ (0.07) $ 0.15
============ ============ ============ ============
Net income (loss) per common share (diluted):
Income (loss) before cumulative effect of a change in accounting
for negative goodwill $ 0.17 $ 0.09 $ (0.08) $ 0.15
Cumulative effect of a change in accounting for negative goodwill -- -- 0.01 --
------------ ------------ ------------ ------------
Net income (loss) per common share $ 0.17 $ 0.09 $ (0.07) $ 0.15
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic 21,967,263 21,834,089 21,967,263 21,834,099
============ ============ ============ ============
Diluted 22,007,598 21,873,875 22,005,508 21,949,521
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended May 31, 2002 and May 31, 2003
(In thousands)
(unaudited)
May 31,
2002 2003
--------- ---------
As Restated
Cash flows from operating activities:
Net income (loss) $ (1,584) $ 3,283
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities
Depreciation and amortization 2,277 2,060
Provision for (recovery of) bad debt expense 1,269 (294)
Equity in income of equity investments (861) (1,114)
Minority interest (770) 743
Gain on issuance of subsidiary shares (14,269) --
Deferred income tax expense, net 5,158 45
(Gain) loss on disposal of property, plant and equipment, net (12) 175
Cumulative effect of a change in accounting for goodwill (240) --
Changes in operating assets and liabilities:
Accounts receivable 20,174 27,403
Receivable from vendor (11,520) 2,730
Inventory (51,201) 118,894
Accounts payable, accrued expenses and other current liabilities 109,242 (90,533)
Income taxes payable (1,066) 2,239
Investment securities-trading (380) (324)
Prepaid expenses and other, net (1,919) (7,163)
--------- ---------
Net cash provided by operating activities 54,298 58,144
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,434) (533)
Proceeds from the sale of property, plant and equipment 243 232
Proceeds from distribution from an equity investee 359 530
Net proceeds from issuance of subsidiary shares 22,399 --
Purchase of acquired business, net of acquired cash (7,107) --
--------- ---------
Net cash provided by investing activities 14,460 229
--------- ---------
6
Audiovox Corporation
Consolidated Statements of Cash Flows (continued)
Years Ended November 30, 2000, 2001 and 2002
(In thousands)
May 31,
2002 2003
--------- ---------
As Restated
Cash flows from financing activities:
Borrowings of bank obligations 192,501 150,751
Repayments on bank obligations (271,357) (187,746)
Proceeds from issuance of convertible subordinated debentures 8,107 --
Principal payments on capital lease obligation (26) (30)
--------- ---------
Net cash used in financing activities (70,775) (37,025)
--------- ---------
Effect of exchange rate changes on cash (205) 16
--------- ---------
Net increase (decrease) in cash (2,222) 21,364
Cash at beginning of period 3,025 2,758
--------- ---------
Cash at end of period $ 803 $ 24,122
========= =========
See accompanying notes to consolidated financial statements.
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Six Months Ended May 31, 2002 and May 31, 2003
(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, 2002 and May
31, 2003, the consolidated statements of operations for the three and six
month periods ended May 31, 2002 (as restated) and May 31, 2003, and the
consolidated statements of cash flows for the six month periods ended May
31, 2002 (as restated) and May 31, 2003. The interim figures are not
necessarily indicative of the results for the year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, including the allowance for doubtful
accounts, allowance for cellular deactivations, inventory valuation,
recoverability of deferred tax and other assets, valuation of long-lived
assets and accrued sales incentives, warranty reserves and disclosure of
the contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
A summary of the Company's significant accounting policies is identified in
Note 1 of the Notes to Consolidated Financial Statements included in the
Company's 2002 Annual Report filed on Form 10-K. There have been no changes
to the Company's significant accounting policies subsequent to November 30,
2002. Certain reclassifications have been made to the 2002 consolidated
financial statements in order to conform to the 2003 presentation.
(2) Restatement of Prior Period Consolidated Financial Statements
As discussed in Note 2 of the Notes to Consolidated Financial Statements
included in the Company's 2002 Annual Report filed on Form 10-K, the
Company has restated its consolidated financial statements for fiscal 2000,
2001 and for the first three quarters of fiscal 2002. These restatement
adjustments were the result of the misapplication of generally accepted
accounting principles. In addition, the Company has reclassified certain
expenses from operating expenses to cost of sales for the three and six
months ended May 31, 2002.
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The net effect of the restatement adjustments on net income (loss) for the
three and six months ended May 31, 2002 is as follows:
May 31, 2002
-------------------------------
Three Months Six Months
Decrease income before cumulative effect of a change in
accounting for negative goodwill $ (782) $(2,090)
Decrease net income (782) (2,090)
Decrease net income per common share - diluted $ (0.03) $ (0.09)
The following table provides additional information regarding the effects
of restatement adjustments on the Company's net income (loss) for the three
and six months ended May 31, 2002: (in thousands)
Increase
(Decrease)
May 31, 2002
-------------------------
Three Months Six Months
Restatement adjustments:
Timing of revenue $ (426) $ (508)
Litigation 69 (330)
Foreign currency translation (17) (1,334)
Inventory pricing (2) 385
Sales incentives 420 693
Gain on the issuance of subsidiary shares (1,556) (1,556)
Operating expense reclassification to cost of
sales (1) -- --
------- -------
Total adjustment to decrease pre-tax
income (1,512) (2,650)
Provision for income taxes (772) (602)
Minority interest (2) (42) (42)
------- -------
Total decrease on net income $ (782) $(2,090)
======= =======
(1) This adjustment represents a reclassification of warehousing and
technical support and general and administrative costs (which are
components of operating expenses) to cost of sales. This
reclassification did not have any effect on previously reported net
income for the three and six months of fiscal 2002.
(2) The adjustment reflects the impact of the restatement adjustments on
minority
9
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
interest.
The following discussion addresses each of the restatement adjustments
for the corrections of accounting errors and the reclassification
adjustment.
(a) Timing of revenue. During the three and six months ended May 31,
2002, the Company overstated net sales by $7,757 and $12,358,
respectively, as the timing of revenue recognition was not in
accordance with the established shipping terms with certain
customers. SAB 101 specifically states that delivery generally is
not considered to have occurred unless the customer has taken
title (which is in this situation when the product was delivered
to the customer's site). Accordingly, the Company should have
deferred revenue recognition until delivery was made to the
customer's site. In addition, during the three and six months
ended May 31, 2002, gross profit was overstated by $562 and $661,
respectively, and operating expenses were overstated by $136 and
$153, respectively.
(b) Litigation. During the three and six months ended May 31, 2002,
the Company overestimated its provisions for certain litigation
matters, thereby overstating cost of sales by $345 and $521,
respectively. Also, the Company understated operating expenses by
$0 and $497 for the three and six months ended May 31, 2002,
respectively as a result of not recording a settlement offer in
the period the Company offered it.
During the three and six months ended May 31, 2002, the Company
understated operating expenses by $276 and $354, respectively as
a result of inappropriately deferring costs related to an
insurance claim. The Company's insurance company refused to
defend the Company against a legal claim made against the
Company. The Company took legal action against the insurance
company and was unsuccessful. The Company was improperly
capitalizing costs that were not probable of recovery.
(c) Foreign currency translation. During the three and six months
ended May 31, 2002, the Company did not properly account for a
change in accounting for its Venezuelan subsidiary as operating
in a non-highly inflationary economy. In prior periods, Venezuela
was deemed to be a highly-inflationary economy in accordance with
certain technical accounting pronouncements. Effective January 1,
2002, it was deemed that Venezuela should cease to be considered
a highly-inflationary economy, however, the Company did not
account for this change. The Company incorrectly recorded the
foreign currency translation adjustment in other income rather
than as other comprehensive income. As a result, the Company
understated other expenses, net, by $69 and $1,429 for the three
and six months ended May 31, 2002,
10
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
respectively. Also, the Company overstated operating expenses by
$52 and $95 for the three and six months ended May 31, 2002,
respectively.
(d) Inventory pricing. For the three and six months ended May 31,
2002, the Company overstated cost of sales related to an
inventory pricing error that occurred at its Venezuelan
subsidiary. The Company was not properly pricing its inventory at
the lower of cost or market in accordance with generally accepted
accounting principles. As a result, the Company overstated
(understated) cost of sales by $(2) and $385 for the three and
six months ended May 31, 2002, respectively.
(e) Sales incentives. During the three and six months ended May 31,
2002, the Electronics segment underestimated accruals for
additional sales incentives (other trade allowances) that were
not yet offered to its customers. As a result, for the three and
six months ended May 31, 2002, the Company understated net sales
by $446 and $4, respectively.
Furthermore, during the three and six months ended May 31, 2002,
the Electronics segment was also not reversing earned and
unclaimed sales incentives (i.e., cooperative advertising, market
development and volume incentive rebate funds) upon the
expiration of the established claim period. As a result, for the
three and six months ended May 31, 2002, the Company understated
(overstated) net sales by $(26) and $689, respectively.
(f) Income taxes. Income taxes were adjusted for the restatement
adjustments discussed above for each period presented.
The Company also applied income taxes to minority interest
amounts during the three and six months ended May 31, 2002. As a
result of these adjustments, the Company overstated the provision
for income taxes by $772 and $602 for the three and six months
ended May 31, 2002, respectively.
(g) Operating expense reclassification. The Company reclassified
certain costs as operating expenses, which were included as a
component of warehousing and technical support and general and
administrative costs, which should have been classified as a
component of cost of sales. The effect of this reclassification
for the three and six months ended May 31, 2002 was to understate
cost of sales and overstate operating expenses by $5,373 and
$10,196, respectively. This reclassification did not have any
effect on previously reported net income or loss for any period
presented herein. This reclassification reduced gross margin by
1.8 and 2.1 percentage points for the three and six months ended
May 31, 2002, respectively.
11
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(h) Gain on the issuance of subsidiary shares. During the second
quarter of fiscal 2002, the Company overstated the gain on
issuance of subsidiary shares by $1,735 due to expenses related
to this issuance being charged to additional paid in capital.
This adjustment also reflects the impact of the other restatement
adjustments on the calculation of the gain on the issuance of
subsidiary shares of $179 that was originally recorded by the
Company in the quarter ended May 31, 2002. As a result, the
Company decreased the gain on issuance of subsidiary shares and
increased the additional paid in capital by $1,556.
12
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following represents the effect of the restatement and reclassification
adjustments in the consolidated statements of operations for the three
months ended May 31, 2002:
Fiscal 2002
For the Quarter Ended May 31,
----------------------------------------------------------------------
Restatement Reclassification
As Reported Adjustments Adjustments As Restated
Net sales $ 304,603 $ (7,336)(1)(7) -- $ 297,267
Cost of sales 280,778 (7,537)(1)(5)(6) $ 5,373 278,614
------------ ------------ ------------ ------------
Gross profit 23,825 201 (5,373) 18,653
------------ ------------ ------------ ------------
Operating expenses:
Selling 7,631 (10)(1) -- 7,621
General and administrative 15,856 245(1)(4)(5) (148)(2) 15,953
Warehousing and technical support 5,889 (149)(1)(4) (5,225)(2) 515
------------ ------------ ------------ ------------
Total operating expenses 29,376 86 (5,373) 24,089
------------ ------------ ------------ ------------
Operating income (loss) (5,551) 115 -- (5,436)
Total other income (expense), net 14,843 (1,627)(4)(8) -- 13,216
------------ ------------ ------------ ------------
Income before provision for income taxes and
minority interest 9,292 (1,512) -- 7,780
Provision for income taxes 5,092 (772)(3) -- 4,320
Minority interest 255 (42)(9) -- 213
------------ ------------ ------------ ------------
Net income $ 4,455 $ (782) -- $ 3,673
============ ============ ============ ============
Net income per common share (basic) $ 0.20 $ (0.03) -- $ 0.17
============ ============ ============ ============
Net income per common share (diluted) $ 0.20 $ (0.03) -- $ 0.17
============ ============ ============ ============
Weighted average number of common shares
outstanding (basic) 21,967,263 21,967,263
============ ============
Weighted average number of common shares
outstanding (diluted) 22,007,598 22,007,598
============ ============
(1) Amounts reflect adjustments for (a) timing of revenue.
(2) Amounts reflect for (g) operating expense reclassification.
(3) Amounts reflect adjustments for (f) income taxes.
(4) Amounts reflect adjustments for (c) foreign currency translation.
(5) Amounts reflect adjustments for (b)litigation.
(6) Amounts reflect adjustments for (d) inventory pricing.
(7) Amounts reflect adjustments for (e) sales incentives.
(8) Amounts reflect adjustments for (h) gain on the issuance of subsidiary
shares.
(9) Amounts reflect impact of restatement adjustments on minority interest.
13
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following represents the effect of the restatement and reclassification
adjustments in the consolidated statements of operations for the six months
ended May 31, 2002:
Fiscal 2002
For the Six Months Ended May 31,
--------------------------------------------------------------------------
Restatement Reclassification
As Reported (a) Adjustments Adjustments As Restated
----------- ----------- ----------- -----------
Net sales $ 493,200 $ (11,664)(1)(7) -- $ 481,536
Cost of sales 451,559 (12,595)(1)(5)(6) $ 10,196 (2) 449,160
--------- --------- --------- ---------
Gross profit 41,641 931 (10,196) 32,376
--------- --------- --------- ---------
Operating expenses:
Selling 14,385 (13)(1) -- 14,372
General and administrative 26,507 787(1)(4)(5) (288)(2) 27,006
Warehousing and technical support 11,735 (170)(1)(4) (9,908)(2) 1,657
--------- --------- --------- ---------
Total operating expenses 52,627 604 (10,196) 43,035
--------- --------- --------- ---------
Operating income (loss) (10,986) 327 -- (10,659)
--------- --------- --------- ---------
Total other income (expense), net 13,862 (2,977)(4)(8) -- 10,885
--------- --------- --------- ---------
Income (loss) before provision for
(recovery of) income taxes, minority
interest and before cumulative effect
of a change in accounting for negative
goodwill 2,876 (2,650) -- 226
Provision for (recovery of) income taxes 3,422 (602)(3) -- 2,820
Minority interest 812 (42)(9) -- 770
--------- --------- --------- ---------
Income (loss) before cumulative effect of a
change in accounting for negative
goodwill 266 (2,090) -- (1,824)
Cumulative effect of a change in
accounting for negative goodwill 240 -- -- 240
--------- --------- --------- ---------
Net income (loss) $ 506 $ (2,090) -- $ (1,584)
========= ========= ========= =========
Net income (loss) per common share
(basic) before cumulative effect of
a change in accounting for negative
goodwill $ 0.01 $ (0.09) -- $ (0.08)
Cumulative effect of a change in
accounting for negative goodwill 0.01 -- -- 0.01
--------- --------- --------- ---------
Net income (loss) per common share
(basic) $ 0.02 $ (0.09) -- $ (0.07)
========= ========== ========= ==========
14
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Fiscal 2002
For the Six Months Ended May 31,
--------------------------------------------------------------------------
Restatement Reclassification
As Reported (a) Adjustments Adjustments As Restated
----------- ----------- ----------- -----------
Netincome (loss) per common share
(diluted) before cumulative effect
of a change in accounting for negative
goodwill $ 0.01 $ (0.09) -- $ (0.08)
Cumulative effect of a change in
accounting for negative goodwill 0.01 -- -- 0.01
--------- --------- --------- ---------
Net income (loss) per common share
(diluted) $ 0.02 $ (0.09) -- $ (0.07)
========= ========== ========= ==========
Weighted average number of common
shares outstanding (basic) 21,967,263 21,967,263
=========== ===========
Weighted average number of common
shares outstanding (diluted) 22,005,508 22,005,508
=========== ===========
(a) Includes reclassification of sales incentives (previously reported in
operating expenses) pursuant to EITF 01-9, "Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's
Products)".
(1) Amounts reflect adjustments for (a) timing of revenue.
(2) Amounts reflect adjustments for (g) operating expense reclassification.
(3) Amounts reflect adjustments for (f) income taxes.
(4) Amounts reflect adjustments for (c) foreign currency translation.
(5) Amounts reflect adjustments for (b)litigation.
(6) Amounts reflect adjustments for (d) inventory pricing.
(7) Amounts reflect adjustments for (e) sales incentives.
(8) Amounts reflect adjustments for (h) gain on the issuance of subsidiary
shares.
(9) Amounts reflect impact of restatement adjustments on minority interest.
As a result of the restatement for the quarter ended May 31, 2002, cash provided
by operating activities was decreased $439 and cash provided by investing
activities was increased $439. There has not been any change to cash used in
financing activities.
(3) Accrued Sales Incentives
During the prior year, the Company adopted the provisions of EITF 01-9
"Accounting for Consideration Given by a Vendor to a Customer". As a
result, the Company has reclassified co-operative advertising, market
development funds and volume incentive rebate costs (collectively sales
incentives), which were previously included in selling expenses, to net
sales as the Company does not receive an identifiable benefit in connection
with these costs. As a result of this reclassification, net sales and
selling expenses, after restatement, were reduced by $11,819 for the six
months ended May 31, 2002. The Company adopted EITF 01-9 during the second
quarter of 2002. As such, no reclassification was necessary for the
15
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
three months ended May 31, 2002. There was no further impact on the
Company's consolidated financial statements as a result of the adoption of
EITF 01-9 as the Company's historical accounting policy with respect to the
recognition and measurement of sales incentives is consistent with EITF
01-9.
A summary of the activity with respect to sales incentives for the quarters
ended May 31, 2002 and 2003 on a segment and consolidated basis is provided
below:
For the three months ended May 31, 2002
Wireless Electronics Total
Opening balance $ 4,315 $ 2,882 $ 7,197
Accruals 11,649 1,706 13,355
Payments (1,898) (836) (2,734)
Reversals for unearned sales incentives (105) -- (105)
Reversals for unclaimed sales incentives (1,431) -- (1,431)
-------- -------- --------
Ending balance $ 12,530 $ 3,752 $ 16,282
======== ======== ========
For the six months ended May 31, 2002
Wireless Electronics Total
Opening Balance $ 5,209 $ 3,265 $ 8,474
Accruals 13,206 2,992 16,198
Payments (4,319) (1,834) (6,153)
Reversals for unearned sales incentives (105) -- (105)
Reversals for unclaimed sales incentives (1,461) (671) (2,132)
-------- -------- --------
Ending balance $ 12,530 $ 3,752 $ 16,282
======== ======== ========
For the three months ended May 31, 2003
Wireless Electronics Total
Opening balance $ 8,641 $ 4,561 $ 13,202
Accruals 5,784 2,370 8,154
Payments (10,953) (1,763) (12,716)
Reversals for unearned sales incentives (51) (240) (291)
Reversals for unclaimed sales incentives (104) -- (104)
-------- -------- --------
Ending balance $ 3,317 $ 4,928 $ 8,245
======== ======== ========
16
<page>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
For the six months ended May 31, 2003
Wireless Electronics Total
Opening balance $ 7,525 $ 4,626 $ 12,151
Accruals 11,336 4,335 15,671
Payments (15,226) (3,062) (18,288)
Reversals for unearned sales incentives (51) (240) (291)
Reversals for unclaimed sales incentives (267) (731) (998)
-------- -------- --------
Ending balance $ 3,317 $ 4,928 $ 8,245
======== ======== ========
(4) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
Six Months Ended
----------------------------------------
May 31, May 31,
2002 2003
-------- ---------
Cash paid during the period:
Interest (excluding bank charges) $ 1,152 $ 1,063
Income taxes (net of refunds) $ 500 $ (219)
During the six months ended May 31, 2002 and May 31, 2003, the Company
recorded a net unrealized holding gain (loss) relating to
available-for-sale marketable securities, net of deferred taxes, of $(414)
and $93, respectively, as a component of accumulated other comprehensive
loss.
17
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) 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,
2002 2003 2002 2003
-------------- ------------ -------------- --------------
(As Restated) (As Restated)
Net income (loss) (numerator for basic
income per share) $ 3,673 $ 2,074 $ (1,584) $ 3,283
============== ============ ============== ==============
Weighted average common shares
(denominator for basic income per
share) 21,967,263 21,834,099 21,967,263 21,834,099
Effect of dilutive securities:
Employee stock options and stock
warrants 40,335 39,776 38,245 115,422
-------------- ------------ -------------- --------------
Weighted average common and
potential common shares
outstanding (denominator for
diluted income per share) 22,007,598 21,873,875 22,005,508 21,949,521
============== ============ ============== ==============
Net income (loss) per common share
(basic):
Income (loss) before cumulative
effect of a change in accounting
for negative goodwill $ 0.17 $ 0.10 $ (0.08) $ 0.15
Cumulative effect of a change in
accounting for negative goodwill -- -- 0.01 --
-------------- ------------ -------------- --------------
Net income (loss) per common share $ 0.17 $ 0.10 $ (0.07) $ 0.15
============== ============ ============== ==============
Net income (loss) per common share
(diluted):
Income (loss) before cumulative
effect of a change in accounting
for negative goodwill $ 0.17 $ 0.09 $ (0.08) $ 0.15
Cumulative effect of a change in
accounting for negative goodwill -- -- 0.01 --
-------------- ------------ -------------- --------------
Net income (loss) per common share $ 0.17 $ 0.09 $ (0.07) $ 0.15
============== ============ ============== ==============
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 (loss) per common share calculation because their effect would
have been anti-dilutive.
18
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Stock options and warrants totaling 2,416,164 and 2,002,182 for the three
and six months ended May 31, 2003, respectively, were not included in the
net income (loss) per common share calculation because their effect would
have been anti-dilutive.
(6) Comprehensive Income (Loss)
The accumulated other comprehensive loss of $5,018 and $3,405 at November
30, 2002 and May 31, 2003, respectively, on the accompanying consolidated
balance sheets is the net accumulated unrealized loss on the Company's
available-for-sale investment securities of $599 and $506 at November 30,
2002 and May 31, 2003, respectively, and the accumulated foreign currency
translation adjustment of $4,419 and $2,899 at November 30, 2002 and May
31, 2003, respectively.
The Company's total comprehensive income (loss) was as follows:
Three Months Ended Six Months Ended
May 31, May 31,
2002 2003 2002 2003
------- ------- ------- -------
(As Restated) (As Restated)
Net income (loss) $ 3,673 $ 2,074 $(1,584) $ 3,283
Other comprehensive income (loss):
Foreign currency translation
adjustments 807 835 397 1,520
Unrealized gain (loss) on securities:
Unrealized holding gain (loss)
arising during period, net of
tax (65) (29) (414) 93
------- ------- ------- -------
Other comprehensive loss, net of tax 742 806 (17) 1,613
------- ------- ------- -------
Total comprehensive income (loss) $ 4,415 $ 2,880 $(1,601) $ 4,896
======= ======= ======= =======
The change in the net unrealized gain (loss) arising during the periods
presented above are net of tax provision (benefit) of ($40) and $(18) for
the three months ended May 31, 2002 and May 31, 2003, respectively, and
$(254) and $57 for the six months ended May 31, 2002 and 2003,
respectively.
Included in foreign currency translation adjustments for the three and six
months ended May 31, 2002 are translation adjustments of $171 and $178,
respectively, related to the translation Company's operations in Venezuela.
Included in foreign currency translation adjustments for the three and six
months ended May 31, 2003 are translation adjustments of $7 and $13,
respectively, related to the translation of the Company's operations in
Venezuela. On January 22, 2003, and as a result of the National Civil
Strike, the Venezuelan
19
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
government suspended trading of the Venezuelan Bolivar and set the currency
at a stated government rate. Accordingly, until further guidance is issued,
the Company's 80%-owned Venezuelan subsidiary will translate its financial
statements utilizing the stated government rate.
(7) Segment Information
The Company has two reportable segments which are organized by products:
Wireless and Electronics. The Wireless segment markets wireless handsets
and accessories through domestic and international wireless carriers and
their agents, independent distributors and retailers. The Electronics
segment sells autosound, mobile electronics and consumer electronics,
primarily to mass merchants, specialty retailers, new car dealers, original
equipment manufacturers (OEM), independent installers of automotive
accessories and the U.S. military.
The Company evaluates performance of the segments based upon income before
provision for income taxes and minority interest. The accounting policies
of the segments are the same as those for the Company as a whole. The
Company allocates interest and certain shared expenses, including treasury,
legal and human resources, to the segments based upon estimated usage.
Intersegment sales are reflected at cost and have been eliminated in
consolidation. A royalty fee on the intersegment sales, which is eliminated
in consolidation, is recorded by the segments and included in other income
(expense). Certain items are maintained at the Company's corporate
headquarters (Corporate) and are not allocated to the segments. They
primarily include costs associated with accounting and certain executive
officer salaries and bonuses and certain items including investment
securities, equity investments, deferred income taxes, certain portions of
excess cost over fair value of assets acquired, jointly-used fixed assets
and debt. The jointly-used fixed assets are the Company's management
information systems, which are used by the Wireless and Electronics
segments and Corporate. A portion of the management information systems
costs, including depreciation and amortization expense, are allocated to
the segments based upon estimates made by management. During the three and
six months ended May 31, 2002 and May 31, 2003, 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.
20
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Consolidated
Wireless Electronics Corporate Totals
Three Months Ended
May 31, 2002 - As Restated
Net sales $ 206,300 $ 90,967 -- $ 297,267
Intersegment sales (purchases) (98) 98 -- --
Pre-tax income (loss) (8,931) 5,333 $ 11,378 7,780
Three Months Ended
May 31, 2003
Net sales $ 189,107 $ 111,903 -- $ 301,010
Intersegment sales (purchases) 57 (57) -- --
Pre-tax income (loss) 1,486 5,262 $ (3,393) 3,355
Six Months Ended
May 31, 2002 - As Restated
Net sales $ 319,291 $ 162,245 -- $ 481,536
Intersegment sales (purchases) 16 16 -- --
Pre-tax income (loss) (15,638) 6,677 $ 9,187 226
Total assets 383,240 148,081 52,047 583,368
Goodwill, net -- 636 4,602 5,238
Six Months Ended
May 31, 2003
Net sales $ 405,669 $ 192,159 -- $ 597,828
Intersegment sales (purchases) (118) 118 -- --
Pre-tax income (loss) 4,735 7,752 $ (6,503) 5,984
Total assets 175,637 195,337 59,677 430,651
Goodwill, net -- 2,910 4,602 7,512
(8) Income Taxes
Quarterly tax provisions are generally based upon an estimated annual
effective tax rate per taxable entity, including evaluations of possible
future events and transactions, and are subject to subsequent refinement or
revision. When the Company is unable to estimate a part of its annual
income or loss, or the related tax expense or benefit, the tax expense or
benefit applicable to that item is reported in the interim period in which
the income or loss occurs. During the three and six months ended May 31,
2003, the Wireless Group utilized certain of its gross deferred tax assets
(including net operating losses and other deferred assets), therefore, the
valuation allowance related to those utilized deferred tax assets has been
removed, which resulted in a decrease in the Company's effective tax rate
for the period.
21
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to the reported provision for (recovery of) income taxes is
as follows:
Three Months Ended Six Months Ended
May 31, May 31,
2002 2003 2002 2003
---------------- --------------------- ------------------- ---------------------
(As Restated) (As Restated)
Tax provision at Federal
statutory rate $ 2,723 35.0 % $ 1,175 35.0% $ 79 35.0% $ 2,095 35.0%
State income taxes, net of
Federal benefit 680 8.7 207 6.2 621 274.8 426 7.1
Increase (decrease) in
beginning-of-the-year
balance of the valuation
allowance for deferred
tax assets 221 2.8 (566) (16.9) 398 176.1 (1,005) (16.8)
Foreign tax rate
differential (87) (1.1) (62) (1.9) 655 289.8 405 6.8
Non-deductible items 614 7.9 23 0.7 1,227 542.9 80 1.3
Other, net 169 2.2 142 4.3 (160) (70.8) (42) (0.7)
------- --- ------- ----- ------- ------ ------- ----
$ 4,320 55.5 % $ 919 27.4% $ 2,820 1247.8% $ 1,959 32.7%
======= === ======= ===== ======= ====== ======= ====
Other is a combination of various factors, including changes in the taxable
income or loss between various tax entities with differing effective tax
rates, changes in the allocation and apportionment factors between taxable
jurisdictions with differing tax rates of each tax entity, changes in tax
rates and other legislation in the various jurisdictions, and other items.
The net change in the total valuation allowance for the three and six
months ended May 31, 2003, was a decrease of $566 and a decrease of $1,005,
respectively. A valuation allowance is provided when it is more likely than
not that some portion, or all, of the deferred tax assets will not be
realized. The Company has established valuation allowances for net
operating loss carryforwards as well as other deferred tax assets of the
Wireless Group. Based on the Company's ability to carry back future
reversals of deductible temporary differences to taxes paid in current and
prior years and the Company's historical taxable income record, adjusted
for unusual items, management believes it is more likely than not that the
Company will realize the benefit of the net deferred tax assets existing at
May 31, 2003.
(9) Product Warranties and Product Repair Costs
The Company generally warrants its products against certain manufacturing
and other defects. The Company provides warranties for all of its products
ranging from 90 days to the lifetime of the product. Warranty expenses are
accrued at the time of sale based on the
22
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Company's estimated cost to repair expected returns for products. This
liability is based primarily on historical experiences of actual warranty
claims as well as current information on repair costs. The warranty
liability of $9,143 and $9,615, is recorded in accrued expenses in the
accompanying consolidated balance sheet as of November 30, 2002 and May 31,
2003, respectively. In addition, the Company records a reserve for product
repair costs. This reserve is based upon the quantities of defective
inventory on hand and an estimate of the cost to repair such defective
inventory. The reserve for product repair costs of $6,267 and $7,274 are
recorded as a reduction to inventory in the accompanying consolidated
balance sheet as of November 30, 2002 and May 31, 2003, respectively.
Warranty claims and product repair costs expense for the three months ended
May 31, 2002 and 2003 were $2,288 and $2,316, and $4,029 and $4,884 for the
six months ended May 31, 2002 and 2003, respectively.
The following table provides the changes in the Company's product
warranties and product repair costs for 2003:
May 31, 2003
Three Months Ended Six Months Ended
Opening balance $ 16,280 $ 15,410
Liabilities accrued for warranties
issued during the period 2,926 4,884
Warranty claims paid during the
period (2,316) (3,404)
-------- --------
Ending balance at May 31, 2003 $ 16,890 $ 16,890
======== ========
(10) New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (Statement 143). Statement 143 is effective for
fiscal years beginning after June 15, 2002, and thus was be adopted by the
Company on December 1, 2002 (fiscal 2003) 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 adoption of Statement 143 did not have any impact on
its results of operations or its financial position as the Company had no
asset retirement obligations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long- Lived Assets" (Statement 144), which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes Statement 121 while retaining
the fundamental recognition and measurement provisions of that statement.
23
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Statement 144 requires that a long-lived asset to be abandoned, exchanged
for a similar productive asset or distributed to owners in a spin-off to be
considered held and used until it is disposed of. However, Statement 144
requires that management consider revising the depreciable life of such
long-lived asset. With respect to long-lived assets to be disposed of by
sale, Statement 144 retains the provisions of Statement 121 and, therefore,
requires that discontinued operations no longer be measured on a net
realizable value basis and that future operating losses associated with
such discontinued operations no longer be recognized before they occur.
Statement 144 is effective for all fiscal quarters of fiscal years
beginning after December 15, 2001. The adoption of Statement 144 did not
have any impact on the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS 145 "Rescission of SFAS Statements No.
4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections"
(Statement 145). Statement 145, as it pertains to the recission of
Statement 4, is effective for fiscal years beginning after May 15, 2002 and
is effective for transactions occurring after May 15, 2002 as it relates to
Statement 13. This Statement updates, clarifies and simplifies existing
accounting pronouncements by rescinding Statement 4, which required all
gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Opinion 30 will now be used to
classify those gains and losses. Adoption of this statement had no material
impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure". Statement 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally provided by
Statement 123, "Accounting for Stock- Based Compensation". Additionally,
Statement 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosure in both annual and interim financial statements about
the method of accounting for stock-based compensation and the effect of the
method used on reported results. The transitional requirements of Statement
148 will be effective for all financial statements for fiscal years ending
after December 15, 2002. The disclosure requirements shall be effective for
financial reports containing condensed financial statements for interim
periods beginning after December 31, 2002. The Company has adopted the
disclosure portion of this statement for the fiscal quarter ending May 31,
2003, as required. The application of this standard will have no impact on
the Company's consolidated financial position or results of operations.
In February 2003, the EITF issued EITF Issue 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor", which was adopted by the Company during the quarter ended May 31,
2003. This EITF provides guidance on the
24
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
income statement classification of amounts received by a customer,
including a reseller and guidance regarding timing of recognition for
volume rebates. Adoption of this new standard, which was applied
prospectively by the Company for new arrangements, including modifications
of existing arrangements, entered into after December 31, 2002, did not
have a material impact on the Company's consolidated financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantors,
Including Guarantees of Indebtedness of Others". FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending
after December 15, 2002. The Company adopted FIN 45 during the quarter
ended May 31, 2003. The adoption of FIN 45 did not have a material effect
on the Company's consolidated financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB No.
51". FIN 46 addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. FIN 46 is effective for
all new variable interest entities created or acquired after January 31,
2003. For variable interest entities created or acquired prior to February
1, 2003, the provisions of FIN 46 must be applied for the first interim
period beginning after June 15, 2003. Accordingly, the Company will adopt
this provision of FIN 46 during the quarter ended November 30, 2003. The
adoption of FIN 46 is being evaluated to determine what impact, if any, the
adoption of the provisions will have on the Company's financial condition
or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting guidance on derivative instruments (including
certain derivative instruments embedded in other contracts) and hedging
activities that fall within the scope of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective
for all contracts entered into or modified after June 30, 2003, with
certain exceptions, and for hedging relationships designated after June 30,
2003. The guidance is to be applied prospectively. The adoption of SFAS No.
149 is being evaluated to determine what impact, if any, the adoption of
the provisions will have on the Company's financial
25
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 changes the accounting guidance for certain financial
instruments that, under previous guidance, could be classified as equity or
"mezzanine" equity by now requiring those instruments to be classified as
liabilities (or assets in some circumstances) in the statement of financial
position. Further, SFAS No. 150 requires disclosure regarding the terms of
those instruments and settlement alternatives. SFAS No. 150 is generally
effective for all financial instruments entered into or modified after May
31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 is being
evaluated to determine what impact, if any, the adoption of the provisions
will have on the Company's financial condition or results of operations.
(11) Financing Arrangements
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, 2002, the Company was not in compliance with certain of its
pre-tax income covenants. Furthermore, as of November 30, 2002, the Company
was also not in compliance with the requirement to deliver audited
financial statements 90 days after the Company's fiscal year-end, and as of
February 28, 2003, the requirement to deliver unaudited quarterly financial
statements 45 days after the Company's quarter end and had not received a
waiver. Accordingly, the Company recorded its outstanding domestic bank
obligations of $36,883 in current liabilities at November 30, 2002.
Subsequent to November 30, 2002, the Company repaid its obligation of
$36,883 in full resulting in domestic bank obligations outstanding at May
31, 2003 of $0. The Company subsequently obtained a waiver for the November
30, 2002 and February 28, 2003 violations. The Company was in compliance
with all its bank covenants at May 31, 2003. While the Company has
historically been able to obtain waivers for such violations, there can be
no assurance that future negotiations with its lenders would be successful
or that the Company will not violate covenants in the future, therefore,
resulting in amounts outstanding to be payable upon demand. This credit
agreement has no cross covenants with other credit facilities.
26
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Business Acquisitions
(a) Code Systems
On March 15, 2002, Code Systems, Inc. (Code), a wholly-owned
subsidiary of Audiovox Electronics Corp., purchased certain assets of
Code-Alarm, Inc., an automotive security product company. The Company
accounted for the transaction in accordance with the purchase method
of accounting. As a result of the transaction, goodwill of $1,854 was
recorded. An adjustment to the allocation of the purchase price was
made to a certain acquired balance resulting in an increase to
goodwill of $686 during the six months ended May 31, 2003.
(b) Recoton
In May 2003, the U.S. Bankruptcy Court accepted the Company's bid for
certain assets of Recoton Corporation. This bid includes certain
defined assets of Recoton's U.S. audio operations including brands and
trademarks and the outstanding common stock of Recoton's German,
Italian, and Japanese operations. In accordance with this bid, the
Company made a deposit of $2,000, which is currently being held in
escrow. The purchase price will approximate $40,000 plus the
assumption of $5,000 in debt, not including related acquisition costs.
The closing is anticipated to be in early July 2003 and is subject to
completion of final documentation and regulatory approval.
(13) Guarantee of Debt
During the six months ended May 31, 2003, the Company adopted FIN 45. The
Company has guaranteed, through August 31, 2003, the borrowings of one of
its 50%-owned equity investees (GLM) at a maximum of $300. The Company
guaranteed the debt of GLM beginning in December 1996. The Company has not
issued or modified this guarantee after December 31, 2002. In accordance
with FIN 45, this guarantee has not been reflected on the accompanying
consolidated financial statements. The Company does not have any
contractual recourse provisions that would enable the Company to recover
any amounts paid under the guarantee. No assets are held by the Company as
collateral or by the guarantor that the Company could obtain and liquidate
to recover all or a portion of the amounts paid under the guarantee.
(14) Employee Stock-Based Compensation
The Company applies the intrinsic value method as outlined in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in
27
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
accounting for stock options and share units granted under these programs.
Under the intrinsic value method, no compensation expense is recognized if
the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of the grant. Accordingly,
no compensation cost has been recognized. Statement of Financial Accounting
Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation",
requires that the Company provide pro forma information regarding net
income and net income per common share as if compensation cost for the
Company's stock option programs had been determined in accordance with the
fair value method prescribed therein. The Company adopted the disclosure
portion of SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" requiring quarterly SFAS No. 123
pro forma disclosure. The following table illustrates the effect on net
income and income per common share as if the Company had measured the
compensation cost for the Company's stock option programs under the fair
value method in each period presented.
Three Months Ended Six Months Ended
May 31, May 31,
--------------------------- --------------------------
2002 2003 2002 2003
------------- -------- ----------- ---------
(As Restated) (As Restated)
Net income (loss), as
reported $ 3,673 $ 2,074 $(1,584) $ 3,283
Deduct: Total stock-based
employee compensation
expense determined
under fair value method
for all awards, net of
related tax effects (303) -- (976) --
------- ------- ------- -------
Pro forma net income
(loss) $ 3,370 $ 2,074 $(2,560) $ 3,283
======= ======= ======= =======
Income per common share:
Basic - as reported $ 0.17 $ 0.10 $ (0.07) $ 0.15
Basic - pro forma $ 0.15 $ 0.10 $ (0.12) $ 0.15
Diluted - as reported $ 0.17 $ 0.09 $ (0.07) $ 0.15
Diluted - pro forma $ 0.15 $ 0.09 $ (0.12) $ 0.15
(15) Subsequent Event
Subsequent to May 31, 2003, the Company has canceled its arrangement with a
certain customer that utilized navigation systems. The Company does not
anticipate a material loss associated with this cancellation; however,
there can be no assurances of this.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company markets its products under the Audiovox brand name as well as
private labels through a large and diverse distribution network both
domestically and internationally. The Company operates through two marketing
groups: Wireless and Electronics. Wireless consists of Audiovox Communications
Corp. (ACC), a 75%-owned subsidiary of Audiovox, and Quintex, which is a
wholly-owned subsidiary of ACC. ACC markets wireless handsets and accessories
primarily on a wholesale basis to wireless carriers in the United States and
carriers overseas. Quintex is a small operation for the direct sale of handsets,
accessories and wireless telephone service. Quintex also receives residual fees
and activation commissions from the carriers. Residuals are paid by the carriers
based upon a percentage of usage of customers activated by Quintex for a period
of time (1-5 years). Quintex also sells a small volume of electronics products
not related to wireless which are categorized as "other".
The Electronics Group consists of three wholly-owned subsidiaries: Audiovox
Electronics Corporation (AEC), American Radio Corp. and Code Systems, Inc.
(Code) and three majority- owned subsidiaries, Audiovox Communications
(Malaysia) Sdn. Bhd., Audiovox Holdings (M) Sdn. Bhd. and Audiovox Venezuela,
C.A. The Electronics Group markets, both domestically and internationally,
automotive sound and security systems, electronic car accessories, home and
portable sound products, FRS radios, in-vehicle video systems, flat-screen
televisions, DVD players and navigation systems. Sales are made through an
extensive distribution network of mass merchandisers and others. In addition,
the Company sells some of its products directly to automobile manufacturers on
an OEM basis. American Radio Corp. is also involved on a limited basis in the
wireless marketplace. Wireless related sales are categorized as "other".
The Company allocates interest and certain shared expenses to the marketing
groups based upon both actual and estimated usage. General expenses and other
income items that are not readily allocable are not included in the results of
the two marketing groups.
Restatement of Consolidated Financial Statements
As discussed in Note 2 of the Notes to Consolidated Financial Statements,
the Company has restated its consolidated financial statements for fiscal 2000,
2001 and the first three quarters of fiscal 2002. These restatement adjustments
are the result of the misapplication of generally accepted accounting
principles. In addition, the Company has reclassified certain expenses from
operating expenses to cost of sales for the three and six months ended May 31,
2002.
29
The net effect of the restatement adjustments on net loss for the three and
six months ended May 31, 2002 is as follows:
May 31, 2002
-------------------------------
Three Months Six Months
Decrease income before cumulative effect of a change in
accounting for negative goodwill $ (782) $(2,090)
Decrease net income (782) (2,090)
Decrease net income per common share - diluted $ (0.03) $ (0.09)
The following table provides additional information regarding the effects
of restatement adjustments on the Company's net income (loss) for the three and
six months ended May 31, 2002: (in thousands)
Increase
(Decrease)
May 31, 2002
-------------------------
Three Months Six Months
Restatement adjustments:
Timing of revenue $ (426) $ (508)
Litigation 69 (330)
Foreign currency translation (17) (1,334)
Inventory pricing (2) 385
Sales incentives 420 693
Gain on the issuance of subsidiary shares (1,556) (1,556)
Operating expense reclassification to cost of
sales (1) -- --
------- -------
Total adjustment to decrease pre-tax
income (1,512) (2,650)
Provision for income taxes (772) (602)
Minority interest (2) (42) (42)
------- -------
Total decrease on net income $ (782) $(2,090)
======= =======
(1) This adjustment represents a reclassification of warehousing and technical
support and general and administrative costs (which are components of
operating expenses) to cost of sales. This reclassification did not have
any effect on previously reported net income for the three and six months
of fiscal 2002.
(2) The adjustment reflects the impact of the restatement adjustments on
minority interest.
The following discussion addresses each of the restatement adjustments for
the corrections of accounting errors and the reclassification adjustment.
(a) Timing of revenue. During the three and six months ended May 31, 2002, the
30
Company overstated net sales by $7,757 and $12,358, respectively, as the
timing of revenue recognition was not in accordance with the established
shipping terms with certain customers. SAB 101 specifically states that
delivery generally is not considered to have occurred unless the customer
has taken title (which is in this situation when the product was delivered
to the customer's site). Accordingly, the Company should have deferred
revenue recognition until delivery was made to the customer's site. In
addition, during the three and six months ended May 31, 2002, gross profit
was overstated by $562 and $661, respectively, and operating expenses were
overstated by $136 and $153, respectively.
(b) Litigation. During the three and six months ended May 31, 2002, the Company
overestimated its provisions for certain litigation matters, thereby
overstating cost of sales by $345 and $521, respectively. Also, the Company
understated operating expenses by $0 and $497 for the three and six months
ended May 31, 2002, respectively as a result of not recording a settlement
offer in the period the Company offered it.
During the three and six months ended May 31, 2002, the Company understated
operating expenses by $276 and $354, respectively as a result of
inappropriately deferring costs related to an insurance claim. The
Company's insurance company refused to defend the Company against a legal
claim made against the Company. The Company took legal action against the
insurance company and was unsuccessful. The Company was improperly
capitalizing costs that were not probable of recovery.
(c) Foreign currency translation. During the three and six months ended May 31,
2002, the Company did not properly account for a change in accounting for
its Venezuelan subsidiary as operating in a non-highly inflationary
economy. In prior periods, Venezuela was deemed to be a highly-inflationary
economy in accordance with certain technical accounting pronouncements.
Effective January 1, 2002, it was deemed that Venezuela should cease to be
considered a highly-inflationary economy, however, the Company did not
account for this change. The Company incorrectly recorded the foreign
currency translation adjustment in other income rather than as other
comprehensive income. As a result, the Company understated other expenses,
net, by $69 and $1,429 for the three and six months ended May 31, 2002,
respectively. Also, the Company overstated operating expenses by $52 and
$95 for the three and six months ended May 31, 2002, respectively.
(d) Inventory pricing. For the three and six months ended May 31, 2002, the
Company overstated cost of sales related to an inventory pricing error that
occurred at its Venezuelan subsidiary. The Company was not properly pricing
its inventory at the lower of cost or market in accordance with generally
accepted accounting principles. As a result, the Company overstated
(understated) cost of sales by $(2) and $385 for the three and six months
ended May 31, 2002, respectively.
(e) Sales incentives. During the three and six months ended May 31, 2002, the
Electronics segment underestimated accruals for additional sales incentives
(other
31
trade allowances) that were not yet offered to its customers. As a result,
for the three and six months ended May 31, 2002, the Company understated
net sales by $446 and $4, respectively.
Furthermore, during the three and six months ended May 31, 2002, the
Electronics segment was also not reversing earned and unclaimed sales
incentives (i.e., cooperative advertising, market development and volume
incentive rebate funds) upon the expiration of the established claim
period. As a result, for the three and six months ended May 31, 2002, the
Company understated (overstated) net sales by $(26) and $689, respectively.
(f) Income taxes. Income taxes were adjusted for the restatement adjustments
discussed above for each period presented.
The Company also applied income taxes to minority interest amounts during
the three and six months ended May 31, 2002. As a result of these
adjustments, the Company understated the provision for/recovery of income
taxes by $772 and $602 for the three and six months ended May 31, 2002,
respectively.
(g) Operating expense reclassification. The Company reclassified certain costs
as operating expenses, which were included as a component of warehousing
and technical support and general and administrative costs, which should
have been classified as a component of cost of sales. The effect of this
reclassification for the three and six months ended May 31, 2002 was to
understate cost of sales and overstate operating expenses by $5,373 and
$10,196, respectively. This reclassification did not have any effect on
previously reported net income or loss for any fiscal year or period
presented herein. This reclassification reduced gross margin by 1.8 and 2.1
percentage points for the three and six months ended May 31, 2002,
respectively.
(h) Gain on the issuance of subsidiary shares. During the second quarter of
fiscal 2002, the Company overstated the gain on issuance of subsidiary
shares by $1,735 due to expenses related to this issuance being charged to
additional paid in capital. This adjustment also reflects the impact of the
other restatement adjustments on the calculation of the gain on the
issuance of subsidiary shares of $179 that was originally recorded by the
Company in the quarter ended May 31, 2002. As a result, the Company
decreased the gain on issuance of subsidiary shares and increased the
additional paid in capital by $1,556.
32
The following represents the effect of the restatement and reclassification
adjustments in the consolidated statements of operations for the three months
ended May 31, 2002:
Fiscal 2002
For the Quarter Ended May 31,
----------------------------------------------------------------------
Restatement Reclassification
As Reported Adjustments Adjustments As Restated
Net sales $ 304,603 $ (7,336)(1)(7) -- $ 297,267
Cost of sales 280,778 (7,537)(1)(5)(6) $ 5,373 278,614
------------ ------------ ------------ ------------
Gross profit 23,825 201 (5,373) 18,653
------------ ------------ ------------ ------------
Operating expenses:
Selling 7,631 (10)(1) -- 7,621
General and administrative 15,856 245(1)(4)(5) (148)(2) 15,953
Warehousing and technical support 5,889 (149)(1)(4) (5,225)(2) 515
------------ ------------ ------------ ------------
Total operating expenses 29,376 86 (5,373) 24,089
------------ ------------ ------------ ------------
Operating income (loss) (5,551) 115 -- (5,436)
Total other income (expense), net 14,843 (1,627)(4)(8) -- 13,216
------------ ------------ ------------ ------------
Income before provision for income taxes and
minority interest 9,292 (1,512) -- 7,780
Provision for income taxes 5,092 (772)(3) -- 4,320
Minority interest 255 (42)(9) -- 213
------------ ------------ ------------ ------------
Net income $ 4,455 $ (782) -- $ 3,673
============ ============ ============ ============
Net income per common share (basic) $ 0.20 $ (0.03) -- $ 0.17
============ ============ ============ ============
Net income per common share (diluted) $ 0.20 $ (0.03) -- $ 0.17
============ ============ ============ ============
Weighted average number of common shares
outstanding (basic) 21,967,263 21,967,263
============ ============
Weighted average number of common shares
outstanding (diluted) 22,007,598 22,007,598
============ ============
(1) Amounts reflect adjustments for (a) timing of revenue.
(2) Amounts reflect for (g) operating expense reclassification.
(3) Amounts reflect adjustments for (f) income taxes.
(4) Amounts reflect adjustments for (c) foreign currency translation.
(5) Amounts reflect adjustments for (b)litigation.
(6) Amounts reflect adjustments for (d) inventory pricing.
(7) Amounts reflect adjustments for (e) sales incentives.
(8) Amounts reflect adjustments for (h) gain on the issuance of subsidiary
shares.
(9) Amounts reflect impact of restatement adjustments on minority interest.
33
The following represents the effect of the restatement and
reclassification adjustments in the consolidated statements of operations for
the six months ended May 31, 2002:
Fiscal 2002
For the Six Months Ended May 31,
--------------------------------------------------------------------------
Restatement Reclassification
As Reported (a) Adjustments Adjustments As Restated
----------- ----------- ----------- -----------
Net sales $ 493,200 $ (11,664)(1)(7) -- $ 481,536
Cost of sales 451,559 (12,595)(1)(5)(6) $ 10,196 (2) 449,160
--------- --------- --------- ---------
Gross profit 41,641 931 (10,196) 32,376
--------- --------- --------- ---------
Operating expenses:
Selling 14,385 (13)(1) -- 14,372
General and administrative 26,507 787(1)(4)(5) (288)(2) 27,006
Warehousing and technical support 11,735 (170)(1)(4) (9,908)(2) 1,657
--------- --------- --------- ---------
Total operating expenses 52,627 604 (10,196) 43,035
--------- --------- --------- ---------
Operating income (loss) (10,986) 327 -- (10,659)
--------- --------- --------- ---------
Total other income (expense), net 13,862 (2,977)(4)(8) -- 10,885
--------- --------- --------- ---------
Income (loss) before provision for
(recovery of) income taxes, minority
interest and before cumulative effect
of a change in accounting for negative
goodwill 2,876 (2,650) -- 226
Provision for (recovery of) income taxes 3,422 (602)(3) -- 2,820
Minority interest 812 (42)(9) -- 770
--------- --------- --------- ---------
Income (loss) before cumulative effect of a
change in accounting for negative
goodwill 266 (2,090) -- (1,824)
Cumulative effect of a change in
accounting for negative goodwill 240 -- -- 240
--------- --------- --------- ---------
Net income (loss) $ 506 $ (2,090) -- $ (1,584)
========= ========= ========= =========
Net income (loss) per common share
(basic) before cumulative effect of
a change in accounting for negative
goodwill $ 0.01 $ (0.09) -- $ (0.08)
Cumulative effect of a change in
accounting for negative goodwill 0.01 -- -- 0.01
--------- --------- --------- ---------
Net income (loss) per common share
(basic) $ 0.02 $ (0.09) -- $ (0.07)
========= ========== ========= ==========
Netincome (loss) per common share
(diluted) before cumulative effect
of a change in accounting for negative
goodwill $ 0.01 $ (0.09) -- $ (0.08)
Cumulative effect of a change in
accounting for negative goodwill 0.01 -- -- 0.01
--------- --------- --------- ---------
Net income (loss) per common share
(diluted) $ 0.02 $ (0.09) -- $ (0.07)
========= ========== ========= ==========
Weighted average number of common
shares outstanding (basic) 21,967,263 21,967,263
=========== ===========
Weighted average number of common
shares outstanding (diluted) 22,005,508 22,005,508
=========== ===========
(a) Includes reclassification of sales incentives (previously reported in
operating expenses) pursuant to EITF 01-9, "Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's
Products)".
(1) Amounts reflect adjustments for (a) timing of revenue.
(2) Amounts reflect adjustments for (g) operating expense reclassification.
34
<page>
(3) Amounts reflect adjustments for (f) income taxes.
(4) Amounts reflect adjustments for (c) foreign currency translation.
(5) Amounts reflect adjustments for (b)litigation.
(6) Amounts reflect adjustments for (d) inventory pricing.
(7) Amounts reflect adjustments for (e) sales incentives.
(8) Amounts reflect adjustments for (h) gain on the issuance of subsidiary
shares.
(9) Amounts reflect impact of restatement adjustments on minority interest.
As a result of the restatement for the quarter ended May 31, 2002, cash provided
by operating activities was decreased $439 and cash provided by investing
activities was increased $439. There has not been any change to cash used in
financing activities.
Critical Accounting Policies
As disclosed in the annual report on Form 10-K for the fiscal year ended
November 30, 2002, the discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in conformity with accounting principles generally
accepted in the United States. The preparation of these financial statement
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses reported in those financial
statements. These judgments can be subjective and complex, and consequently,
actual results could differ from those estimates. Our most critical accounting
policies relate to revenue recognition; accounts receivable; sales incentives;
inventory; warranties and income taxes. Since November 30, 2002, there have been
no changes in our critical accounting policies and no other significant changes
to the assumptions and estimates related to them.
35
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, May 31, May 31,
2002 2003 2002 2003
----- ----- ----- -----
(As Restated) (As Restated)
Net sales:
Wireless
Wireless products 67.1% 61.5% 63.3% 66.2%
Activation commissions 2.1 1.2 2.8 1.4
Residual fees 0.2 0.2 0.2 0.2
Other 0.0 0.0 0.0 0.0
----- ----- ----- -----
Total Wireless 69.4 62.9 66.3 67.8
----- ----- ----- -----
Electronics
Mobile electronics 19.5% 24.6 20.3 20.9
Consumer electronics 6.4 9.2 7.3 7.4
Sound 4.6 3.3 6.0 3.8
Other 0.1 0.0 0.1 0.0
----- ----- ----- -----
Total Electronics 30.6 37.1 33.7 32.1
----- ----- ----- -----
Total net sales 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of sales 93.7 91.5 93.3 89.3
----- ----- ----- -----
Gross profit 6.3 8.5 6.7 10.7
Selling 2.6 2.7 3.0 2.6
General and administrative 5.4 4.4 5.6 4.2
Warehousing and technical support 0.2 0.5 0.3 0.5
----- ----- ----- -----
Total operating expenses 8.2 7.6 8.9 7.3
----- ----- ----- -----
Operating income (loss) (1.8) 1.0 (2.2) 1.3
Interest and bank charges (0.3) (0.2) (0.4) (0.4)
Equity in income in equity
investments 0.2 0.2 0.2 0.2
Gain on issuance of subsidiary
shares 4.8 0.0 3.0 0.0
Other, net (0.3) (0.1) (0.5) (0.1)
----- ----- ----- -----
Income (loss) before provision for
(recovery of) income taxes 2.6 1.1 0.1 1.0
Provision for (recovery of) income
taxes 1.5 0.3 0.6 0.3
Minority interest 0.1 (0.1) 0.2 0.1
Change in accounting principle -- -- 0.0 0.0
----- ----- ----- -----
Net income (loss) 1.2 % 0.7 % (0.3)% 0.6 %
===== ===== ====== =====
36
Consolidated Results
Three months ended May 31, 2002 compared to three months ended May 31, 2003
The net sales and percentage of net sales by marketing group and product
line for the three months ended May 31, 2002 and May 31, 2003 are reflected in
the following table:
Three Months Ended
----------------------------------------------
May 31, 2002 May 31, 2003
------------ ---------------------
(As Restated)
Net sales:
Wireless
Wireless products $ 199,495 67.1% $ 185,174 61.5%
Activation commissions 6,200 2.1 3,516 1.2
Residual fees 482 0.2 489 0.2
Other 123 -- (72) --
--------- ----- --------- -----
Total Wireless 206,300 69.4 189,107 62.8
--------- ----- --------- -----
Electronics
Mobile electronics 57,894 19.5 74,108 24.6
Consumer electronics 19,164 6.4 27,762 9.2
Sound 13,646 4.6 9,928 3.3
Other 263 0.1 105 --
--------- ----- --------- -----
Total Electronics 90,967 30.6 111,903 37.2
--------- ----- --------- -----
Total $ 297,267 100.0% $ 301,010 100.0%
========= ===== ========= =====
Net sales for the three months ended May 31, 2003 were $301,010, a 1.3%
increase from net sales of $297,267 from 2002.
Wireless Group sales were $189,107 for the three months ended May 31, 2003,
an 8.3% decrease from sales of $206,300 in 2002. Unit sales of wireless handsets
decreased 22.9% to approximately 1,109,000 units for the three months ended May
31, 2003 from approximately 1,437,000 units in 2002. This decrease was
attributable to a new product launch in 2002 that did not repeat in 2003 and a
closeout of certain models in Canada in 2002 that were not replaced in 2003. The
average selling price of the Company's handsets increased to $161 per unit for
the three months ended May 31, 2003 from $135 per unit in 2002 as a result of
new products.
Electronics Group sales were $111,903 for the three months ended May 31,
2003, a 23.0% increase from sales of $90,967 in 2002. This increase was largely
due to increased sales in the mobile video and consumer electronics product
lines. Offsetting some of this increase was a decline in sound sales, which
continue to decline given the change in the marketplace as fully-featured sound
systems are being incorporated into vehicles at the factory rather than being
sold in the aftermarket. This declining trend in sound systems is expected to
continue except in the satellite radio product line. Sales by the Company's
international subsidiaries decreased 62.3% for the three months ended May 31,
2003 to approximately $2,223 due to a 80.6% decrease in Venezuela due to
37
the temporary shut-down of the operations attributable to political and economic
instability and a 44.9% decrease in Malaysia as a result of lower OEM sales.
Gross profit margin for the three months ended May 31, 2003 was 8.5%,
compared to 6.3% in 2002. This increase in profit margin resulted primarily from
an increase in margins in Wireless. Gross profit margins in Wireless were 5.0%
in 2003 compared to 1.7% in 2002. There was a change in the mix in Wireless
product sales to newer models, which carry a higher gross margin. New product
historically is sold at a higher gross margin. This trend continues to have a
major effect on the gross margins of the Wireless Group. In addition, lower
inventory write-downs to market for the three months ended May 31, 2003.
Specifically, inventory write-downs were $0 in 2003 compared to $2,859 in 2002.
Consolidated gross margins were also favorably impacted by decreased sales
incentives in the Wireless Group. Trends will be discussed in further detail in
each individual marketing group MD&A discussion. Margins for the Electronics
Group decreased to 14.5% from 16.7% in 2002, primarily due to lower margins in
the consumer goods category and an increase in video sales to consumer channels
that carry lower margins.
Operating expenses decreased $1,531 to $22,558 for the three months ended
May 31, 2003, compared to $24,089 in 2002. As a percentage of net sales,
operating expenses decreased to 7.6% for the three months ended May 31, 2003
from 8.2% in 2002. Major components of the decrease in operating expenses were
in salaries due to a non-recurring bonus in 2002 related to the issuance of
subsidiary shares and a decrease in bad debt expenses due to the recovery of a
previously charged customer bad debt, partially offset by increases in direct
labor, office salaries, and professional fees.
Net income for the three months ended May 31, 2003 was $2,074 compared to
$3,673 in 2002. Earnings per share for the three months ended May 31, 2003 was
$0.10, basic and 0.09 diluted compared to$0.17 for fiscal 2002, basic and
diluted (as restated).
38
Six months ended May 31, 2002 compared to six months ended May 31, 2003
The net sales and percentage of net sales by marketing group and
product line for the six months ended May 31, 2002 and May 31, 2003 are
reflected in the following table:
Six Months Ended
----------------------------------------------
May 31, 2002 May 31, 2003
------------ ---------------------
(As Restated)
Net sales:
Wireless
Wireless products $304,663 63.3% $395,885 66.2%
Activation commissions 13,468 2.8 8,612 1.4
Residual fees 1,140 0.2 1,024 0.2
Other 20 -- 148 --
-------- ----- -------- -----
Total Wireless 319,291 66.3 405,669 67.9
-------- ----- -------- -----
Electronics
Mobile electronics 97,588 20.3 125,198 20.9
Consumer electronics 35,156 7.3 44,257 7.4
Sound 28,855 6.0 22,472 3.8
Other 646 0.1 233 --
-------- ----- -------- -----
Total Electronics 162,245 33.7 192,159 32.1
-------- ----- -------- -----
$481,536 100.0% $597,828 100.0%
======== ====== ======== =====
Net sales for the six months ended May 31, 2003 were $597,828, a 24.2%
increase from net sales of $481,536 from 2002.
Wireless Group sales were $405,669 for the six months ended May 31, 2003, a
27.1% increase from sales of $319,291 in 2002. Unit sales of wireless handsets
increased 1.7% to approximately 2,300,000 units for the six months ended May 31,
2003 from approximately 2,261,000 units in 2002. In addition, the average
selling price of the Company's handsets increased to $166 per unit for the six
months ended May 31, 2003 from $129 per unit in 2002 as a result of new product
introductions. Wireless sales were impacted in 2002 by late introductions of new
products by its vendor, delays in acceptances testing by our customers and
slower growth in the wireless industry.
Electronics Group sales were $192,159 for the six months ended May 31,
2003, an 18.4% increase from sales of $162,245 in 2002. This increase was
largely due to increased sales in the mobile video and consumer electronics
product lines. Offsetting some of this increase was a decline in sound sales,
which continue to decline given the change in the marketplace as fully-featured
sound systems are being incorporated into vehicles at the factory rather than
being sold in the aftermarket. This declining trend in sound systems is expected
to continue except in the satellite radio product line. Sales by the Company's
international subsidiaries decreased 60.4% for the six months ended May 31, 2003
to approximately $4,619 due to an 89.1% decrease in Venezuela due
39
to the temporary shut-down of the operations attributable to political and
economic instability and a 35.3% decrease in Malaysia as a result of lower OEM
sales.
Gross profit margin for the six months ended May 31, 2003 was 8.5%,
compared to 6.7% in 2002. This increase in profit margin resulted primarily from
an increase in margins in Wireless. Wireless margins were 5.2% compared to 1.6%
in 2002. There was a change in the mix in Wireless product sales to newer
models, which carry a higher gross margin. Wireless margins were impacted by
late product introductions by its suppliers in 2002, a situation that did not
repeat in 2003. New product historically is sold at a higher gross margin. This
trend continues to have a major effect on the gross margins of the Wireless
Group. In addition, lower inventory write-downs to market for the six months
ended May 31, 2003. Specifically, inventory write-downs were $0 in 2003 compared
to $3,899 in 2002. Margins for the Electronics Group decreased to 15.5% from
16.7% in 2002 due to lower margins in the consumer goods category.
Operating expenses increased $530 to $43,565 for the six months ended May
31, 2003, compared to $43,035 in 2002. As a percentage of net sales, operating
expenses decreased to 7.3% for the six months ended May 31, 2003 from 8.9% in
2002. Major components of the increase in operating expenses were direct labor,
salaries and employee benefits.
Net income for the six months ended May 31, 2003 was $3,283 compared to net
loss of $1,584 in 2002. Earnings per share for the six months ended May 31, 2003
was $0.15, basic and diluted compared to loss per share of $0.07 for fiscal
2002, basic and diluted (as restated).
40
Wireless Results
Three months ended May 31, 2002 compared to three months ended May 31, 2003
The following table sets forth for the periods indicated certain statements
of operations data for Wireless expressed as a percentage of net sales:
Three Months Ended
-----------------------------------------------
May 31, 2002 May 31, 2003
(As Restated)
Net sales:
Wireless products $ 199,495 96.7% $ 185,174 97.9%
Activation commissions 6,200 3.0 3,516 1.9
Residual fees 482 0.2 489 0.2
Other 123 0.1 (72) --
--------- ----- --------- -----
Total net sales 206,300 100.0 189,107 100.0
Gross profit 3,425 1.7 9,382 5.0
Operating expenses
Selling 2,873 1.4 2,706 1.4
General and administrative 7,988 3.9 3,915 2.1
Warehousing and technical support 492 0.2 699 0.4
--------- ----- --------- -----
Total operating expenses 11,353 5.5 7,320 3.9
--------- ----- --------- -----
Operating income (loss) (7,928) (3.8) 2,062 1.1
Other expense (1,003) (0.5) (576) (0.3)
--------- ----- --------- -----
Pre-tax income (loss) $ (8,931) (4.3)% $ 1,486 0.8 %
========= ===== ========= =====
Net sales were $189,107 for the three months ended May 31, 2003, a decrease
of $17,193, or 8.3%, from 2002. Unit sales of wireless handsets decreased by
328,000 units for the three months ended May 31, 2003, or 22.8%, to
approximately 1,109,000 units from 1,437,000 units in 2002. This decrease was
attributable to a new product launch in 2002 that did not repeat in 2003 and a
closeout of certain models in Canada in 2002 that were not replaced in 2003. In
addition, there was a $4,484 decrease in sales incentives compared to 2002 as
there was not a major 2003 product launch as occurred in 2002. These programs
are expected to continue and will either increase or decrease based upon
competition and customer and market requirements. Further offsetting the decline
in revenue was the average selling price of handsets, which increased to $161
per unit for the three months ended May 31, 2003, from $135 per unit in 2002.
This increase was due to higher selling prices of the newly-introduced digital
products, including products with color LCD's which have a higher selling price.
Gross profit margins increased to 5.0% for the three months ended May 31, 2003
from 1.7% in 2002, primarily due to the sales of new, higher margin products and
lower inventory write-downs. There were no inventory write-downs for the three
months ended May 31, 2003 compared to $2,859 in 2002. These write-downs were
based upon open purchase orders from customers and selling prices subsequent to
the balance sheet date as well as indications from our
41
customers based upon current negotiations. As of May 31, 2003, 1,932 of
previously written-down units remained in inventory which were valued at $398.
The Company plans to sell these items to its existing customers during the next
year. None of the written down inventory was scrapped. The Company expects that,
due to market conditions and customer consolidation, it could experience
additional write-downs in the future. Gross margins were favorably impacted by
reimbursement from a vendor for software upgrades performed on inventory sold of
$623 and $74 for the three months ended May 31, 2002 and 2003, respectively.
Without this reimbursement, gross margins would have been lower by 0.3% and
0.03% for the three months ended May 31, 2002 and 2003, respectively. The
Company has received price protection of $17,000 and $11,850 for the three
months ended May 31, 2002 and 2003, respectively, from a vendor for certain
inventory, of which $9,348 and $11,598 was recorded as a reduction to cost of
sales, as related inventory was sold. The other $252 in price protection has
been reflected as a reduction to the remaining inventory cost at May 31, 2003.
Without this price protection, gross profit margins would have been lower by
4.5% and 6.1% for the three months ended May 31, 2002 and 2003, respectively.
The Company has an agreement with its vendor for additional future price
protection with respect to specific inventory items if needed. During three
months ended May 31, 2003, there was a decrease of $4,484 in sales incentives
expense due to a non-recurring product launch in 2002, net of reversals of $155.
The Company expects, due to market conditions and customer consolidation,
it could experience additional sales incentives expense in the future.
Operating expenses decreased $4,033 for the three months ended May 31, 2003
from 2002. As a percentage of net sales, operating expenses decreased to 3.9%
during three months ended May 31, 2003, compared to 5.5% in 2002. Selling
expenses decreased $167 for the three months ended May 31, 2003 compared to
2002, primarily in commissions of $270, due to a reduction of commissions paid
to distributors in Mexico compared to last year and lower sales. This decrease
was partially offset by an increase of $126 in salesmen salaries from the hiring
of additional salesmen in Quintex to support additional sales programs. Numerous
other individually insignificant fluctuations account for the remaining net
change in selling expenses. General and administrative expenses decreased $4,073
for the three months ended May 31, 2003 from 2002, primarily in salaries of
$2,968 due to a non-recurring bonus provision and new executive compensation
contract in 2002 and bad debt expense of $1,389 due to the recovery of a bad
debt previously written off and a non- recurring bankruptcy in 2002. The Company
does not consider this a trend in the overall accounts receivable. This decrease
was offset by an increase in insurance expense of $143 due to increased
insurance premiums for general liability and umbrella coverage. Numerous other
individually insignificant fluctuations account for the remaining net change in
general and administrative expenses. Warehousing and technical support expenses
increased $207 for the three months ended May 31, 2003 from 2002, primarily in
direct labor, payroll taxes and benefits of $280 due to additional employees for
product testing. This increase was partially offset by a decrease in the costs
of buying offices of $62 as a result of eliminating the use of the buying office
in Korea. Numerous individually insignificant fluctuations account for the
remaining net change in warehousing and technical support expenses. Pre-tax
income for the three months ended May 31, 2003 was $1,486, compared to pre-tax
loss of $8,931 for fiscal 2002.
Management believes that the wireless industry is extremely competitive and
that this competition could affect gross margins and the carrying value of
inventories in the future as new
42
competitors enter the marketplace. This pressure from increased competition is
further enhanced by the consolidation of many of Wireless' customers into a
smaller group, dominated by only a few, large customers. Also, timely delivery
and carrier acceptance of new product could affect our quarterly performance.
Our suppliers have to continually add new products in order for Wireless to
improve its margins and gain market share. These new products require extensive
testing and software development which could delay entry into the market and
affect our sales in the future. 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.
Six months ended May 31, 2002 compared to six months ended May 31, 2003
The following table sets forth for the periods indicated certain statements
of operations data for Wireless expressed as a percentage of net sales:
Six Months Ended
---------------------------------------------
May 31, 2002 May 31, 2003
---------------------- ---------------------
(As Restated)
Net sales:
Wireless products $ 304,663 95.4% $ 395,885 97.6%
Activation commissions 13,468 4.2 8,612 2.1
Residual fees 1,140 0.4 1,024 0.3
Other 20 -- 148 --
--------- ----- --------- -----
Total net sales 319,291 100.0 405,669 100.0
Gross profit 5,038 1.6 21,199 5.2
Operating expenses
Selling 5,613 1.8 5,369 1.3
General and administrative 11,389 3.6 8,247 2.0
Warehousing and technical support 1,108 0.3 1,412 0.4
--------- ----- --------- -----
Total operating expenses 18,110 5.7 15,028 3.7
--------- ----- --------- -----
Operating income (loss) (13,072) (4.1) 6,171 1.5
Other expense (2,566) (0.8) (1,436) (0.4)
--------- ----- --------- -----
Pre-tax income (loss) $ (15,638) (4.9)% $ 4,735 1.1 %
========= ===== ========= =====
Net sales were $405,669 for the six months ended May 31, 2003, an increase
of $86,378, or 27.1%, from 2002. Unit sales of wireless handsets increased by
39,000 units for the six months ended May 31, 2003, or 1.7%, to approximately
2,300,000 units from 2,261,000 units in 2002. This increase was attributable to
increased sales of digital handsets for new product introductions which were
delayed in 2002, in addition to 2002 late acceptances by our customers and lower
demand for wireless products, a situation that did not repeat in 2003. In
addition, there was a $622 decrease in sales incentives compared to 2002. These
programs are expected to continue and will either increase or decrease based
upon competition and customer and market requirements. The average selling
43
price of handsets increased to $166 per unit for the six months ended May 31,
2003, from $129 per unit in 2002. This increase was due to higher selling prices
of the newly-introduced digital products, including products with color LCD's,
which have a higher selling price. Gross profit margins increased to 5.2% for
the six months ended May 31, 2003 from 1.6% in 2002, primarily due to the sales
of new, higher margin products and lower inventory write-downs. There were no
inventory write-downs for the six months ended May 31, 2003, compared to $3,899
in 2002. These write- downs were based upon open purchase orders from customers
and selling prices subsequent to the balance sheet date as well as indications
from our customers based upon current negotiations. As of May 31, 2003, 1,932 of
previously written-down units remained in inventory which were valued at $398.
The Company plans to sell these items to its existing customers during the next
year. None of the written down inventory was scrapped. The Company expects that,
due to market conditions and customer consolidation, it could experience
additional write-downs in the future. Gross margins were favorably impacted by
reimbursement from a vendor for software upgrades performed on inventory sold of
$817 and $123 for the six months ended May 31, 2002 and 2003, respectively.
Without this reimbursement, gross margins would have been lower by .2% and .03%
for the six months ended May 31, 2002 and 2003, respectively. The Company has
received price protection of 0.2% and 0.03% for the six months ended May 31,
2002 and 2003, respectively, from a vendor for certain inventory, of which
$9,348 and $15,158 was recorded as a reduction to cost of sales, as related
inventory was sold. The other $252 in price protection has been reflected as a
reduction to the remaining inventory cost at May 31, 2003. Without this price
protection, gross profit margins would have been lower by 2.9% and 3.7% for the
six months ended May 31, 2002 and 2003, respectively. The Company has an
agreement with its vendor for additional future price protection with respect to
specific inventory items if needed. During the six months ended May 31, 2002,
there was a decrease of $886 in sales incentive expense as a result of fewer new
product introductions, net of reversals of $318.
The Company expects, due to market conditions and customer consolidation,
it could experience additional sales incentives expense in the future.
Operating expenses decreased $3,082 for the six months ended May 31, 2003
from 2002. As a percentage of net sales, operating expenses decreased to 3.7%
during six months ended May 31, 2003, compared to 5.7% in 2002. Selling expenses
decreased $244 for the six months ended May 31, 2003 compared to 2002, primarily
in commissions of $440, due to a reduction of commissions paid to distributors
in Mexico compared to last year. Travel and entertainment decreased $77 due to
fewer trade shows during the quarter. These decreases were partially offset by
an increase of $191 in salesmen salaries from the hiring of additional salesmen
in Quintex to support additional sales programs. Numerous other individually
insignificant fluctuations account for the remaining net change in selling
expenses. General and administrative expenses decreased $3,142 for the six
months ended May 31, 2003 from 2002, primarily in salaries of $2,783 due to a
non- recurring bonus provision and new executive compensation contract in 2002
and bad debt expense of $1,248 primarily due to the recovery of a previously
charged bad debt and a customer who filed for bankruptcy in 2003. The Company
does not consider this a trend in the overall accounts receivable. Employee
benefits increased $199 due to increased costs under the health care plan and
battery recycling charges, due to a 2002 refund of $84 that did not repeat in
2003. Numerous other individually insignificant fluctuations account for the
remaining net change in general and administrative expenses. Warehousing and
technical support expenses increased $304 for the six
44
months ended May 31, 2003 from 2002, primarily in direct labor, payroll taxes
and benefits of $484 due to additional employees for product testing and bonus
accruals. This increase was partially offset by decreases in travel of $53 due
to less travel by engineers and a decrease in the costs of buying offices of
$128 as a result of less activity in the Korean buying office due to lower
purchases. Numerous other individually insignificant fluctuations account for
the remaining net change in warehousing and technical support expenses. Pre-tax
income for the six months ended May 31, 2003 was $4,735, compared to pre-tax
loss of $15,638 for fiscal 2002.
Management believes that the wireless industry is extremely competitive and
that this competition could affect gross margins and the carrying value of
inventories in the future as new competitors enter the marketplace. This
pressure from increased competition is further enhanced by the consolidation of
many of Wireless' customers into a smaller group, dominated by only a few, large
customers. Also, timely delivery and carrier acceptance of new product could
affect our quarterly performance. Our suppliers have to continually add new
products in order for Wireless to improve its margins and gain market share.
These new products require extensive testing and software development which
could delay entry into the market and affect our sales in the future. In
addition, given the anticipated emergence of new technologies in the wireless
industry, the Company will need to sell existing inventory quantities of current
technologies to avoid further write-downs to market.
Electronics Results
Three months ended May 31, 2002 compared to three months ended May 31, 2003
The following table sets forth for the periods indicated certain statements
of income data for the Electronics Group expressed as a percentage of net sales:
Three Months Ended
May 31, 2002 May 31, 2003
--------------------- ---------------------
(As Restated)
Net sales:
Mobile electronics $ 57,894 63.6% $ 74,108 66.2%
Consumer electronics 19,164 21.1 27,762 24.8
Sound 13,646 15.0 9,928 8.9
Other 263 0.3 105 0.1
-------- ----- -------- -----
Total net sales 90,967 100.0 111,903 100.0
Gross profit 15,158 16.7 16,175 14.5
Operating expenses
Selling 4,057 4.5 4,596 4.1
General and administrative 5,670 6.2 6,054 5.4
Warehousing and technical support (9) -- 656 0.6
-------- ----- -------- -----
Total operating expenses 9,718 10.7 11,306 10.1
-------- ----- -------- -----
Operating income 5,440 6.0 4,869 4.4
Other income (expense) (107) (0.1) 393 0.4
-------- ----- -------- -----
Pre-tax income $ 5,333 5.9 % $ 5,262 4.7 %
======== ===== ======== =====
<page> 45
Net sales were $111,903 for the three months ended May 31, 2003, a 23.0%
increase from net sales of $90,967 in 2002. Mobile and consumer electronics'
sales increased over last year, partially offset by a decrease in sound and
other. Mobile electronics increased $16,214 (28.0%) during 2003 from 2002. Sales
of mobile video within the mobile electronics category increased 59.8% for the
three months ended May 31, 2003, from 2002. Consumer electronics increased
$8,598 (44.9%) for the three months ended May 31, 2003, from 2002, primarily in
sales of video-in-a-bag and portable DVD players. These increases were partially
offset by a decrease in the sound category of $3,718 (27.2%). Given the change
in the marketplace, fully-featured sound systems are being incorporated into
vehicles at the factory rather than being sold in the aftermarket. This
declining trend in sound systems is expected to continue except in the satellite
radio product line. There was also an increase in sales incentives of $424. Net
sales in the Company's Malaysian subsidiary decreased from last year by
approximately $1,364 primarily from lower OEM business. The Company's Venezuelan
subsidiary experienced a decrease of $2,189 in sales from last year, due to the
temporary closing of the offices due to the impact of economic and political
instability in the country.
Gross profit margins decreased to 14.5% for the three months ended May 31,
2003 compared to 16.7% in 2002, primarily in the consumer electronics category.
This decline was due to sales of older FRS radios at lower margins in
anticipation of newer, higher margined products. There also was an increase in
the sales of video products sold through consumer channels, which carry a lower
gross margin as opposed to other product lines. During the three months ended
May 31, 2003, there was an increase in sales incentives expense of $424, net of
reversals of $240, as a result of increased sales.
Operating expenses increased $1,588 for the three months ended May 31,
2003, an 16.3% increase from operating expenses in 2002. As a percentage of net
sales, operating expenses decreased to 10.1% during the three months ended May
31, 2003 compared to 10.7% in 2002. Selling expenses increased $539 during the
three months ended May 31, 2003, partially in commissions of $233 due to an
increase of $203 from an increase in commissionable sales in video and consumer
goods, which was offset by a $96 decrease in commissionable sales in
international and American Radio, which have a different commission rate
structure. In addition, selling expenses increased in, salaries of $113
primarily due to increased head count to support the growing business, travel
and entertainment of $50 to support increased sales and an increase in
advertising and trade show expense of $124 due to additional promotions to
support the sales increase. General and administrative expenses increased $384
from 2002, mostly in salaries of $135, professional fees of $229 for a study of
optimizing the use of public warehouses, and an increase of $163 in corporate
allocations for additional corporate services. These increases were partially
offset by decreases in employee benefits of $69 due to better dental care
experience. Numerous other individually insignificant fluctuations account for
the remaining net change in general and administrative expenses. Warehousing and
technical support increased $665 for the three months ended May 31, 2003 from
2002, primarily in direct labor, payroll taxes and benefits of $656 due to an
increased headcount. There was also an increase in overseas buying office
expenses of $60 as a result of increased purchases. Numerous other individually
insignificant fluctuations account for the remaining net change in warehousing
and technical support expenses. Pre-tax income for the three months ended May
31, 2003 was $5,262, compared to $5,333 for 2002.
46
The Company believes that the Electronics Group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales and general economic conditions. Also, all of its products are
subject to price fluctuations which could affect the carrying value of
inventories and gross margins in the future.
Six months ended May 31, 2002 compared to six months ended May 31, 2003
The following table sets forth for the periods indicated certain statements
of income data for the Electronics Group expressed as a percentage of net sales:
Six Months Ended
May 31, 2002 May 31, 2003
----------------------- ------------------------
(As Restated)
Net sales:
Mobile electronics $ 97,588 60.1% $ 125,198 65.2%
Consumer electronics 35,156 21.7 44,257 23.0
Sound 28,855 17.8 22,472 11.7
Other 646 0.4 233 0.1
--------- ----- --------- ------
Total net sales 162,245 100.0 192,159 100.0
Gross profit 27,175 16.7 29,774 15.5
Operating expenses
Selling 7,406 4.6 8,395 4.3
General and administrative 10,992 6.7 11,850 6.2
Warehousing and technical support 474 0.3 1,298 0.7
--------- ----- --------- ------
Total operating expenses 18,872 11.6 21,543 11.2
--------- ----- --------- ------
Operating income 8,303 5.1 8,231 4.3
Other income (expense) (1,626) (1.0) (479) (0.2)
--------- ----- --------- ------
Pre-tax income $ 6,677 4.1 % $ 7,752 4.1 %
========= ===== ========= =====
Net sales were $192,159 for the six months ended May 31, 2003, an 18.4%
increase from net sales of $162,245 in 2002. Mobile and consumer electronics'
sales increased over last year, partially offset by a decrease in sound and
other. Mobile electronics increased $27,610 (28.3%) during 2003 from 2002. Sales
of mobile video within the mobile electronics category increased 49.4% for the
six months ended May 31, 2003, from 2002. Consumer electronics increased $9,101
(25.9%) for the six months ended May 31, 2003 from 2002, primarily in sales of
video-in-a-bag and portable DVD players. These increases were partially offset
by a decrease in the sound category of $6,383 (22.1%). Given the change in the
marketplace, fully-featured sound systems are being incorporated into vehicles
at the factory rather than being sold in the aftermarket. This declining trend
in sound systems is expected to continue except in the satellite radio product
line. There was also an increase in sales incentives of $1,043. Net sales in the
Company's Malaysian subsidiary decreased from last year by approximately $2,080
primarily from lower OEM business. The Company's Venezuelan
47
subsidiary experienced a decrease of $4,575 in sales from last year, due to the
temporary closing of the offices due to the impact of economic and political
instability in the country.
Gross profit margins decreased to 15.5% for the six months ended May 31,
2003, compared to 16.7% for 2002. This decline was due to sales of older FRS
radios at lower margins in anticipation of newer, higher margined products.
There also was an increase in the sales of video products sold through consumer
channels, which carry a lower gross margin as opposed to other product lines.
During the six months ended May 31, 2003, there was an increase in sales
incentives expense of $1,043, net of reversals of $971.
Operating expenses increased $2,671 for the six months ended May 31, 2003,
a 14.2% increase from operating expenses in 2002. As a percentage of net sales,
operating expenses decreased to 11.6% during the six months ended May 31, 2003
compared to 11.7% in 2002. Selling expenses increased $989 during the six months
ended May 31, 2003, partially in commissions of $260 due to an increase of
commissionable sales and from Code, which was offset by a decrease in
commissionable sales in American Radio, which has a different commission rate
structure. In addition, selling expenses increased in salaries of $367 primarily
due to $234 from Code and general increases in other areas, travel and
entertainment of $99 due to an increase of $85 from Code and an increase in
advertising and trade shows of $262 due to increased promotions to support the
growing business. Numerous other individually insignificant fluctuations account
for the remaining net change in selling expenses. General and administrative
expenses increased $858 from 2002, mostly in salaries of $599 ($237 due to
Code), travel and entertainment of $117 ($67 due to Code), insurance expense of
$152 due to higher premiums on general liability and Ocean Cargo as shipments
and sales have increased. These increases were partially offset by decreases in
professional fees of $241 due to a patent infringement fee of $497 during 2002
that did not recur in 2003 and a reduction in bad debt expense of $314 primarily
due to a 2002 customer write-off due to bankruptcy that did not recur. There was
also an increase in the corporate allocation of $328 for additional corporate
services. Numerous other individually insignificant fluctuations account for the
remaining net change in general and administrative expenses. Warehousing and
technical support increased $824 for the six months ended May 31, 2003 from
2002, primarily in direct labor, payroll taxes and benefits of $714 due to
increased headcount. There was also an increase in overseas buying office
expenses of $123 as a result of increased purchases. Numerous other individually
insignificant fluctuations account for the remaining net change in warehousing
and technical support expenses Pre-tax income for the six months ended May 31,
2003 was $7,752, compared to $6,677 for 2002.
The Company believes that the Electronics Group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales and general economic conditions. Also, all of its products are
subject to price fluctuations which could affect the carrying value of
inventories and gross margins in the future.
Other Income and Expense
Interest expense and bank charges increased (decreased) $(25) and $117,
during the three and six months ended May 31, 2003 from three and six months
ended May 31, 2002, respectively,
48
primarily due to lower interest bearing debt during the quarter, offset by
interest paid on a state tax settlement.
Equity in income of equity investees increased by approximately $186 and
$253, for the three and six months ended May 31, 2003 compared to three and six
months ended May 31, 2002, respectively. The majority of the increase was due to
an increase in the equity income of ASA due to increased sales and improvement
in gross margins. Other expenses decreased during 2003 compared to 2002. The
foreign exchange gain (losses) were $32 and $(763), respectively, for the three
and six months ended May 31, 2003 and $(250) and $(2,168), respectively, three
and six months ended May 31, 2002. This decrease was due to the devaluation of
14% in 2003 versus 40% in 2002. This decrease in devaluation was due to
Venezuela fixing the exchange rate of the Bolivar with the U.S. Dollar during
the first quarter of 2003. We also had an increase in minority interest expense
of $576 and $1,513 for the three and six months ended May 31, 2003 compared to
three and six months ended May 31, 2002, respectively, primarily due to the
effect of Toshiba's increased ownership in ACC and profitable operations.
Provision for Income Taxes
The effective tax (recovery) rate for the three and six months ended May
31, 2003, was 27.4% and 32.7%, respectively, compared to last year's 55.5% and
1247.8% for the comparable periods. During the three and six months ended May
31, 2002, the Company experienced a high effective tax rate due to the impact of
certain non-deductible items including a bonus payment and the mix of foreign
and domestic earnings. During the three and six months ended May 31, 2003, the
reduction in the Company's valuation allowance relating to the Wireless segment
resulted in a decrease to the Company's effective tax rate. In addition, the mix
of foreign and domestic earnings resulted in a increase in the Company's
effective tax rate for the six months ended May 31, 2003.
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, 2003, the Company had working capital (defined
as current assets less current liabilities) of $296,403, which includes cash of
$24,122 compared with working capital of $292,687 at November 30, 2002, which
included cash of $2,758. Operating activities provided approximately $58,144,
primarily from collections of accounts receivable and decreases in inventory,
partially offset by decreases in accounts payable and accrued expenses.
Investing activities provided approximately $229, primarily from the
distribution from an equity investee, partially offset by purchases of property,
plant and equipment. Financing activities used approximately $37,025, primarily
from repayments of bank obligations.
The Company's principal source of liquidity is its revolving credit
agreement which expires July 27, 2004. At May 31, 2003, the credit agreement
provided for $200,000 of available credit, including $15,000 for foreign
currency borrowings. The continued availability of this financing is dependent
upon the Company's operating results which would be negatively impacted by a
decrease in demand for the Company's products. The Company reduced its credit
availability from $200,000 to $150,000 during
49
the third quarter of 2003 as a result of the Company's working capital position
and current anticipated borrowing requirements.
Under the credit agreement, the Company may obtain credit through direct
borrowings and letters of credit. The obligations of the Company under the
credit agreement are guaranteed by certain of the Company's subsidiaries and is
secured by accounts receivable, inventory and the Company's shares of ACC. The
Company's ability to borrow under its credit facility is a maximum aggregate
amount of $150,000, subject to certain conditions, based upon a formula taking
into account the amount and quality of its accounts receivable and inventory.
The credit agreement also allows for commitments up to $50,000 in forward
exchange contracts. In addition, the Company guarantees the borrowings of one of
its equity investees at a maximum of $300.
The credit agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net worth.
Additionally, the agreement includes restrictions and limitations on payments of
dividends, stock repurchases and capital expenditures.
At November 30, 2002, the Company was not in compliance with certain of its
pre-tax income covenants. Furthermore, as of November 30, 2002, the Company was
also not in compliance with the requirement to deliver audited financial
statements 90 days after the Company's fiscal year-end, and as of February 28,
2003, the requirement to deliver unaudited quarterly financial statements 45
days after the Company's quarter end and had not received a waiver. Accordingly,
the Company recorded its outstanding domestic bank obligations of $36,883 in
current liabilities at November 30, 2002.
Subsequent to November 30, 2002, the Company repaid its obligation of
$36,883 in full resulting in domestic bank obligations outstanding at May 31,
2003 of $0. The Company subsequently obtained a waiver for the November 30, 2002
and February 28, 2003 violations. The Company was in compliance with all its
bank covenants at May 31, 2003. While the Company has historically been able to
obtain waivers for such violations, there can be no assurance that future
negotiations with its lenders would be successful or that the Company will not
violate covenants in the future, therefore, resulting in amounts outstanding to
be payable upon demand. This credit agreement has no cross covenants with other
credit facilities.
The Company also has revolving credit facilities in Malaysia 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.
50
The Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At May 31,
2003, such obligations and commitments are as follows:
Payments Due By Period
---------------------------------------------------------------
Contractual Cash Less than 1-3 4-5 After
Obligations Total 1 Year Years Years 5 years
- ------------------------ ------- ------- ------- ------- -------
Capital lease obligations $13,929 $ 554 $ 1,677 $ 1,157 $10,541
Operating leases 8,464 2,168 4,544 1,488 264
------- ------- ------- ------- -------
Total contractual cash
obligations $22,393 $ 2,722 $ 6,221 $ 2,645 $10,805
======= ======= ======= ======= =======
Amount of Commitment
Expiration per period
---------------------------------------------------------
Total
Other Commercial Amounts Less than 1-3 Over
Commitments Committed 1 Year Years 4-5 Years 5 years
- ----------------- --------- -------- ----- --------- -------
Lines of credit $ 3,246 $ 3,246 -- -- --
Standby letters of credit 2,834 2,834 -- -- --
Guarantees 300 300 -- -- --
Commercial letters of
credit 4,496 4,496 -- -- --
------- ------- ---- ---- ----
Total commercial
commitments $10,876 $10,876 $ -- $ -- $ --
======= ======= ===== ==== =====
The Company has guaranteed, through August 31, 2003, the borrowings of one
of its 50%- owned equity investees (GLM) at a maximum of $300. During the
quarter ended May 31, 2003, the Company adopted FIN 45, "Guarantors Accounting
and Disclosure Requirements for Guarantors, Including Guarantees of Indebtedness
of Others" (FIN 45). In accordance with FIN 45, the Company has not issued or
modified this guarantee after December 31, 2002. Accordingly, this guarantee has
not been reflected on the accompanying consolidated financial statements (See
Note 13).
The Company regularly reviews its cash funding requirements and attempts to
meet those requirements through a combination of cash on hand, cash provided by
operations, available borrowings under bank lines of credit and possible future
public or private debt and/or equity offerings. At times, the Company evaluates
possible acquisitions of, or investments in, businesses that are complementary
to those of the Company, which transaction may requires the use of cash. The
Company believes that its cash, other liquid assets, operating cash flows,
credit arrangements, access to equity capital markets, taken together, provide
adequate resources to fund ongoing
51
operating expenditures. In the event that they do not, the Company may require
additional funds in the future to support its working capital requirements or
for other purposes and may seek to raise such additional funds through the sale
of public or private equity and/or debt financings as well as from other
sources. No assurance can be given that additional financing will be available
in the future or that if available, such financing will be obtainable on terms
favorable to the Company when required.
In June 2003 the Company purchased a building for expansion purposes for
$3,509, which includes closing costs.
In May 2003, the U.S. Bankruptcy Court accepted the Company's bid for
certain assets of Recoton Corporation. This bid includes certain defined assets
of Recoton's U.S. audio operations including brands and trademarks and the
outstanding common stock of Recoton's German, Italian, and Japanese operations.
In accordance with this bid, the Company made a deposit of $2,000, which is
currently being held in escrow. The purchase price will approximate $40,000 plus
the assumption of $5,000 in debt, not including related acquisition costs. The
closing is anticipated to be in early July 2003 and is subject to completion of
final documentation and regulatory approval.
Related Party Transactions
The Company has entered into several related party transactions which are
described below.
Leasing Transactions
During 1998, the Company entered into a 30-year capital lease for a
building with its principal stockholder and chief executive officer, which is
the headquarters of the Wireless operation. Payments on the lease were based
upon the construction costs of the building and the then-current interest rates.
The effective interest rate on the capital lease obligation is 8%. In connection
with the capital lease, the Company paid certain costs on behalf of its
principal stockholder and chief executive officer in the amount of $1,301. The
advance does not have a specified due date or interest rate. During 2001 and
2002, the entire balance of $1,301 was repaid to the Company.
During 1998, the Company entered into a sale/leaseback transaction with its
principal stockholder and chief executive officer for $2,100 of equipment, which
has been classified as an operating lease. The lease is a five-year lease with
monthly payments of $34. No gain or loss was recorded on the transaction as the
book value of the equipment equaled the fair market value.
The Company also leases certain facilities from its principal stockholder.
Rentals for such leases are considered by management of the Company to
approximate prevailing market rates. Total lease payments required under the
leases for the five-year period ending May 31, 2008 are $2,793.
52
Amounts Due from Officers
A note due from an officer/director of the Company, which bore interest at
the LIBOR rate, to be adjusted quarterly, plus 1.25% per annum, was paid in full
during fiscal 2002. In addition, the Company has outstanding notes due from
various officers of the Company aggregating $235 as of May 31, 2003, which have
been included in prepaid expenses and other current assets on the accompanying
consolidated balance sheet. The notes bear interest at the LIBOR rate plus 0.5%
per annum. Principal and interest are payable in equal annual installments
beginning July 1, 1999 through July 1, 2003. In accordance with the
Sarbanes-Oxley Act of 2002, the Company will not alter the terms of the notes
and all amounts will be repaid in full in July 2003. In addition, no new notes
with officers or directors of the Company will be entered into.
Transactions with Toshiba
At November 30, 2002, the Company had on hand 504,020 units in the amount
of $91,226, which were purchased from Toshiba and have been recorded in
inventory and accounts payable on the accompanying consolidated balance sheet.
Of this accounts payable $56,417 was subject to an arrangement with Toshiba,
which provides for, among other things, extended payment terms. This arrangement
has since been modified such that payment terms are no longer extended. The
payment terms are such that the payable is non-interest bearing. The balance of
$91,226 accounts payable is payable in accordance with the terms established in
the distribution agreement, which is 30 days. During the first quarter of 2003,
the Company paid this amount in full. At May 31, 2003, the Company had $2,958 of
inventory which was purchased from Toshiba and has been recorded in inventory
and accounts payable on the accompanying consolidated balance sheet. Under the
above arrangement, the Company is entitled to receive price protection in the
event the selling price to its customers is less than the purchase price from
Toshiba. The Company will record such price protection, if necessary, at the
time of the sale of the units.
Inventory on hand at November 30, 2002 and May 31, 2003 purchased from
Toshiba Corporation (Toshiba), the 25% minority shareholder of ACC and major
supplier to ACC, approximated $138,467 and $48,500 respectively. As of November
30, 2002, the Company recorded receivables from Toshiba aggregating
approximately $12,219 for price protection and software upgrades. These amounts
were paid in full during the first quarter of 2003. As of May 31, 2003, the
Company recorded receivables from Toshiba aggregating approximately $10,450 for
price protection.
The Company has also received price protection (a reduction in our purchase
price) for inventory on hand in addition to goods sold. During the six months
ended May 31, 2003, $15,158 of price protection from Toshiba was recorded as a
reduction to cost of sales as related inventory was sold. In addition, $252 of
price protection from Toshiba has been reflected as a reduction to the remaining
inventory cost at May 31, 2003.
53
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 this will be adopted by the Company on
December 1, 2002 (fiscal 2003) 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 adoption of
Statement 143 did not have any impact on its results of operations or its
financial position as the Company had no asset retirement obligations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long- Lived Assets" (Statement 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes Statement 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", while retaining
the fundamental recognition and measurement provisions of that statement.
Statement 144 requires that a long-lived asset to be abandoned, exchanged for a
similar productive asset or distributed to owners in a spin-off to be considered
held and used until it is disposed of. However, Statement 144 requires that
management consider revising the depreciable life of such long-lived asset. With
respect to long-lived assets to be disposed of by sale, Statement 144 retains
the provisions of Statement 121 and, therefore, requires that discontinued
operations no longer be measured on a net realizable value basis and that future
operating losses associated with such discontinued operations no longer be
recognized before they occur. Statement 144 is effective for all fiscal quarters
of fiscal years beginning after December 15, 2001. The adoption of Statement 144
did not have a material effect on the Company's consolidated financial
statements.
In April 2002, the FASB issued SFAS 145 "Rescission of SFAS Statements No.
4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections" (Statement
145). Statement 145, as it pertains to the recission of Statement 4, is
effective for fiscal years beginning after May 15, 2002 and is effective for
transactions occurring after May 15, 2002 as it relates to Statement 13. This
Statement updates, clarifies and simplifies existing accounting pronouncements
by rescinding Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. Adoption of
this statement had no material impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally provided by SFAS
No. 123, "Accounting for Stock-Based Compensation". Additionally, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on
reported results. The transitional requirements of SFAS No. 148 will be
effective for all financial statements for fiscal years ending after December
15, 2002. The disclosure requirements shall be effective for financial reports
containing condensed financial statements for interim periods beginning after
December 31, 2002. The Company has adopted the disclosure portion of this
statement for the fiscal quarter ending May 31, 2003, as
54
required. The application of this standard will have no impact on the Company's
consolidated financial position or results of operations.
In February 2003, the EITF issued EITF Issue 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor", which was adopted by the Company during the quarter ended May 31, 2003.
This EITF provides guidance on the income statement classification of amounts
received by a customer, including a reseller and guidance regarding timing of
recognition for volume rebates. Adoption of this new standard, which was applied
prospectively by the Company for new arrangements, including modifications of
existing arrangements, entered into after December 31, 2002, did not have a
material impact on the Company's consolidated financial position or results of
operations.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantors, Including
Guarantees of Indebtedness of Others". FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company adopted
FIN 45 during the quarter ended May 31, 2003. The adoption of FIN 45 did not
have a material effect on the Company's consolidated financial position or
results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51".
FIN 46 addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim period beginning
after June 15, 2003. Accordingly, the Company will adopt this provision of FIN
46 during the quarter ended November 30, 2003. The adoption of FIN46 is being
evaluated to determine what impact, if any, the adoption of the provisions will
have on the Company's financial condition or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting guidance on derivative instruments (including certain
derivative instruments embedded in other contracts) and hedging activities that
fall within the scope of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is effective for all contracts entered
into or modified after June 30, 2003, with certain exceptions, and for helping
relationships designated after June 30, 2003. The guidance is to be applied
prospectively. The adoption of SFAS No. 149 is being evaluated to determine what
impact, if any, the adoption of the provisions will have on the Company's
financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments
55
with Characteristics of both Liabilities and Equity." SFAS No. 150 changes the
accounting guidance for certain financial instruments that, under previous
guidance, could be classified as equity or "mezzanine" equity by now requiring
those instruments to be classified as liabilities (or assets in some
circumstances) in the statement of financial position. Further, SFAS No. 150
requires disclosure regarding the terms of those instruments and settlement
alternatives. SFAS No. 150 is generally effective for all financial instruments
entered into or modified after May 31, 2003, and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 is being evaluated to determine what impact, if any,
the adoption of the provisions will have on the Company's financial condition or
results of operations.
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, 2002 and the Form 10-Q for the first quarter ended February 28,
2003. These factors, among others, may cause actual results to differ materially
from the results suggested in the forward- looking statements. Forward-looking
statements include statements relating to, among other things:
o growth trends in the wireless, 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
56
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
ITEM 4 CONTROLS AND PROCEDURES
Within the 90-day period immediately preceding the filing of this Report,
the Company's Chief Executive Officer and Principal Financial Officer has each
evaluated the effectiveness of the Company's "Disclosure Controls and
Procedures" and has concluded that they were effective. As such term is used
above, the Company's Controls and Procedures are controls and other procedures
of the Company that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Security Exchange Commission's rules
and forms. Disclosure Controls and Procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by the Company in such reports is accumulated and communicated to the
Company's management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date that the Company's Chief Executive Officer and Principal Financial Officer
conducted their evaluations of the Disclosure Controls and Procedures, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
57
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- ---------------------------------------------
99.1 Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
(b) Reports on Form 8-K
For the second quarter ended May 31, 2003, the Company filed
four reports on Form 8-K.
The first report on Form 8-K, dated and filed March 14, 2003,
reported the Company's unaudited financial results as of
November 30, 2002 and a Waiver to the Company's Fourth Amended
& Restated Credit Agreement
The second report on Form 8-K, dated March 21, 2002 and filed
March 27, 2003, reported that two press releases were issued
announcing that the Company had received a Nasdaq Staff
Determination and had requested a hearing to review the Staff
Determination, respectively.
The third report on Form 8-K, dated April 15, 2003 and filed
April 16, 2003, reported that a press release was issued
regarding the Company's inability to timely file a Form 10-Q
for the quarter ended February 28, 2003.
The fourth report on Form 8-K, dated and filed May 29, 2003,
reported that a press release was issued announcing that the
Company would restate results for fiscal years 2000, 2001, and
the first three quarters of fiscal 2002.
58
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: June 30, 2003
By:s/Charles M. Stoehr
------------------------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
59
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, John J. Shalam, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Audiovox Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and,
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial date and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
60
actions with regard to significant deficiencies and material weaknesses.
Date: June 30, 2003
s/John J. Shalam
- --------------------------------------------
John J. Shalam,
Chief Executive Officer
61
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Charles M. Stoehr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Audiovox Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and,
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial date and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
62
actions with regard to significant deficiencies and material weaknesses.
Date: June 30, 2003
s/Charles M. Stoehr
- ---------------------------------------
Charles M. Stoehr
Chief Financial Officer
63