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 The Quarter Ended August 31, 2004
Commission file number 0-28839
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 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 12b-2 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.
Class Outstanding at October 8, 2004
Class A Common Stock 20,790,338 Shares
Class B Common Stock 2,260,954 Shares
2
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I - FINANCIAL INFORMATION 4
ITEM 1. FINANCIAL STATEMENTS 4
Consolidated Balance Sheets at November 30,
2003 and August 31, 2004 (unaudited) 4
Consolidated Statements of Earnings (unaudited) for the Three
and Nine Months Ended August 31, 2003 and August 31, 2004 5
Consolidated Statements of Cash Flows (unaudited) for the Nine
Months Ended August 31, 2003 and August 31, 2004 6
Notes to Consolidated Financial Statements (unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 50
ITEM 4. CONTROLS AND PROCEDURES 51
PART II - OTHER INFORMATION 51
ITEM 1. LEGAL PROCEEDINGS 51
ITEM 6. EXHIBITS 53
SIGNATURES 55
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
November 30, August 31,
2003 2004
------------ -----------
(unaudited)
Assets
Current assets:
Cash $ 4,702 $ 8,592
Accounts receivable, net 266,421 222,120
Inventory 152,762 165,126
Receivables from vendors 7,830 11,092
Prepaid expenses and other current assets 10,319 10,477
Deferred income taxes 9,531 8,196
Assets held-for-sale 70,641 170,646
--------- ---------
Total current assets 522,206 596,249
Investment securities 9,512 7,548
Equity investments 13,142 13,138
Property, plant and equipment, net 18,598 18,896
Excess cost over fair value of assets acquired 7,532 7,195
Intangible assets 8,043 8,043
Other assets 670 458
--------- ---------
$ 579,703 $ 651,527
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 35,126 $ 28,199
Accrued expenses and other current liabilities 31,115 24,810
Accrued sales incentives 14,604 7,419
Income taxes payable 13,218 12,456
Bank obligations 39,940 117,597
Current portion of long-term debt 3,433 10,320
Liabilities related to assets held-for-sale 78,772 87,189
--------- ---------
Total current liabilities 216,208 287,990
Long-term debt 18,246 7,388
Capital lease obligation 6,070 6,022
Deferred income taxes 3,178 1,523
Deferred compensation 5,280 6,089
--------- ---------
Total liabilities 248,982 309,012
--------- ---------
Minority interest 4,993 6,689
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $50 par value; 50,000 shares authorized and outstanding, liquidation
preference of $2,500 2,500 2,500
Series preferred stock $.01 par value, 1,500,000 shares authorized; no shares issued or
outstanding -- --
Common stock:
Class A $.01 par value; 60,000,000 shares authorized; 20,728,382 and 20,772,846 shares
issued at November 30, 2003 and August 31, 2004, respectively 207 208
Class B $.01 convertible par value; 10,000,000 shares authorized; 2,260,954 shares issued
and outstanding 22 22
Paid-in capital 252,104 252,752
Retained earnings 80,635 91,526
Accumulated other comprehensive loss (1,229) (2,685)
Treasury stock, at cost, 1,072,737 and 1,070,957 shares of Class A common stock at
November 30, 2003 and August 31, 2004, respectively (8,511) (8,497)
--------- ---------
Total stockholders' equity 325,728 335,826
--------- ---------
Total liabilities and stockholders' equity $ 579,703 $ 651,527
========= =========
See accompanying notes to consolidated financial statements.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
For the Three and Nine Months Ended August 31, 2003 and 2004
(In thousands, except share and per share data)
(unaudited)
Three Months Ended Nine Months Ended
----------------------------- ---------------------------------
August 31, August 31, August 31, August 31,
2003 2004 2003 2004
------------ ------------ ------------ ------------
Net sales $ 135,239 $ 132,965 $ 327,397 $ 417,533
Cost of sales 112,516 109,747 274,793 351,406
------------ ------------ ------------ ------------
Gross profit 22,723 23,218 52,604 66,127
------------ ------------ ------------ ------------
Operating expenses:
Selling 5,759 8,370 15,967 23,144
General and administrative 11,807 12,924 29,168 36,200
Warehousing and technical support 479 935 1,859 3,404
------------ ------------ ------------ ------------
Total operating expenses 18,045 22,229 46,994 62,748
------------ ------------ ------------ ------------
Operating income 4,678 989 5,610 3,379
------------ ------------ ------------ ------------
Other income (expense):
Interest and bank charges (893) (888) (1,648) (2,682)
Equity in income of equity investees 1,019 1,182 2,134 3,706
Other, net 44 324 (411) 1,663
------------ ------------ ------------ ------------
Total other income, net 170 618 75 2,687
------------ ------------ ------------ ------------
Income from continuing operations before provision for income
taxes, minority interest and discontinued operations 4,848 1,607 5,685 6,066
Provision for income taxes 2,726 832 3,850 3,042
Minority interest income (expense) 161 (738) 454 (710)
------------ ------------ ------------ ------------
Income from continuing operations 2,283 37 2,289 2,314
Income (loss) from discontinued operations, net of tax (1,636) 5,307 1,641 8,577
------------ ------------ ------------ ------------
Net income $ 647 $ 5,344 $ 3,930 $ 10,891
============ ============ ============ ============
Earnings (loss) per common share (basic):
From continuing operations $ 0.11 $ 0.00 $ 0.10 $ 0.11
From discontinued operations $ (0.08) $ 0.24 $ 0.08 $ 0.39
------------ ------------ ------------ ------------
Net income per common share (basic) $ 0.03 $ 0.24 $ 0.18 $ 0.50
============ ============ ============ ============
Earnings (loss) per common share (diluted):
From continuing operations $ 0.10 $ 0.00 $ 0.10 $ 0.10
From discontinued operations $ (0.07) $ 0.24 $ 0.08 $ 0.39
------------ ------------ ------------ ------------
Net income per common share (diluted) $ 0.03 $ 0.24 $ 0.18 $ 0.49
============ ============ ============ ============
Weighted-average common shares outstanding (basic) 21,840,621 21,962,843 21,836,241 21,945,364
============ ============ ============ ============
Weighted-average common shares outstanding (diluted) 22,101,749 22,400,415 22,000,232 22,363,733
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended August 31, 2003 and 2004
(In thousands)
(unaudited)
Nine Months Ended
-----------------------------
August 31, August 31,
2003 2004
----------- -----------
Cash flows from operating activities:
Net income $ 3,930 $ 10,891
Income from discontinued operations (1,641) (8,577)
----------- -----------
Income from continuing operations 2,289 2,314
Adjustments to reconcile net income to net cash provided by (used in) continuing operating
activities:
Depreciation and amortization 2,443 2,417
Recovery of bad debt expense (41) (146)
Equity in income of equity investees (2,134) (3,706)
Minority interest (expense) (454) 710
Deferred income tax expense, net (3,080) 731
Loss on disposal of property, plant and equipment, net 160 --
Tax benefit on stock options exercised -- 107
Non-cash stock compensation 297 179
Changes in operating assets and liabilities, net of assets and liabilities
acquired:
Accounts receivable 43,785 42,920
Inventory 13,513 (12,607)
Receivables from vendors 9,313 (3,262)
Prepaid expenses and other (1,712) 13,376
Investment securities-trading (796) (809)
Accounts payable, accrued expenses and other current liabilities and accrued sales
incentives 8,169 (19,534)
Income taxes payable 2,057 (742)
Change in assets held-for-sale 111,949 (99,995)
Change in liabilities related to assets held-for-sale (82,095) 8,424
----------- -----------
Net cash provided by (used in) operating activities 103,663 (69,623)
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (4,119) (2,910)
Proceeds from sale of property, plant and equipment 129 173
Proceeds from distribution from an equity investee 810 3,609
Proceeds from reduction of purchase price of acquired business -- 513
Purchase of subsidiary shares -- (1,410)
Sale of assets to equity investee 3,600 --
Purchase of acquired business, net of cash acquired (39,609) --
----------- -----------
Net cash used in investing activities (39,189) (25)
----------- -----------
Cash flows from financing activities:
Borrowings from bank obligations 164,331 1,006,160
Repayments on bank obligations (201,158) (928,551)
Principal payments on capital lease obligation (45) (48)
Proceeds from exercise of stock options and warrants 385 534
Principal payments on debt -- (4,324)
Payment of guarantee -- (291)
----------- -----------
Net cash (used in) provided by financing activities (36,487) 73,480
----------- -----------
Effect of exchange rate changes on cash (34) 58
----------- -----------
Net increase in cash 27,953 3,890
Cash at beginning of period 2,758 4,702
----------- -----------
Cash at end of period $ 30,711 $ 8,592
=========== ===========
See accompanying notes to consolidated financial statements.
6
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements of Audiovox Corporation
and subsidiaries ("Audiovox" or the "Company") were prepared in accordance
with accounting principles generally accepted in the United States of
America and include all adjustments (consisting of normal recurring
adjustments), which, in the opinion of management, are necessary to present
fairly the consolidated financial position, results of operations and cash
flows for all periods presented. The results of operations are not
necessarily indicative of the results to be expected for the full fiscal
year.
These consolidated financial statements do not include all disclosures
associated with consolidated financial statements prepared in accordance
with accounting principles generally accepted in the United States of
America. Accordingly, these statements should be read in conjunction with
the Company's consolidated financial statements and notes thereto contained
in the Company's Form 10-K/A for the year ended November 30, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts of
assets, liabilities, revenues and expenses reported in those financial
statements as well as the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements. These judgments can
be subjective and complex, and consequently actual results could differ
from those estimates and assumptions. Significant estimates made by the
Company include the allowance for doubtful accounts, allowance for cellular
deactivations, inventory valuation, recoverability of deferred tax assets,
valuation of long-lived assets, accrued sales incentives and warranty
reserves.
A summary of the Company's significant accounting policies is identified in
Note 1 of Notes to Consolidated Financial Statements included in the
Company's 2003 Annual Report filed on Form 10-K/A. There have been no
changes to the Company's significant accounting policies subsequent to
November 30, 2003.
In connection with Audiovox Communications Corporation ("ACC") entering
into a definitive asset purchase agreement ("Agreement") with UTStarcom,
Inc. ("UTSI") on June 11, 2004 (see Note 2 of Notes to Consolidated
Financial Statements), the Company has classified certain assets and
certain liabilities of ACC as held-for-sale on the accompanying
consolidated balance sheets. The Company is in the process of completing
this sale and plans to exit the Wireless business, which includes ACC.
Accordingly, the Company has presented the Wireless business results as a
discontinued operation for all periods presented. In addition, certain
reclassifications have been made to the 2003 consolidated financial
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
statements in order to conform to the current period presentation.
The Company has one reportable segment ("Electronics") which is organized
by product class. 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.
(2) Discontinued Operations
On June 11, 2004, the Company's majority owned subsidiary, ACC, entered
into a definitive asset Agreement to sell selected assets and certain
liabilities (excluding its receivables, inter- company accounts payable,
income taxes payable, subordinated debt and certain accrued expenses and
other current liabilities), to UTSI for a purchase price of $165,100
("Purchase Price") subject to a net working capital adjustment. If the net
working capital adjustment reflected at the closing is less than $40,000,
then the Purchase Price will be adjusted downward in an amount equal to the
deficiency, and if the net working capital balance exceeds $40,000, then
the Purchase Price will be adjusted upwards in an amount equal to the
excess.
A portion of the Purchase Price proceeds will be utilized for the following
payments:
o ACC will repay Toshiba, minority interest shareholder of ACC, $8,107
as payment in full of the outstanding principal amount of a
subordinated note. In addition, Audiovox will purchase from Toshiba,
its remaining minority interest in ACC for $5,483. As a result of this
purchase ACC will release Toshiba from its obligation to continue to
supply wireless handsets to ACC and releases Toshiba from all claims
that ACC or Audiovox have or may have against them.
o Upon completion of the Agreement, ACC's Chief Executive Officer's
employment agreement with ACC will be terminated and pursuant to his
employment agreement and his long-term incentive compensation award he
will receive $4,000. ACC will also purchase certain of his personally
held intangibles for a purchase price of $16,000. The Company will
purchase his personally held intangibles in order for ACC to have the
ability to convey all of the assets used in connection with the
conduct of Wireless business to UTSI.
o Upon completion of the closing of the Agreement, ACC will pay $5,000
to certain employees of ACC and its subsidiaries as a severance
payment and in exchange for which Audiovox will receive a release
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
from such employees.
o Pursuant to the terms of the Agreement, 5% (or $8,255) of the $165,100
Purchase Price will be placed in escrow by UTSI for 120 days after
closing.
o The Company's Chairman and Chief Executive Officer will receive $1,916
upon the closing of the asset sale pursuant to an amendment to a
long-term incentive compensation award which clarified that such
payment would be paid pursuant to a sale of the Wireless business
pursuant to an asset sale.
o Estimated taxes of approximately $28,100 will be paid in connection
with the asset sale agreement.
If the asset sale had closed on August 31, 2004, Audiovox would have
received the $165,100 purchase price at closing and would have received an
additional $41,808 pursuant to the post-closing net working capital
adjustment. This amount would be reduced by payments to former employees of
the wireless business, transaction costs that are estimated to be $4,000,
payments to Toshiba with respect to certain indebtedness and the purchase
of their 25% interest in ACC, payment of an incentive award to the
Company's CEO and taxes relating to the asset sale. If the asset sale
closed on August 31, 2004, the aggregate amount of these reductions would
be approximately $72,606 and Audiovox would retain approximately $134,302.
Audiovox will retain all of the receivables related to the Wireless
business, which, as of November 30, 2003 and August 31, 2004, amounted to
$128,613 and $134,436, respectively. Audiovox will also retain certain
liabilities (including accrued expenses, other current liabilities and
income taxes payable) related to the Wireless business, which as of
November 30, 2003 and August 31, 2004, amounted to $5,520 and $2,227,
respectively.
Audiovox will retain the proceeds of the Wireless business to repay
domestic bank obligations, which at August 31, 2004 approximated $109,062,
and to fund and grow the consumer electronics business. However, after the
repayment of domestic bank obligations, Audiovox may use all or a portion
of the proceeds for other purposes and will consider other market
opportunities, including acquisitions.
While the anticipated closing date for this transaction is expected on
November 1, 2004, there can be no assurances that such transaction will
close on that date as it is subject to certain closing conditions,
including regulatory and third party approvals. The Company's Board of
Directors as well as the Board of Directors of UTSI has approved the
9
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
transaction and the Company's Chairman and Chief Executive Officer and
majority shareholder, has agreed to vote his shares in favor of this
Agreement.
On or after the closing date of the sale to UTSI, the following additional
agreements will become effective:
o For a period of five-years after the closing, the Company will enter
into a royalty free licensing agreement permitting UTSI to use the
Audiovox brand name on certain products. During such period, the
Company will not conduct, directly or indirectly, in the Wireless
business without the prior written consent of UTSI.
o Certain ACC employee stock options under the 1997 Stock Option Plan
and 1999 Stock Compensation Plan will be extended for one year from
the closing. This extension would result in a remeasurement of stock
options which will be accounted for in accordance with FIN 44 and SFAS
123.
o The Company will provide certain Information Technology services, that
are currently provided to ACC, for at least six months after the
closing as set forth in the Transition Services Agreement with UTSI.
As consideration for the performance of these services, UTSI will pay
the Company based on the usage of these services as set forth in the
Transition Services Agreement.
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 144, "Accounting for the Impairment of Long-lived Assets," the Company
has assessed the measurement date in accounting for the sale transaction on
June 11, 2004 in connection with the date of board approval and signing of
the Agreement. Accordingly, the Company reclassified all associated assets
and liabilities as held-for-sale and recorded the Wireless Segment as a
discontinued operation for all periods presented. The following sets forth
the carrying amounts of the major classes of assets and liabilities of ACC,
which are classified as held-for-sale in the accompanying consolidated
balance sheets.
November 30, August 31,
2003 2004
------------ -----------
Assets
Inventory $ 66,902 $160,091
Prepaid expenses and other current assets 2,052 8,870
Property, plant and equipment, net 1,644 1,654
Other assets 43 31
-------- --------
Total assets held-for-sale $ 70,641 $170,646
======== ========
10
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
November 30, August 31,
2003 2004
------------ -----------
Liabilities
Accounts payable $59,738 $70,208
Accrued expenses and other current liabilities 11,701 12,818
Accrued sales incentives 7,290 4,127
Long-term debt 43 36
------- -------
Total liabilities related to assets held-for-sale $78,772 $87,189
======= =======
The following is a summary of the Wireless Segment included within
discontinued operations:
Three Months Ended Nine Months Ended
-------------------------- -------------------------
August 31, August 31, August 31, August 31,
2003 2004 2003 2004
---------- ---------- ---------- ----------
Net sales from discontinued
operations $ 130,583 $ 314,600 $ 536,253 $ 845,116
Income (loss) from operations of
discontinued operations before
income taxes (1,756) 5,739 2,355 8,893
Provision for (recovery of) income
taxes (120) 432 714 316
--------- --------- --------- ---------
Income (loss) from discontinued
operations, net of tax $ (1,636) $ 5,307 $ 1,641 $ 8,577
========= ========= ========= =========
Interest expense of $23 and $1,028 was allocated to discontinued operations
for the three months ended August 31, 2003 and 2004, respectively. Interest
expense of $1,081 and $2,411 was allocated to discontinued operations for
the nine months ended August 31, 2003 and 2004, respectively. These
allocations represent consolidated interest that cannot be attributed to
other operations of the Company and such allocations were based on the
required working capital needs of the Wireless business.
Included in income from discontinued operations are tax provisions
(recovery of) of ($120), and $432 for the three months ended August 31,
2003 and 2004, respectively, and $714 and $316 for the nine months ended
August 31, 2003 and 2004, respectively. The Company has established
valuation allowances for state net operating loss carryforwards as well as
other deferred tax assets of the Wireless Segment. The net change in the
total valuation allowance, which resulted from the utilization of
previously fully reserved net operating loss carryforwards by the Wireless
11
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
Segment, for the three and nine months ended August 31, 2004, was a
decrease of $3,622 and $5,262, respectively. Such change positively
impacted the provision for income taxes during the periods indicated.
A summary with respect to Wireless sales incentives included in liabilities
held-for-sale is provided below:
For the Three Months Ended
----------------------------
August 31, August 31,
2003 2004
--------- --------
Opening balance $ 3,317 $ 4,482
Accruals 2,253 3,983
Payments (2,809) (4,169)
Reversals for unearned sales incentive (206) (159)
Reversals for unclaimed sales incentives (263) (10)
------- -------
Ending balance $ 2,292 $ 4,127
======= =======
For the Nine Months Ended
--------------------------
August 31, August 31,
2003 2004
--------- --------
Opening balance $ 7,525 $ 7,289
Accruals 13,588 12,123
Payments (18,034) (14,250)
Reversals for unearned sales incentive (257) (887)
Reversals for unclaimed sales incentives (530) (148)
-------- --------
Ending balance $ 2,292 $ 4,127
======== ========
12
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
A summary with respect to Wireless product warranties and product repair
costs is provided below:
Three Months Ended Nine Months Ended
---------------------- -----------------------
August 31, August 31,
2003 2004 2003 2004
--------- -------- -------- ---------
Opening balance $ 4,173 $ 4,946 $ 4,101 $ 3,817
Liabilities accrued for warranties
issued during the period 505 1,339 1,753 2,725
Warranty claims paid during the
period (607) (281) (1,783) (538)
------- ------- ------- -------
Ending balance $ 4,071 $ 6,004 $ 4,071 $ 6,004
======= ======= ======= =======
(3) Income Per Common Share
Basic income per common share is based upon the weighted average number of
common shares outstanding during the period. Diluted net income per common
share reflects the potential dilution that would occur if securities or
other contracts to issue common stock were exercised or converted into
common stock.
A reconciliation between the numerators and denominators of basic and
diluted income per common share is as follows:
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
August 31, August 31,
2003 2004 2003 2004
------------ ------------ ------------ ------------
Income from continuing operations $ 2,283 $ 37 $ 2,289 $ 2,314
Income (loss) from discontinued
operations, net of tax (1,636) 5,307 1,641 8,577
------------ ------------ ------------ ------------
Net income $ 647 $ 5,344 $ 3,930 $ 10,891
============ ============ ============ ============
Weighted-average number of common
shares outstanding 21,840,621 21,962,843 21,836,241 21,945,364
Effect of dilutive securities:
Stock options and warrants 261,128 437,572 163,991 418,369
------------ ------------ ------------ ------------
Weighted-average number of common
shares and potential common shares
outstanding 22,101,749 22,400,415 22,000,232 22,363,733
============ ============ ============ ============
13
Stock options and warrants totaling 1,588,200 and 1,864,188 for the three
and nine months ended August 31, 2003, respectively, were not included in
the net income per diluted share calculation because the exercise price of
these options and warrants were greater than the average market price of
the common stock during the period.
Stock options and warrants totaling 483,450 for the nine months ended
August 31, 2004, were not included in the net income per diluted share
calculation as the exercise price of these options and warrants were
greater than the average market price of the common stock during the
period.
(4) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss of $1,229 and $2,685 at November 30,
2003 and August 31, 2004, respectively, includes the net accumulated
unrealized gain (loss) on the Company's available-for-sale investment
securities of $1,135 and $(578) at November 30, 2003 and August 31, 2004,
respectively, and foreign currency translation loss of $(2,364) and
$(2,107) at November 30, 2003 and August 31, 2004, respectively.
The Company's total comprehensive income (loss) was as follows:
Three Months Ended Nine Months Ended
------------------------ ----------------------
August 31, August 31,
2003 2004 2003 2004
-------- -------- -------- --------
Net income $ 647 $ 5,344 $ 3,930 $ 10,891
-------- -------- -------- --------
Other comprehensive income (loss):
Foreign currency translation adjustments (1,112) (34) 406 257
Unrealized holding gain (loss) on
available-for-sale investment
securities arising during period, net of
tax 127 (242) 220 (1,713)
-------- -------- -------- --------
Other comprehensive income (loss), net of
tax (985) (276) 626 (1,456)
-------- -------- -------- --------
Total comprehensive income (loss) $ (338) $ 5,068 $ 4,556 $ 9,435
======== ======== ======== ========
The change in the net unrealized gain (loss) arising during the periods
presented above are net of tax provision (benefit) of $78 and $(148) for
the three months ended August 31, 2003 and August 31, 2004, respectively,
and $135 and $(1,051) for the nine months ended August 31, 2003 and August
31, 2004, respectively.
14
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
(5) Supplemental Cash Flow Information / Changes in Stockholders' Equity
The following is supplemental information relating to the consolidated
statements of cash flows:
Nine Months Ended
-----------------------
August 31, August 31,
2003 2004
--------- ---------
Cash paid during the period:
Interest (excluding bank charges) $1,420 $3,231
Income taxes (net of refunds) $3,171 $4,274
Changes in Stockholders' Equity
During the nine months ended August 31, 2004, 44,464 stock options were
exercised into shares of Class A common stock aggregating proceeds of $534
to the Company.
As a result of stock option exercises, the Company recorded a tax benefit
of $107 during the nine months ended August 31, 2004 which is included in
paid-in capital in the accompanying consolidated balance sheet.
Non-Cash Transactions
During the nine months ended August 31, 2004, the Company recorded a
non-cash stock compensation charge of $179 related to the rights under the
call/put options previously granted to certain employees of Audiovox German
Holdings GmbH ("Audiovox Germany") (see Note 6 of Notes to Consolidated
Financial Statements).
During the nine months ended August 31, 2003, the Company issued stock
warrants resulting in a non-cash stock compensation charge of $297.
(6) Business Acquisitions
Code-Alarm, Inc.
On March 15, 2002, Code Systems, Inc. ("Code"), a wholly-owned subsidiary
of Audiovox Electronics Corp. ("AEC"), a wholly-owned subsidiary of the
Company, purchased certain assets of Code-Alarm, Inc., an automotive
security product company. The purpose of this acquisition was to expand
brand recognition and improve OEM production with manufacturers. The
15
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
results of operations of Code-Alarm, Inc. are included in the accompanying
consolidated financial statements from the date of acquisition. The
purchase price consisted of approximately $7,100, paid in cash at the
closing, and a debenture (CSI Debenture) whose value is linked to the
future earnings of Code. The payment of any amount under the terms of the
CSI Debenture is based upon Code's performance and is scheduled to occur in
the first calendar quarter of 2006.
The Company accounted for the transaction in accordance with the purchase
method of accounting. An adjustment to the allocation of the purchase price
was made to certain acquired assets resulting in an increase to goodwill of
$706 during the year ended November 30, 2003. During the nine months ended
August 31, 2004, an adjustment to the purchase price was made due to the
collection of monies held in escrow at the time of closing, resulting in a
$513 decrease to goodwill. As a result of the acquisition, goodwill, as
adjusted, of $2,047 was recorded.
Simultaneous with this business acquisition, the Company entered into a
purchase and supply agreement with a third party. Under the terms of this
agreement, the third party will purchase or direct its suppliers to
purchase certain products from the Company. In exchange for entering into
this agreement, the Company issued 50 warrants in its subsidiary, Code,
which vest immediately. These warrants were deemed to have minimal value
based upon the then current value of Code. Furthermore, the agreement calls
for the issuance of additional warrants based upon the future operating
performance of Code.
Based upon the contingent nature of the debenture and warrants, no
recognition was given to the CSI debenture or warrants as the related
contingencies were not considered probable and such warrants had not vested
as of November 30, 2003 or August 31, 2004.
Recoton Audio Group
On July 8, 2003, the Company, through a newly-formed, wholly-owned
subsidiary, acquired in cash (i) certain accounts receivable, inventory and
trademarks from the U.S. audio operations of Recoton Corporation (the "U.S.
audio business") or ("Recoton") and (ii) the outstanding capital stock of
Recoton German Holdings GmbH (the "international audio business"), the
parent holding company of Recoton's Italian, German and Japanese
subsidiaries, for $40,046, net of cash acquired, including transaction
costs of $1.9 million. The primary reason for this transaction was to
expand the product offerings of AEC and to obtain certain long-standing
trademarks such as Jensen(R), Acoustic Research(R) and others. The Company
also acquired an obligation with a German financial institution as a result
of the purchase of the common stock of Recoton German Holdings GmbH. This
16
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
obligation is secured by the acquired company's accounts receivable and
inventory. The excess of the estimated purchase price over the fair value
of assets and liabilities acquired was allocated to trademarks with an
indefinite useful life (see Note 7 to Notes to Consolidated Financial
Statements).
The results of operations of this acquisition have been included in the
consolidated financial statements from the date of acquisition.
The following unaudited pro-forma financial information for the three and
nine months ended August 31, 2003 represents the combined results of the
Company's operations and the Recoton acquisition as if the Recoton
acquisition had occurred at the beginning of the year of acquisition
(December 1, 2002). The unaudited pro-forma financial information is
presented for illustration purposes only and is not necessarily indicative
of the results of operations in future periods or results that would have
been achieved had the Company and Recoton been combined during the specific
periods.
Three Months Ended Nine Months Ended
------------------- ---------------
August 31, 2003
------------------------------------
Net sales $ 141,009 $ 367,786
Net loss (1,524) (11,269)
Net loss per share-basic and (0.07) (0.51)
diluted
On August 29, 2003, the Company entered into a call/put option agreement
with certain employees of Audiovox Germany, whereby these employees can
acquire up to a maximum of 20% of the Company's stated share capital in
Audiovox Germany at a call price equal to the same proportion of the actual
price paid by the Company for Audiovox Germany. The put options cannot be
exercised until the later of (i) November 30, 2008 or (ii) the full
repayment (including interest) of an inter-company loan granted to Audiovox
Germany in the amount of 5.3 million Euros. Notwithstanding the lapse of
these time periods, the put options become immediately exercisable upon (i)
the sale of Audiovox Germany or (ii) the termination of employment or death
of the employee. The put price to be paid to the employee upon exercise
will be the then net asset value per share of Audiovox Germany.
Accordingly, the Company recognizes compensation expense based on 20% of
the increase in Audiovox Germany's net assets representing the incremental
change of the put price over the call option price. Compensation expense
for these options amounted to $179 for the nine months ended August 31,
2004.
17
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
(7) Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill is as follows:
Balance at November 30, 2003 $ 7,532
Escrow monies collected in connection with Code-Alarm (see Note 6
of Notes to Consolidated Financial Statements) (513)
Premium paid for purchase of 5% of the outstanding shares of ACC
from minority shareholder (see Note 14 of Notes to Consolidated
Financial Statements) 176
-------
Balance at August 31, 2004 $ 7,195
=======
At November 30, 2003 and August 31, 2004, intangible assets consisted of
the following:
Gross
Carrying Accumulated Total Net
Value Amortization Book Value
Patents subject to amortization $ 677 $ 677 --
Trademarks subject to amortization 34 34 --
Trademarks not subject to amortization 8,043 -- $8,043
------ ------ ------
Total $8,754 $ 711 $8,043
====== ====== ======
At August 31, 2004, all trademarks and patents subject to amortization have
been fully amortized.
(8) Equity Investments
As of November 30, 2003 and August 31, 2004, the Company's 72% owned
subsidiary, Audiovox Communications Sdn. Bhd., had a 29% ownership interest
in Avx Posse (Malaysia) Sdn. Bhd. (Posse) which monitors car security
commands through a satellite based system in Malaysia. In addition, the
Company had a 20% ownership interest in Bliss- tel which distributes
cellular telephones and accessories in Thailand, and the Company had a 50%
non-controlling ownership interests in two other entities: Audiovox
Specialized Applications, Inc. (ASA) which acts as a distributor to
specialized markets for specialized vehicles, such as RV's and van
conversions, of televisions and other automotive sound, security and
accessory products; and G.L.M. Wireless Communications, Inc. (G.L.M.) which
is in the cellular telephone, pager and communications business in the New
York metropolitan area.
18
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
The following presents summary financial information for ASA. Such summary
financial information has been provided herein based upon the individual
significance of this unconsolidated equity investment to the consolidated
financial information of the Company. Furthermore, based upon the lack of
significance to the consolidated financial information of the Company, no
summary financial information for the Company's other equity investments
has been provided herein:
November 30, August 31,
2003 2004
-------- ---------
Current assets $22,518 $22,310
Non-current assets 4,803 4,405
Current liabilities 4,640 4,660
Members' equity 22,681 22,055
Nine Months Ended
---------------------------
November 30, August 31,
2003 2004
-------- ---------
Net sales $33,144 $42,554
Gross profit 9,252 13,331
Operating income 2,008 4,696
Net income 4,218 6,591
The Company's share of income from this unconsolidated equity investment
for the nine months ended August 31, 2003 and 2004 was $2,109 and $3,296,
respectively. In addition, the Company received distributions from ASA
totaling $3,609 during the nine months ended August 31, 2004, which was
recorded as a reduction to equity investments on the accompanying
consolidated balance sheet.
(9) Income Taxes
Quarterly tax provisions are generally based upon an estimated annual
effective tax rate per taxable entity, including evaluations of possible
future events and transactions, and are subject to subsequent refinement or
revision. When the Company is unable to estimate a part of its annual
income or loss, or the related tax expense or benefit, the tax expense or
benefit applicable to that item is reported in the interim period in which
the income or loss occurs.
19
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to the reported provision for income taxes is as follows:
Three Months Ended Nine Months Ended
August 31, August 31,
2003 2004 2003 2004
----------------- ------------------- ------------------ -----------------
Tax provision at Federal
statutory rate $ 1,697 35.0% $ 563 35.0% $ 1,990 35.0% $ 2,123 35.0%
State income taxes, net of
Federal benefit 554 11.4 609 37.9 980 17.2 797 13.1
Foreign tax rate
differential 118 2.4 (248) (15.4) 1,215 21.4 (106) (1.8)
Non-deductible changes in
rates and other, net 357 7.4 (92) (5.7) (335) (5.9) 228 3.8
------- ----- ------- ----- ------- ----- ------- -----
$ 2,726 56.2% $ 832 51.8% $ 3,850 67.7% $ 3,042 50.1%
======= ===== ======= ===== ======= ===== ======= =====
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.
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 effective tax rate for the three and nine months ended August 31, 2004,
was 51.8% and 50.1%, respectively, compared to 56.2% and 67.7% for the
comparable periods in the prior year.
(10) Accrued Sales Incentives
A summary of the activity with respect to the Company's sales incentives is
provided below:
For the Three Months Ended
----------------------------
August 31, August 31,
2003 2004
---------- ----------
Opening balance $ 4,928 $ 6,984
Accruals 8,181 ** 3,980
Payments (2,763) (3,296)
Reversals for unearned sales incentive (168) (105)
Reversals for unclaimed sales incentives (540) (144)
------- -------
Ending balance $ 9,638 $ 7,419
======= =======
20
For the Nine Months Ended
------------------------------
August 31, August 31,
2003 2004
----------- ------------
Opening balance $ 4,626 $ 14,604
Accruals 12,516 ** 12,014
Payments (5,825) (15,880)
Reversals for unearned sales incentive (408) (1,923)
Reversals for unclaimed sales incentives (1,271) (1,396)
-------- --------
Ending balance $ 9,638 $ 7,419
======== ========
** Included in Electronics accruals is $4,111 of accrued sales incentives
acquired from Recoton (see Note 6 of Notes to Consolidated Financial
Statements).
(11) Product Warranties and Product Repair Costs
The following table provides a summary of the activity with respect to the
Company's product warranties and product repair costs:
Three Months Ended Nine Months Ended
------------------------ --------------------------
August 31, August 31,
2003 2004 2003 2004
-------- -------- -------- --------
Opening balance $ 12,717 $ 13,244 $ 11,309 $ 14,695
Liabilities accrued for warranties
issued during the period 2,992 (760) 6,628 1,796
Warranty claims paid during the
period (1,195) (1,439) (3,423) (5,446)
-------- -------- -------- --------
Ending balance $ 14,514 $ 11,045 $ 14,514 $ 11,045
======== ======== ======== ========
During the three months ended August 31, 2004, the Company received a
credit of $1,517 from a vendor as a result of re-negotiating return charges
for defective inventory. This credit has been included as a reduction to
the liabilities accrued for warranties issued during the three and nine
months ended August 31, 2004. In addition, liabilities accrued for
warranties have been favorably impacted in fiscal 2004 as a result of lower
defective repair charges from one of the Company's vendors.
21
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
(12) Financing Arrangements
(a) Bank Obligations
The Company's principal source of liquidity is its revolving credit
agreement. On July 15, 2004, the Company entered into the Fifth
Amended and Restated Credit Agreement (the "Credit Agreement") which
supersedes the Fourth Amended and Restated Credit Agreement, as
amended, in its entirety. The Credit Agreement provides for aggregate
commitments of the Lenders in the amount of $150,000. The Credit
Agreement also allows for commitments up to $50,000 in forward
exchange contracts. The Credit Agreement will expire on the earlier of
July 15, 2005 or the date of consummation of: (i) the sale of
substantially all the assets of ACC to UTSI pursuant to the UTSI
Purchase Agreement and/or (ii) the purchase by the Borrower of Toshiba
Corporation's interest in ACC and the repayment by ACC of the Toshiba
Note pursuant to the Toshiba Agreement.
Under the Credit Agreement, the Company may obtain credit through
direct borrowings and letters of credit. The obligations of the
Company under the Credit Agreement are guaranteed by certain of the
Company's subsidiaries and are secured by the Company's accounts
receivable and inventory.
At November 30, 2003 and August 31, 2004, the Credit Agreement
provided for $150,000 of available credit. Outstanding domestic
obligations under the Credit Agreement at November 30, 2003 and August
31, 2004 are as follows:
November 30, August 31,
2003 2004
------------ ---------
Revolving Credit Notes $ 11,709 $ 24,062
Eurodollar Notes 20,000 85,000
-------- --------
$ 31,709 $109,062
======== ========
The Company's ability to borrow under its Credit Agreement is subject
to certain conditions, based upon a formula taking into account the
amount and quality of its accounts receivable and inventory. The
Credit Agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net
worth. Additionally, the agreement includes restrictions and
limitations on payments of dividends, stock repurchases and capital
expenditures.
22
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
The Company was in compliance with its bank covenants at November 30,
2003 and August 31, 2004. While the Company has historically been able
to obtain waivers for compliance violations, there can be no assurance
that future negotiations with its lenders would be successful or that
the Company will not violate covenants in the future, therefore,
resulting in amounts outstanding to be payable upon demand. This
Credit Agreement has no cross covenants with other credit facilities.
The Company also has revolving credit facilities in Malaysia
("Malaysian Credit Agreement") to finance additional working capital
needs. The credit facilities are partially secured by two stand-by
letters which, in aggregate, approximated $1,600. In addition, the
obligations of the Company are also secured by the property and
building owned by Audiovox Communications Sdn. Bhd. Outstanding
obligations under the Malaysian Credit Agreement at November 30, 2003
and August 31, 2004 were approximately $2,721 and $2,491,
respectively. The Company has additional stand-by letters of credit
aggregating $674 for insurance policies.
(b) Debt/Loan Agreement
On September 2, 2003, the Company's subsidiary, Audiovox Germany,
borrowed 12 million Euros under a new term loan agreement. This
agreement was for a 5-year term loan with a financial institution
consisting of two tranches. Tranche A is for 9 million Euros and
Tranche B is for 3 million Euros. The term loan matures on August 30,
2008. Payments are due in 60 monthly installments and interest accrues
at (i) 2.75% over the Euribor rate for Tranche A and (ii) 3.5% over
the three months Euribor rate for Tranche B. Any amount repaid may not
be reborrowed. The term loan becomes immediately due and payable if a
change of control occurs without permission of the financial
institution.
Audiovox Corporation guarantees 3 million Euros of this term loan. The
term loan is secured by the pledge of the stock of Audiovox Germany
and on all brands and trademarks of the Audiovox Germany. The term
loan requires the maintenance of certain yearly financial covenants
that are calculated according to German Accounting Standards for
Audiovox Germany. Should any of the financial covenants not be met,
the financial institution may charge a higher interest rate on any
outstanding borrowings. The short and long term amounts outstanding
under this agreement were $3,226 and $9,736, respectively, at November
30, 2003 and $2,213 and $7,388, respectively, at August 31, 2004, and
have been included in the accompanying consolidated balance sheets.
23
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
(c) Factoring / Working Capital Arrangements
The Company has available a 16,000 Euro factoring arrangement and
6,000 Euro working capital arrangement with a German financial
institution for its German operations. Selected accounts receivable
are purchased from the Company on a non- recourse basis at 80% of face
value and payment of the remaining 20% upon receipt from the customer
of the balance of the receivable purchased. The rate of interest is
Euribor plus 2.5%, and the Company pays 0.4% of its gross sales as a
fee for this arrangement. The amount outstanding under the working
capital agreement was $5,510 and $6,044 at November 30, 2003 and
August 31, 2004, respectively, and has been included in bank
obligations in the accompanying consolidated balance sheet.
(d) Subordinated Debt to Toshiba
On May 29, 2002, an $8,107 convertible subordinated note (the Note)
was issued to Toshiba. The Note bears interest at a per annum rate
equal to 1 3/4% and interest is payable annually on May 31st of each
year, commencing May 31, 2003. The unpaid principal amount shall be
due and payable, together with all unpaid interest, on May 31, 2007
and automatically renews for an additional five years. As discussed in
Note 2 of Notes to Consolidated Financial Statements, the Company
expects to repay the total amount outstanding under the Note, which
approximated $8,107 at August 31, 2004, to Toshiba during the closing
of the UTSI Agreement which is expected to close during the fourth
quarter of fiscal 2004. As such, the Note has been included in current
portion of long-term debt in the accompanying consolidated balance
sheet at August 31, 2004.
(13) Payment of Guarantee
The Company guaranteed the debt of G.L.M. beginning in December 1996, and
this guarantee was not subsequently modified. During the nine months ended
August 31, 2004, the Company received a request for payment in connection
with this guarantee. As a result of the payment request, the Company paid
$291 on behalf of G.L.M. during the nine months ended August 31, 2004 and
such guarantee is no longer in effect.
(14) Purchase of 5% Minority Interest in ACC
On June 8, 2004, prior to the execution of the definitive asset purchase
agreement with UTSI, Audiovox purchased 5% of ACC stock from Toshiba, a
minority shareholder in ACC, for $1,410. Toshiba's 5% minority interest in
ACC had a book value of $1,234 at the time of purchase, resulting in
24
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
goodwill of $176 (see Note 7 of Notes to Consolidated Financial
Statements). As a result of this purchase, Audiovox currently owns 80% of
ACC's stock and Toshiba the remaining 20%. As discussed in Note 2 of Notes
to Consolidated Financial Statements, Audiovox and Toshiba subsequently
entered into an Agreement pursuant to which Toshiba would sell its
remaining 20% of ACC's stock to Audiovox at the closing of the Agreement
between Audiovox, ACC and UTSI for total cash consideration of $13,590
pursuant to its agreements with Audiovox and ACC, including repayment of an
$8,107 convertible subordinated note from ACC to Toshiba.
(15) Contingencies and Legal Matters
The Company is currently, and has in the past been, a party to routine
litigation incidental to its business. From time to time, the Company
receives notification of alleged violations of registered patent holders'
rights. The Company has either been indemnified by its manufacturers in
these matters, obtained the benefit of a patent license or has decided to
vigorously defend such claims.
The Company and ACC, along with other manufacturers of wireless phones and
cellular service providers, were named as defendants in two class action
lawsuits alleging non- compliance with FCC ordered emergency 911 call
processing capabilities. These lawsuits were consolidated and transferred
to the United States District Court for the Northern District of Illinois,
which in turn referred the cases to the Federal Communications Commission
("FCC") to determine if the manufacturers and service providers are in
compliance with the FCC's order on emergency 911 call processing
capabilities. On July 22, 2004, the FCC responded to the questions referred
by the court, in most part, in favor of the defendants and any damages in
an amount would be determined by the court. Plaintiffs have recently moved
for leave to file a consolidated amended complaint. The Company and ACC
intend to vigorously defend this matter. However, no assurances regarding
the outcome of this matter can be given at this point in the litigation.
During 2001, the Company, along with other suppliers, manufacturers and
distributors of hand-held wireless telephones, was named as a defendant in
five class action lawsuits alleging damages relating to exposure to radio
frequency radiation from hand-held wireless telephones. These class actions
have been consolidated and transferred to a Multi-District Litigation Panel
before the United States District Court of the District of Maryland. On
March 5, 2003, Judge Catherine C. Blake of the United States District Court
for the District of Maryland granted the defendants' consolidated motion to
dismiss these complaints. Plaintiffs have appealed to the United States
Circuit Court of Appeals, Fourth Circuit. The appeal pending before the
United States Circuit Court of Appeals, Fourth Circuit in the consolidated
25
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
class action lawsuits (Pinney, Farina, Gilliam, Gimpelson and Naquin)
against ACC and other suppliers, manufacturers and distributors as well as
wireless carriers of hand- held wireless telephones alleging damages
relating to risk of exposure to radio frequency radiation from the wireless
telephones has not yet been heard and any damages in an amount would be
determined by the court. An appeal was heard on October 1, 2004, and the
Company is awaiting a ruling on this matter.
During the third quarter of fiscal 2003, a certain Venezuelan employee, who
is also a minority shareholder in Audiovox Venezuela, submitted a claim to
the Venezuela Labor Court for severance compensation of approximately $560.
The Court approved the claim and it was paid and expensed by Audiovox
Venezuela in the third quarter of fiscal 2003. The Company is challenging
the payment of this claim and will seek reimbursement from the Venezuelan
shareholders or the Company's insurance carrier. During the second quarter
of fiscal 2004, the Company instituted arbitration procedures against the
Venezuelan shareholders and their affiliated companies alleging breach of
contract, breach of fiduciary duty and fraud. The Venezuelan shareholders
and their affiliated companies have interposed affirmative defenses and
counterclaims. This arbitration is pending before the International Centre
for Dispute Resolution in New York, New York. The Company intends to
vigorously pursue and defend this matter.
During the second quarter of fiscal 2004, the Company, AEC and one of its
distributors of car security products, were named as defendants in a
lawsuit brought by Magnadyne Corporation in the United States District
Court, Central District of California alleging patent infringement and
seeking damages and injunctive relief in an amount to be determined by the
court. The Company has answered the amended complaint, asserted various
affirmative defenses and interposed counterclaims alleging
non-infringement, invalidity and non- enforceability. AEC answered the
amended complaint and asserted affirmative defenses and interposed
counterclaims. Discovery in this matter recently commenced. The Company and
AEC intend to vigorously defend this matter. However, no assurances
regarding the outcome of this matter can be given at this point in the
litigation.
On September 17, 2004, Shintom Co. Ltd. commenced action against Audiovox
Corporation in the Chancery Court of the State of Delaware, New Castle
County, seeking recovery of the greater of the sum of $2,500,000 or the
value of Audiovox preferred stock determined as of April 16, 1987 (the date
of the merger of Audiovox Corp., a New York Corporation, with Audiovox
Corporation, a Delaware corporation) which preferred stock was purchased by
Shintom from Audiovox in April 1981. The Company believes that the lawsuit
is baseless and it intends to vigorously defend this matter. However, no
assurance regarding the outcome of this matter can be given at this point
in the litigation.
26
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three and Nine Months Ended August 31, 2003 and 2004
(Dollars in thousands, except share and per share data)
(unaudited)
On August 5, 2004, Compression Labs, Inc. ("CLI") commenced an action
against Audiovox Corporation and other suppliers, manufacturers and
distributors of products alleged to incorporate CLI's patented technology
in the United States District Court for the Eastern District of Texas,
alleging patent infringement and seeking damages and injunctive relief in
an amount to be determined by the court. The Company has filed a motion to
dismiss the complaint. The Company intends to vigorously defend this
matter. However, no assurances regarding the outcome of this matter can be
given at this point in the litigation.
The Company does not expect the outcome of any pending litigation,
separately and in the aggregate, to have a material adverse effect on its
business, consolidated financial position, results of operations or cash
flows.
(16) New Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51", which addresses consolidation by business enterprises of variable
interest entities (VIEs) either: (1) that do not have sufficient equity
investment at risk to permit the entity to finance its activities without
additional subordinated financial support, or (2) in which the equity
investors lack an essential characteristic of a controlling financial
interest. In December 2003, the FASB completed deliberations of proposed
modifications to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date of the
VIE. The adoption of FIN 46 did not have an impact on the Company's
consolidated financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
"Revenue Recognition" (SAB No. 104), which codifies, revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition", in order to make
this interpretive guidance consistent with current authoritative accounting
and auditing guidance and SEC rules and regulations. The changes noted in
SAB No. 104 did not have a material effect on our consolidated results of
operations, consolidated financial position or consolidated cash flows.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
The Company through its four wholly-owned subsidiaries: Audiovox
Electronics Corporation ("AEC"), American Radio Corp., Code Systems, Inc.
("Code") and Audiovox German Holdings GmbH ("Audiovox Germany") and three
majority-owned subsidiaries: Audiovox Communications (Malaysia) Sdn. Bhd.,
Audiovox Holdings (M) Sdn. Bhd. and Audiovox Venezuela, C.A. markets its
products under the Audiovox(R) brand name and other brand names, such as
Jensen(R), Magnate(R), Mac Audio(R), Heco(R), Acoustic Research(R) and
Advent(R), as well as private labels through a large and diverse distribution
network both domestically and internationally.
The Company markets, both domestically and internationally, automotive
sound and security systems, electronic car accessories, home and portable sound
products, two-way radios, in-vehicle video systems, flat-screen televisions, DVD
players and navigation systems. Sales are made through an extensive distribution
network of mass merchandisers and others. In addition, the Company sells some of
its products directly to automobile manufacturers on an OEM basis. American
Radio Corp. is also involved on a limited basis in the wireless marketplace and
these sales are categorized as "other sales".
The Company reclassified the Wireless Segment results from continuing
operations and now reflects the Wireless Segment results as a discontinued
operation (refer to discussion below under Discontinued Operations).
Critical Accounting Policies
As disclosed in the Annual Report on Form 10-K/A for the fiscal year ended
November 30, 2003, the discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in conformity with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses reported in those financial
statements. These judgments can be subjective and complex, and consequently,
actual results could differ from those estimates. Our most critical accounting
policies and estimates relate to revenue recognition; sales incentives; accounts
receivable; inventory; goodwill and other intangible assets; warranties and
income taxes. Since November 30, 2003, there have been no changes in our
critical accounting policies and no other significant changes to the assumptions
and estimates related to them.
Executive Summary and Consolidated Results
In this discussion and analysis, we explain the general financial condition
and the results of operations for Audiovox, including the following:
o our earnings and costs in the periods presented
o factors that affect our business
o changes in earnings and costs between periods
o sources of earnings
28
o the impact of these factors on our overall financial condition
As you read this discussion and analysis, refer to the accompanying
consolidated statements of earnings, which present the results of our operations
for the three and nine-month periods ended August 31, 2003 and 2004. We analyze
and explain the differences between periods in the specific line items of the
consolidated statements of earnings.
Management Key Indicators
Management reviews the following financial and non-financial indicators to
assess the performance of the Company's operating results:
o Net sales by product class - Management reviews this indicator in
order to determine sales trends for certain product classes as this
indicator is directly impacted by unit sales and new product
introductions.
o Gross profit margin - This indicator allows management to assess the
effectiveness of product introductions, inventory purchases and
significance of inventory write-downs.
o Operating expenses as a percentage of net sales - This indicator is
reviewed to determine the efficiency of operating expenses in relation
to the Company's operations and identify significant fluctuations or
possible future trends.
o Inventory and accounts receivable turnover - Inventory purchases and
accounts receivable collections are two significant liquidity factors
that determine the Company's ability to fund current operations and
determine if additional borrowings may be necessary for future capital
outlays.
o Major acquisitions and divestitures - Management consistently monitors
the aforementioned key indicators as well as economic and industry
conditions during consideration of major acquisitions and
divestitures.
29
Three months ended August 31, 2003 compared to three months ended August 31,
2004
Continuing Operations
The following table sets forth, for the periods indicated, certain
statement of earnings data for the Company as a percentage of net sales:
Three Months Ended
----------------------------------------------
August 31, 2003 August 31, 2004
-------------------- ---------------------
Net sales:
Mobile electronics $ 78,292 57.9% $ 66,244 49.8%
Consumer electronics 40,374 29.9 32,927 24.8
Sound 16,428 12.1 33,794 25.4
Other 145 0.1 -- --
--------- ------ --------- ------
Total net sales 135,239 100.0 132,965 100.0
Gross profit 22,723 16.8 23,218 17.4
Selling 5,759 4.2 8,370 6.3
General and administrative 11,807 8.7 12,924 9.7
Warehousing and technical support 479 0.4 935 0.7
--------- ------ --------- ------
Total operating expenses 18,045 13.3 22,229 16.7
--------- ------ --------- ------
Operating income 4,678 3.5 989 0.7
--------- ------ --------- ------
Interest and bank charges (893) (0.7) (888) (0.7)
Equity in income in equity investees 1,019 0.8 1,182 0.9
Other, net 44 -- 324 0.3
--------- ------ --------- ------
Income from continuing operations
before provision for income taxes,
minority interest and discontinued
operations 4,848 3.6 1,607 1.2
Provision for income taxes 2,726 2.0 832 0.7
Minority interest income (expense) 161 0.1 (738) (0.5)
--------- ------ --------- ------
Income from continuing operations $ 2,283 1.7% $ 37 0.0 %
========= ====== ========= ======
Net Sales
Net sales decreased $2,274, or 1.7%, to $132,965 for the three months ended
August 31, 2004, from net sales of $135,239 in 2003. This decrease was due to a
decline in Mobile and Consumer Electronics partially offset by an increase in
Sound. In addition, this decrease was partially offset by a $4,979 increase in
Audiovox Germany sales as a result of the Recoton acquisition in July 2003 and
$3,561 increase in Code sales due to a growth in OEM sales.
Sales for Mobile Electronics decreased $12,048 (15.4%) for the three months
ended August 31, 2004 from 2003, primarily from a decline in the video bag
business due to increased competition from low priced portable DVD players, as
well as the decline in SUV sales combined with an increased presence by OE's.
This decrease in mobile electronics was partially offset by an increase in the
Company's OE sales in security and mobile video.. Consumer Electronics sales
30
decreased $7,447 (18.4%) for the three months ended August 31, 2004 from 2003.
The decline in Consumer Electronics was due to a decrease in sales of consumer
home products, portable DVD's and two-way radios, partially offset by an
increase in flat panel TV's. Increased competition, most notably in the DVD
category, caused Consumer Electronics sales to decline. Sound sales increased
$17,366 (105.7%) as a result of the Jensen(R), Magnate(R), Mac Audio(R),
Heco(R), Acoustic Research(R) and Advent(R), trademarks which usage right was
acquired during the Recoton acquisition. In addition, sound sales were
positively impacted by increased sales of $8,054 in the satellite radio product
line as well as sales from Audiovox Germany.
Net sales of the Company's Malaysian subsidiary decreased from last year by
approximately $931 primarily from a shift in the Malaysia business environment
and stricter credit policies. Specifically, the OEM market in Malaysia has
declined as more automakers are incorporating electronic products into vehicles
at the factory rather than being sold in the aftermarket. This decrease was
offset by a $362 increase in the Company's Venezuelan subsidiary due to economic
growth in Venezuela as a result of improved political stability.
Sales incentives expense increased $369, net of reversals of $249, to
$3,731, due to a decline in reversals. Specifically, reversals for unclaimed
sales incentives decreased $396 as compared to the prior year quarter as the
Company has focused more attention on customer claims. The Company believes that
the reversal of earned but unclaimed sales incentives upon the expiration of the
claim period is a disciplined, rational, consistent and systematic method of
reversing unclaimed sales incentives. These sales incentive programs are
expected to continue and will either increase or decrease based upon competition
and customer demands.
Gross Profit
Gross profit margins increased to 17.4% for the three months ended August
31, 2004 as compared to 16.8% for the three months ended August 31, 2003. This
increase was due to a credit of $1,517 and decreased defective repair rates from
one of the Company's vendors during the three months ended August 31, 2004.
Without this credit, the Electronics gross margin for the three months ended
August 31, 2004 would have been 16.3%. The Company expects defective repair
rates to decrease as compared to prior years as a result of renegotiated repair
rates with vendors. In addition, gross margins were negatively impacted by a
decline in sales of mobile electronics which carry a higher gross margin as
opposed to other product lines. Furthermore, there was a $369 increase in sales
incentive expense, net of reversals of $249, primarily due to a decline in
reversals.
The above declines in margins were offset by margins achieved in Audiovox
Germany from Jensen(R), Magnate(R), Mac Audio(R), Heco(R), Acoustic Research(R)
and Advent(R) products as well as an increase in Code-Alarm margins due to a
decline in production and warranty costs.
Operating Expenses
Consolidated operating expenses increased $4,184 to $22,229 for the three
months ended August 31, 2004, as compared to $18,045 in 2003. As a percentage of
net sales, operating expenses increased to 16.7% for the three months ended
August 31, 2004 from 13.3% in 2003.
31
Electronics operating expenses increased $3,453, or 24.4% to $17,613, for
the three months ended August 31, 2004 from 2003. The domestic group (AEC , Code
and American Radio Corp.) accounted for $2,590, or 75.0% of the 2004 increase.
The international group (Audiovox Germany, Malaysia and Venezuela) accounted for
$862, or 25.0%, of the 2004 increase which was primarily due to the operations
of Audiovox Germany, which commenced as a result of the Recoton acquisition in
July 2003. As a percentage of net sales, Electronics operating expenses
increased to 13.2% for the three months ended August 31, 2004 compared to 10.5%
in 2003.
Electronics selling expenses increased $2,068 to $7,421 during the third
quarter of 2004 of which $679 (32.8%) and $1,389 (67.2%) was attributable to the
domestic group and international group, respectively.
o The increase for the domestic group was primarily due to an increase
in salesmen salaries, payroll taxes and benefits of $205 as a result
of higher employee wages and the hiring of additional employees to
support the acquired Recoton business. Commissions increased $142 due
to an increase in Code sales and advertising expense increased $176 as
a result of an increased product line and promotions during fiscal
2004.
o The increase for the international group was due to a $1,433 increase
in Audiovox Germany expenses offset by a $44 decrease in Malaysia and
Venezuela. As a result of the Recoton acquisition in July 2003,
Audiovox Germany expenses increased $488 in commissions, $222 in trade
show, $206 in salesmen salaries and $273 in of advertising.
Advertising costs consisted primarily of product brochures and
informative advertising materials regarding the Company's product
line.
Electronics general and administrative expenses increased $940 to $9,314
due to a $1,443 increase in the domestic group offset by a $503 decrease in the
international group.
o The increase for the domestic group was primarily due to an increase
of $365 in professional fees, $312 in corporate allocations, $251 in
bad debt and $183 in employee benefits. The increase in professional
fees was due to legal costs incurred to develop and protect patent
rights. The Company expects, as technology for electronic products
become more complex, the Company will have to expend more resources on
defending patent rights and obtaining patents on new products. The
increases in corporate allocations and employee benefits were due to
the hiring of additional employees, increased health care costs,
increased wages and MIS costs as a result of the additional resources
necessary to support the increased product lines. Bad debt expense
increased due to the fiscal 2003 recovery of a bad debt previously
written off which did not reoccur during the three months ended August
31, 2004. The Company does not consider this to be a trend in the
overall accounts receivable.
o The decrease for the international group was primarily due to a $617
decrease in employee benefits as a result of benefits paid to certain
Venezuelan executives in the comparable prior year quarter as a result
of restructuring the Venezuelan operations. In addition, office
expenses decreased $154 due to costs incurred during the initial
startup of Audiovox Germany in July 2003. The above decreases were
partially offset by a $231 increase in bad debt expense as a result of
collection expenses related to Italian and Japanese receivables.
32
The Company does not consider this to be a trend in overall accounts
receivable.
Electronic's warehousing and technical support increased $445, or 102.8% to
$878. This increase was due to a $472 increase in direct labor due to the hiring
of additional employees and increased wages. The increase in product complexity
has resulted in the Company hiring additional engineers and providing added
customer service.
The following is a summary of general corporate operating expenses for the
three months ended:
August 31, 2003 August 31, 2004
----------------- ------------------
Advertising $ 406 $ 963
Professional fees 976 1,354
Depreciation 407 342
Insurance 221 239
Other 1,875 1,718
------ ------
Total general corporate operating
expenses $3,885 $4,616
====== ======
General corporate operating expenses increased $731 or 18.8% to $4,616 for
the three months ended August 31, 2004 primarily due to an increase in
professional fees as a result of compliance costs for Sarbanes-Oxley Section 404
and an increase in advertising due to an advertising program intended to promote
overall Company awareness through media and public relations. Other corporate
operating expenses are mainly comprised of accounting, MIS and certain executive
office salaries.
Other Income and Expense
Interest expense and bank charges decreased $5 to $888 during the three
months ended August 31, 2004, primarily due to a reduction of German debt as a
result of payments made since the Recoton acquisition. This decrease was offset
by increased average borrowings from the Company's primary credit facility
during the third quarter of fiscal 2004 as compared to the third quarter of
fiscal 2003 due to increased purchases of Electronics inventory.
Equity in income of equity investees increased $163 for the three months
ended August 31, 2004, primarily due to an increase in the equity income of ASA
as a result of increased sales and improvement in gross margins in specialized
markets.
Other income increased $280 during the third quarter of 2004 as compared to
2003 due to a civil penalty expense of $620 incurred in the prior year. The
above increase was partially offset by a $373 decline in the fair market value
of investment securities under the Company's deferred compensation plan as
compared to the prior year, which is offset by a corresponding decrease to
general and administrative expenses. Other income of $324 for the three months
ended August 31, 2004 consists primarily of royalty income.
33
Minority interest expense increased $899 for the three months ended August
31, 2004 compared to the three months ended August 31, 2003, mainly due to the
write-off of amounts owed to the Company from its minority interest shareholder
in Audiovox Venezuela.
Provision for Income Taxes
The effective tax rate for the three months ended August 31, 2004 was 51.8%
compared to 56.2% for the comparable period in the prior year. The decrease in
the effective tax rate was mostly due to the Company's mix of foreign and
domestic earnings.
Discontinued Operations
On June 11, 2004, the Company's majority owned subsidiary, ACC, entered
into a definitive asset Agreement to sell selected assets and certain
liabilities (excluding its receivables, inter- company accounts payable, income
taxes payable, subordinated debt and certain accrued expenses and other current
liabilities), to UTSI for a purchase price of $165,100 ("Purchase Price")
subject to a net working capital adjustment. If the net working capital
adjustment reflected at the closing is less than $40,000, then the Purchase
Price will be adjusted downward in an amount equal to the deficiency, and if the
net working capital balance exceeds $40,000, then the Purchase Price will be
adjusted upwards in an amount equal to the excess.
A portion of the Purchase Price proceeds will be utilized for the following
payments:
o ACC will repay Toshiba, minority interest shareholder of ACC, $8,107
as payment in full of the outstanding principal amount of a
subordinated note. In addition, Audiovox will purchase from Toshiba,
its remaining minority interest in ACC for $5,483. As a result of this
purchase ACC will release Toshiba from its obligation to continue to
supply wireless handsets to ACC and releases Toshiba from all claims
that ACC or Audiovox have or may have against them.
o Upon completion of the Agreement, ACC's Chief Executive Officer's
employment agreement with ACC will be terminated and pursuant to his
employment agreement and his long-term incentive compensation award he
will receive $4,000. ACC will also purchase certain of his personally
held intangibles for a purchase price of $16,000. The Company will
purchase his personally held intangibles in order for ACC to have the
ability to convey all of the assets used in connection with the
conduct of Wireless business to UTSI.
o Upon completion of the closing of the Agreement, ACC will pay $5,000
to certain employees of ACC and its subsidiaries as a severance
payment and in exchange for which Audiovox will receive a release from
such employees.
o Pursuant to the terms of the Agreement, 5% (or $8,255) of the $165,100
Purchase Price will be placed in escrow by UTSI for 120 days after
closing.
o The Company's Chairman and Chief Executive Officer will receive $1,916
upon the closing of the asset sale pursuant to an amendment to a
long-term incentive compensation award which clarified that such
34
payment would be paid pursuant to a sale of the Wireless business
pursuant to an asset sale.
o Estimated taxes of approximately $28,100 will be paid in connection
with the asset sale agreement.
If the asset sale had closed on August 31, 2004, Audiovox would have
received the $165,100 purchase price at closing and would have received an
additional $41,808 pursuant to the post-closing net working capital adjustment.
This amount would be reduced by payments to former employees of the wireless
business, transaction costs that are estimated to be $4,000, payments to Toshiba
with respect to certain indebtedness and the purchase of their 25% interest in
ACC, payment of an incentive award to the Company's CEO and taxes relating to
the asset sale. If the asset sale closed on August 31, 2004, the aggregate
amount of these reductions would be approximately $72,606 and Audiovox would
retain approximately $134,302.
Audiovox will retain all of the receivables related to the Wireless
business, which, as of November 30, 2003 and August 31, 2004, amounted to
$128,613 and $134,436, respectively. Audiovox will also retain certain
liabilities (including accrued expenses, other current liabilities and income
taxes payable) related to the Wireless business, which as of November 30, 2003
and August 31, 2004, amounted to $5,520 and $2,227, respectively.
Audiovox will retain the remaining proceeds of the Wireless business to
repay domestic bank obligations, which at August 31, 2004 approximated $109,062,
and to fund and grow the consumer electronics business. However, after the
repayment of domestic bank obligations, Audiovox may use all or a portion of the
proceeds for other purposes and will consider other market opportunities,
including acquisitions.
While the anticipated closing date for this transaction is expected on
November 1, 2004, there can be no assurances that such transaction will close on
that date as it is subject to certain closing conditions, including third party
approvals. The Company's Board of Directors as well as the Board of Directors of
UTSI has approved the transaction and the Company's Chairman and Chief Executive
Officer and majority shareholder, has agreed to vote his shares in favor of this
Agreement.
On or after the closing date of the sale to UTSI, the following additional
agreements will become effective:
o For a period of five-years after the closing, the Company will enter
into a royalty free licensing agreement permitting UTSI to use the
Audiovox brand name on certain products. During such period, the
Company will not conduct, directly or indirectly, in the Wireless
business without the prior written consent of UTSI.
o Certain ACC employee stock options under the 1997 Stock Option Plan
and 1999 Stock Compensation Plan will be extended for one year from
the closing. This extension would result in a remeasurement of stock
options which will be accounted for in accordance with FIN 44 and SFAS
123.
35
o The Company will provide certain Information Technology services, that
are currently provided to ACC, for at least six months after the
closing as set forth in the Transition Services Agreement with UTSI.
As consideration for the performance of these services, UTSI will pay
the Company based on the usage of these services as set forth in the
Transition Services Agreement.
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 144, "Accounting for the Impairment of Long-lived Assets," the Company has
assessed the measurement date in accounting for the sale transaction on June 11,
2004 in connection with the date of board approval and signing of the Agreement.
Accordingly, the Company reclassified all associated assets and liabilities as
held-for-sale and recorded the Wireless Segment as a discontinued operation for
all periods presented. The following sets forth the carrying amounts of the
major classes of assets and liabilities of ACC, which are classified as
held-for-sale in the accompanying consolidated balance sheets.
November 30, August 31,
2003 2004
----------- -----------
Assets
Inventory $ 66,902 $160,091
Prepaid expenses and other current assets 2,052 8,870
Property, plant and equipment, net 1,644 1,654
Other assets 43 31
-------- --------
Total assets held-for-sale $ 70,641 $170,646
======== ========
Liabilities
Accounts payable $ 59,738 $ 70,208
Accrued expenses and other current liabilities 11,701 12,818
Accrued sales incentives 7,290 4,127
Long-term debt 43 36
-------- --------
Total liabilities related to assets held-for-sale $ 78,772 $ 87,189
======== ========
The following is a summary of the Wireless Segment included within
discontinued operations:
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
August 31, August 31, August 31, August 31,
2003 2004 2003 2004
---------- ----------- ----------- -----------
Net sales from discontinued
operations $ 130,583 $ 314,600 $ 536,253 $ 845,116
Income (loss) from operations of
discontinued operations before
income taxes (1,756) 5,739 2,355 8,893
Provision for (recovery of) income
taxes (120) 432 714 316
--------- --------- --------- ---------
Income (loss) from discontinued
operations, net of tax $ (1,636) $ 5,307 $ 1,641 $ 8,577
========= ========= ========= =========
36
Interest expense of $23 and $1,028 was allocated to discontinued operations
for the three months ended August 31, 2003 and 2004, respectively. Interest
expense of $1,081 and $2,411 was allocated to discontinued operations for the
nine months ended August 31, 2003 and 2004, respectively. These allocations
represent consolidated interest that cannot be attributed to other operations of
the Company and such allocations were based on the required working capital
needs of the Wireless business.
Included in income from discontinued operations are tax provisions
(recovery of) of ($120), and $432 for the three months ended August 31, 2003 and
2004, respectively, and $714 and $316 for the nine months ended August 31, 2003
and 2004, respectively. The Company has established valuation allowances for
state net operating loss carryforwards as well as other deferred tax assets of
the Wireless Segment. The net change in the total valuation allowance, which
resulted from the utilization of previously fully reserved net operating loss
carryforwards by the Wireless Segment, for the three and nine months ended
August 31, 2004, was a decrease of $3,617 and $5,256, respectively. Such change
positively impacted the provision for income taxes during the periods indicated.
Results from Discontinued Operations
Income (loss) from discontinued operations, net of tax, provided income of
$5,307 and ($1,636) for the three months ended August 31, 2004 and 2003,
respectively.
Net sales of the Wireless Group were $314,600 and $130,583 for the three
months ended August 31, 2004 and 2003, respectively. Unit sales of wireless
handsets increased by approximately 778,000 units for the three months ended
August 31, 2004, or 95.3%, to approximately 1,594,000 units from 816,000 units
in 2003. This increase was primarily due to a lack of new product introductions
in the comparable prior quarter. Specifically, the Company introduced new
products during the fourth quarter of fiscal 2003, such as CDM8900 camera and
color display phones with 1x technology. The average selling price of the
Company's handsets increased to $186 per unit for the three months ended August
31, 2004 from $145 per unit in 2003. Net sales were also impacted by an increase
in sales incentives expense of $2,030 net of reversals of $169.
Wireless gross profit margins increased to 5.1% for the three months ended
August 31, 2004 from 3.9% in 2003, primarily due to increased sales of new
product introductions during the third quarter of fiscal 2004 as compared to
lower priced, older items in the prior year. In addition, the Company recorded
inventory write-downs of $1,050 and $1,839 for the three months ended August 31,
2004 and 2003, respectively. At August 31, 2004, the Company had on hand
approximately 140,000 units of written-down inventory which, after write-down,
had an approximate extended value of $30,300. Gross margins included
reimbursements from a vendor for software upgrades on sold inventory of $62 and
$20 for the three months ended August 31, 2004 and 2003, respectively.
Operating expenses of the Wireless Group were $7,941 and $7,336 for the
three months ended August 31, 2004 and 2003, respectively, an increase of $605.
As a percentage of net sales, operating expenses of the Wireless Group decreased
to 2.5% during the three months ended August 31, 2004, compared to 5.6% in 2003.
37
As a result of increased sales, improved gross margins and improved
operating expense efficiency, Wireless pre-tax income (loss) for the three
months ended August 31, 2004 was $5,739, compared to $(1,756) for 2003.
Net Income
As a result of the improved operating results from the discontinued
operations and increased gross margins in the Electronics Group, partially
offset by increased operating expenses, net income for the three months ended
August 31, 2004 was $5,344 compared to $647 in 2003. Earnings per share for the
three months ended August 31, 2004 was $0.24 basic and diluted as compared to
$0.03 basic and diluted for 2003. Net income was favorably impacted by sales
incentive reversals of $418 and $1,177 for the three months ended August 31,
2004 and 2003, respectively.
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.
38
Nine months ended August 31, 2003 compared to nine months ended August 31, 2004
Continuing Operations
The following table sets forth, for the periods indicated, certain
statement of earnings data for the Company as a percentage of net sales:
Nine Months Ended
-------------------------------------------------
August 31, 2003 August 31, 2004
--------------------- ---------------------
Net sales:
Mobile electronics $ 203,488 62.2% $ 200,846 48.1%
Consumer electronics 84,631 25.8 105,265 25.2
Sound 38,900 11.9 111,422 26.7
Other 378 0.1 -- --
--------- ----- --------- -----
Total net sales 327,397 100.0 417,533 100.0
Gross profit 52,604 16.0 66,127 15.8
Selling 15,967 4.9 23,144 5.5
General and administrative 29,168 8.9 36,200 8.7
Warehousing and technical support 1,859 0.5 3,404 0.8
--------- ----- --------- -----
Total operating expenses 46,994 14.3 62,748 15.0
--------- ----- --------- -----
Operating income 5,610 1.7 3,379 0.8
--------- ----- --------- -----
Interest and bank charges (1,648) (0.5) (2,682) (0.6)
Equity in income in equity investees 2,134 0.6 3,706 0.9
Other, net (411) (0.1) 1,663 0.4
--------- ----- --------- -----
Income from continuing operations
before provision for income taxes,
minority interest and discontinued
operations 5,685 1.7 6,066 1.5
Provision for income taxes 3,850 1.2 3,042 0.7
Minority interest (expense) 454 0.2 (710) (0.2)
--------- ----- --------- -----
Income from continuing operations $ 2,289 0.7% $ 2,314 0.6%
========= ====== ========= ======
Net Sales
Net sales increased $90,136, or 27.5%, to $417,533 for the nine months
ended August 31, 2004, from net sales of $327,397 in 2003, primarily due to
increased sales in the consumer electronics and sound. In addition, sales of
Audiovox Germany accounted for $33,439, or 37.1%, of this increase as a result
of the Recoton acquisition in July 2003 and $6,700 increase in Code sales due to
a growth in OEM sales.
Sound sales increased $72,522 (186.4%) as a result of the Jensen(R),
Magnate(R), Mac Audio(R), Heco(R), Acoustic Research(R) and Advent(R),
trademarks which usage right was acquired during the Recoton acquisition. In
addition, sound sales were positively impacted by increased sales of $29,129 in
the satellite radio product line as well as sales from Audiovox Germany. Sales
for Consumer electronics increased $20,634 (24.4%) for the nine months ended
August 31, 2004 from 2003, mainly from sales of DVD players and flat panel
39
TV's. These products were introduced during fiscal 2003 and strong customer
demand has caused sales activity to increase during fiscal 2004. Mobile
electronics sales decreased $2,642 (1.3%) for the nine months ended August 31,
2004 from 2003 due to a decline in sales of mobile video.
Net sales of the Company's Malaysian subsidiary decreased $2,424 from last
year primarily due to a shift in the Malaysia business environment and stricter
credit policies. Specifically, the OEM market in Malaysia has declined as more
automakers are incorporating electronic products into vehicles at the factory
rather than being sold in the aftermarket. This decrease was offset by a $1,425
increase in the Company's Venezuela subsidiary due to economic growth in
Venezuela as a result of improved political stability.
Sales incentives expense increased $1,969, net of reversals of $3,319, to
$8,694, due to increased sales, as the majority of the Electronics Group sales
incentives are based on sales volume. The increase in sales incentive expense
was partially offset by increased reversals. Specifically, reversals for
unearned sales incentives for the nine months ended August 31, 2004 increased
$1,515 as compared to 2003 due to customers not purchasing the minimum
quantities of product required during the program time period as a result of
lower than expected post holiday season sales. In addition, reversals for
unclaimed sales incentives for 2004 increased $125 to $1,396 as compared to
2003. The Company believes that the reversal of earned but unclaimed sales
incentives upon the expiration of the claim period is a disciplined, rational,
consistent and systematic method of reversing unclaimed sales incentives. The
majority of sales incentive programs are calendar-year programs. Accordingly,
the program ends on the month following the fiscal year end and the claim period
expires one year from the end of the program. These sales incentive programs are
expected to continue and will either increase or decrease based upon competition
and customer demands.
Gross Profit
Gross profit margins decreased to 15.8% for the nine months ended August
31, 2004 compared to 16.0% in 2003. This decrease was due a decline in sales of
mobile electronics which carry a higher gross margin as opposed to other product
lines. Specifically, the increase in sound sales has created a shift in the
sales allocation causing consolidated gross margins to decline. Further more,
there was a $1,969 increase in sales incentive expense, net of reversals of
$3,319, primarily due to increased sales.
The above declines in margins were offset by margins achieved in Audiovox
Germany from Jensen(R), Magnate(R), Mac Audio(R), Heco(R), Acoustic Research(R)
and Advent(R) products as well as an increase in Code-Alarm margins due to a
decline in production and warranty costs. In addition, gross margins were
favorably impacted from a credit of $1,517 from one of the Company's vendors
during the nine months ended August 31, 2004. Without this credit, the
Electronics gross margin for the nine months ended August 31, 2004 would have
been 15.5%.
Operating Expenses
Consolidated operating expenses increased $15,754 to $62,748 for the nine
months ended August 31, 2004, as compared to $46,994 in 2003. As a percentage of
net sales, operating expenses increased to 15.0% for the nine months ended
August 31, 2004 from 14.3% in 2003.
40
Electronics operating expenses increased $14,009, or 39.2% to $49,711, for
the nine months ended August 31, 2004 from 2003. The domestic group accounted
for $5,839, or 41.7%, of the 2004 increase. The international group (Audiovox
Germany, Malaysia and Venezuela) accounted for $8,170, or 58.3%, of the 2004
increase which was primarily due to the operations of Audiovox Germany, which
commenced as a result of the Recoton acquisition in July 2003. As a percentage
of net sales, Electronics operating expenses increased to 11.9% for the nine
months ended August 31, 2004 compared to 10.9% in 2003.
Electronics selling expenses increased $6,379 to $20,127 during the third
quarter of 2004 of which $2,330 (36.5%) and $4,049 (63.5%) was attributable to
the domestic group and international group, respectively.
o The increase for the domestic group was primarily due to increases of
$395 in commissions due to an increase in commissionable sales and
salesmen salaries, payroll taxes and benefits of $875 as a result of
higher employee wages and the hiring of additional employees. In
addition, advertising expense and trade show expense increased $561
and $320, respectively, as a result of an increased product line and
increased promotions during the annual consumer electronics show as
compared to the prior year.
o The increase for the international group was due to an increase of
$4,136 in Audiovox Germany expenses offset by a $87 decline in
Malaysia and Venezuela. Due to the operations of Recoton, which was
acquired in July 2003, Audiovox Germany expenses increased $1,685 in
commissions, $423 in salesmen salaries, $335 in trade show and $1,179
in advertising. Advertising costs consisted primarily of product
brochures and informative advertising materials regarding the
Company's product line.
Electronics general and administrative expenses increased $6,138 to $26,361
of which $2,758 (44.9%) and $3,380 (55.1%) was attributable to the domestic
group and international group, respectively.
o The increase for the domestic group was primarily attributable to an
increase of $656 in professional fees due to legal fees incurred to
develop and protect patent rights. In addition, corporate allocations,
insurance expense, office expenses, occupancy costs and
salaries/payroll taxes increased $905, $318, $136, $372, and $306,
respectively, as compared to the prior year. These increases were due
to the hiring of additional employees, increased wages and MIS costs
as a result of the additional resources necessary to support the
increased product lines and sales activity. In addition, higher
inventory levels as a result of increased sales activity caused
insurance expense and occupancy costs to increase. The above increases
were partially offset by a $442 decrease in bad debt expense due to
the recovery of a previously reserved bad debt. The Company does not
consider this decrease in bad debt expense to be a trend in the
overall accounts receivable.
o The increase for the international group was due to an increase of
$4,038 in Audiovox Germany expenses offset by a $658 decline in
Malaysia and Venezuela expenses. As a result of the Recoton
acquisition in July 2003, Audiovox Germany expenses increased $2,529
in salaries and related payroll taxes, $258 in professional fees, $234
in office expenses, $220 in occupancy costs and $339 in depreciation.
The decline in Malaysia and Venezuela expenses was primarily due
41
to a decrease in Venezuela's employee benefits because of a 2003
payment made to certain Venezuela employees, which did not recur in
fiscal 2004.
Electronics warehousing and technical support increased $1,492, or 86.0%,
to $3,223. This increase was due to a $1,410 increase in direct labor and
payroll taxes due to the hiring of additional employees and includes an increase
of $669 in Audiovox Germany expenses. The increase in product complexity has
resulted in the Company hiring additional engineers and providing added customer
service.
The following is a summary of general corporate operating expenses for the
nine months ended:
August 31, 2003 August 31, 2004
---------------- ----------------
Advertising $ 2,219 $ 3,031
Professional fees 2,783 3,691
Depreciation 1,183 889
Insurance 490 753
Other 4,617 4,673
------- -------
Total general corporate operating
expenses $11,292 $13,037
======= =======
General corporate operating expenses increased $1,745, or 15.5% to $13,037
for the nine months ended August 31, 2004 primarily due to an increase in
professional fees as a result of compliance costs for Sarbanes-Oxley and an
increase in advertising due to an advertising program intended to promote
overall Company awareness through media and public relations. Other corporate
operating expenses are mainly comprised of accounting, MIS and certain executive
officer salaries.
Other Income and Expense
Interest expense and bank charges increased $1,034 during the nine months
ended August 31, 2004, primarily due to interest incurred on German debt
acquired as a result of the Recoton acquisition, and increased average
borrowings from the Company's primary credit facility during fiscal 2004 as
compared to the prior period in fiscal 2003 due to increased purchases of
Electronics inventory.
Equity in income of equity investees increased $1,572 for the nine months
ended August 31, 2004, which was predominantly due to an increase in the equity
income of ASA as a result of increased sales and improvement in gross margins.
In addition, increased sales and net income of Bliss-tel contributed towards the
increase in equity income.
Other income increased $2,074 during the nine months ended August 31, 2004
as compared to the similar period in 2003. Increased royalty income of $764
during fiscal 2004 contributed to the increase in other income as a result of
royalty rights received during the Recoton acquisition. In addition, included in
other expense for the nine months ended August 31, 2003 is a civil penalty of
42
$620 which did not recur for fiscal 2004. Furthermore, other expense decreased
$293 as a result of lower foreign exchange devaluation in our Venezuelan
subsidiary as compared to fiscal 2003.
Minority interest expense increased $1,164 for the nine months ended August
31, 2004 compared to the nine months ended August 31, 2003, mainly due to the
write-off of amounts owed to the Company from its minority interest shareholder
in Audiovox Venezuela.
Provision for Income Taxes
The effective tax rate for the nine months ended August 31, 2004 was 50.1%
compared to last year's 67.7% for the comparable period. The decrease in the
effective tax rate was primarily due to the Company's mix of foreign and
domestic earnings.
Discontinued Operations
Income from discontinued operations, net of tax was $8,577 and $1,641 for
the nine months ended August 31, 2004 and 2003, respectively.
Net sales of the Wireless Group were $845,116 and $536,253 for the nine
months ended August 31, 2004 and 2003, respectively. Unit sales of wireless
handsets increased by approximately 1,334,000 units for the nine months ended
August 31, 2004, or 42.8%, to approximately 4,449,000 units from 3,115,000 units
in 2003. This increase was primarily due to increased sales of products
introduced during the fourth quarter of fiscal 2003, such as camera and color
display phones with CDMA 1x technology. The average selling price of the
Company's handsets increased to $178 per unit for the nine months ended August
31, 2004 from $161 per unit in 2003. Net sales were also impacted by a decrease
in sales incentives expense of $1,713 net of reversals of $1,035.
Wireless gross profit margins decreased to 4.4% for the nine months ended
August 31, 2004 from 4.9% in 2003, primarily due to increased price competition
within the wireless industry. Wireless received price protection of $0 and
$11,850 for the nine months ended August 31, 2004 and 2003, respectively.
Without this price protection, gross profit margins would have been lower by
2.2% for the nine months ended August 31, 2003. Gross margins included
reimbursements from a vendor for software upgrades on sold inventory of $1,010
and $143 for the nine months ended August 31, 2004 and 2003, respectively.
Operating expenses of the Wireless Group were $23,091 and $21,952 for the
nine months ended August 31, 2004 and 2003, respectively, an increase of $1,139.
However, as a percentage of net sales, operating expenses decreased to 2.7%
during nine months ended August 31, 2004, compared to 4.1% in 2003.
As a result of the increased sales and improved operating expense
efficiency, partially offset by a decline in gross margins, Wireless pre-tax
income for the nine months ended August 31, 2004 was $8,893, compared to $2,355
for 2003.
43
Net Income
As a result of increased sales, other income and income from discontinued
operations partially offset by decreased gross margins and increased operating
expenses, net income for the nine months ended August 31, 2004 was $10,891
compared to $3,930 in 2003. Earnings per share for the nine months ended August
31, 2004 was $0.50 (basic) and $0.49 (diluted) as compared to $0.18 (basic and
diluted) for 2003. Net income was favorably impacted by sales incentive
reversals of $4,354 and $2,466 for the nine months ended August 31, 2004 and
2003, respectively.
The Company believes that the Electronics Group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales and general economic conditions. Also, all of its products are
subject to price fluctuations which could affect the carrying value of
inventories and gross margins in the future.
Liquidity and Capital Resources
Cash Flows, Commitments and Obligations
The Company has historically financed its operations primarily through a
combination of available borrowings under bank lines of credit and debt and
equity offerings. The amount of financing needed is dependent primarily on the
collection of accounts receivable and purchase of inventory. As of August 31,
2004, the Company had working capital (which includes assets and liabilities
held-for-sale) of $308,259 which includes cash of $8,592 as compared with
working capital of $305,998 and cash of $4,702 at November 30, 2003.
Operating activities used cash of $69,623 for the nine months ended August
31, 2004 compared to cash provided of $103,663 in 2003. The decrease in cash
provided by operating activities as compared to the prior year is primarily due
to the increase in inventory, including assets held-for-sale, partially offset
by an increase in liabilities related to assets held-for-sale. Net income
provided $10,891 for operating activities for the nine months ended August 31,
2004 compared to $3,930 in 2003.
The following significant fluctuations in the balance sheets impacted cash
flow from operations:
o The overall decrease in cash flow from operations for the nine months
ended August 31, 2004 as compared to 2003 was primarily due to an
increase in purchases of inventory due to the increase in sales for
the nine months ended August 31, 2004. The increase in cash used for
inventory purchases was partially offset by increased inventory
turnover which approximated 3.3 during for the nine months ended
August 31, 2004 compared to 3.0 in the comparable period in the prior
year. The increased turnover is a result of increased sales and
although this is a favorable condition, the Company cannot guarantee
this to be a trend in the future.
o In addition, cash flow from operating activities for the nine months
ended August 31, 2004, was impacted by a decrease in accounts payable,
primarily from payments made to inventory vendors. The timing of
payments made can fluctuate and are often impacted by the timing of
inventory purchases and amount of inventory on hand.
44
o Cash flows from operating activities for the nine months ended August
31, 2004 were favorably impacted by a decrease in accounts receivable
primarily from collections. Accounts receivable turnover approximated
5.2 during for the nine months ended August 31, 2004 compared to 4.4
in the comparable period in the prior year. Overall collections of
accounts receivable and credit quality of customers has improved,
however, accounts receivable collections are often impacted by general
economic conditions.
Investing activities used $25 during the nine months ended August 31, 2004,
primarily from the purchase of property, plant and equipment, as well as the
purchase of subsidiary shares (see Note 15 to Notes to Consolidated Financial
Statements). These cash usages were offset by a distribution from an equity
investee. Investing activities used cash of $39,189 during the nine months ended
August 31, 2003, primarily from the acquisition of Recoton (see Note 6 to Notes
to Consolidated Financial Statements)
Financing activities provided $73,480 during the nine months ended August
31, 2004, primarily from net borrowings of bank obligations, partially offset by
payments of debt. Financing activities for the nine months ended August 31, 2003
used cash of $36,487 mainly due to net payments of bank obligations as inventory
levels in the prior year were lower as compared to August 31, 2004.
The Company's principal source of liquidity is its revolving credit
agreement, which expires on the earlier of July 15, 2005 or the date of
consummation of (i) the sale of substantially all the assets of ACC to UTSI
pursuant to the UTSI Purchase Agreement and/or (ii) the purchase by the Borrower
of Toshiba Corporation's interest in ACC and the repayment by ACC of the Toshiba
Note pursuant to the Toshiba Agreement. The Company is currently in the process
of negotiating a new credit agreement to fund the working capital needs of the
Company subsequent to the expiration of the existing credit agreement of which
no assurance can be given.
At August 31, 2004, the credit agreement provided for $150,000 of available
credit. Under the credit agreement, the Company may obtain credit through direct
borrowings and letters of credit. The obligations of the Company under the
credit agreement are guaranteed by certain of the Company's subsidiaries and is
secured by accounts receivable and inventory. The Company's ability to borrow
under its credit facility is a maximum aggregate amount of $150,000, subject to
certain conditions, based upon a formula taking into account the amount and
quality of its accounts receivable and inventory. The credit agreement also
allows for commitments up to $50,000 in forward exchange contracts.
The credit agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net worth.
Additionally, the agreement includes restrictions and limitations on payments of
dividends, stock repurchases and capital expenditures.
The Company was in compliance with all of its bank covenants at November
30, 2003 and August 31, 2004. There can be no assurance that the Company will
not violate covenants in the future, therefore, resulting in amounts outstanding
to be payable upon demand. While the Company has historically been able to
obtain waivers for violations, there can be no assurance that future
negotiations with its lenders would be successful. This credit agreement has no
cross covenants with other credit facilities.
45
The Company also has revolving credit facilities in Malaysia ("Malaysian
Credit Agreement") to finance additional working capital needs. The credit
facilities are partially secured by two stand-by letters which, in aggregate,
approximated $1,600. The obligations of the Company under the Malaysian credit
facilities are secured by the property and building in Malaysia owned by
Audiovox Communications Sdn. Bhd. The German credit facility consists of
accounts receivable factoring up to 16,000 Euros and a working capital facility,
secured by accounts receivable and inventory, up to 6,000 Euros. The German and
Malaysia facilities are renewable on an annual basis. The Company has additional
stand-by letters of credit aggregating $674 for insurance policies.
The Company guaranteed the debt of G.L.M. beginning in December 1996, and
this guarantee was not modified. During the nine months ended August 31, 2004,
the Company received a request for payment in connection with this guarantee. As
a result of the payment request, the Company paid $291 on behalf of G.L.M.
during the nine months ended August 31, 2004.
The Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At August 31,
2004, such obligations and commitments are as follows:
Payments Due By Period
--------------------------------------------------------------------
Contractual Cash Less than 1-3 4-5 After
Obligations Total 1 Year Years Years 5 Years
- ------------------------ ------- ------- ------- ------- -------
Capital lease obligation $13,237 $ 552 $ 1,131 $ 1,157 $10,397
Operating leases 11,329 3,504 5,397 2,424 4
------- ------- ------- ------- -------
Total contractual cash
obligations $24,566 $ 4,056 $ 6,528 $ 3,581 $10,401
======= ======= ======= ======= =======
Amount of Commitment
Expiration per period
-----------------------------------------------------------------------------------
Total
Other Commercial Amounts Less than After
Commitments Committed 1 Year 1-3 Years 4-5 Years 5 years
----------- -------- -------- -------- -------- -----
Lines of credit (1) $117,597 $117,597 $ -- $ -- --
Stand-by letters of
credit (1) 2,274 2,274 -- -- --
Commercial letters of
credit (1) 356 356 -- -- --
Debt (1) 17,708 10,320 4,548 2,840 --
-------- -------- -------- -------- -----
Total commercial
commitments $137,935 $130,547 $ 4,548 $ 2,840 --
======== ======== ======== ======== =====
(1) Refer to Note 13 of Notes to Consolidated Financial Statements.
46
The Company regularly reviews its cash funding requirements and attempts to
meet those requirements through a combination of cash on hand, cash provided by
operations, available borrowings under bank lines of credit and possible future
public or private debt and/or equity offerings. At times, the Company evaluates
possible acquisitions of, or investments in, businesses that are complementary
to those of the Company, which transaction may require the use of cash. The
Company believes that its cash, other liquid assets, operating cash flows,
credit arrangements, access to equity capital markets, taken together, provide
adequate resources to fund ongoing operating expenditures. In the event that
they do not, the Company may require additional funds in the future to support
its working capital requirements or for other purposes and may seek to raise
such additional funds through the sale of public or private equity and/or debt
financings as well as from other sources. No assurance can be given that
additional financing will be available in the future or that if available, such
financing will be obtainable on terms favorable to the Company when required.
Treasury Stock
The Company's Board of Directors approved the repurchase of 1,563,000
shares of the Company's Class A common stock in the open market under a share
repurchase program (the Program). No shares were purchased under the Program
during fiscal 2003 or fiscal 2004. As of November 30, 2003 and August 31, 2004,
1,072,737 and 1,070,957 shares were repurchased under the Program at an average
price of $7.93 per share for an aggregate amount of $8,511 and $8,497,
respectively.
Off-Balance Sheet Arrangements
The Company does not maintain any off-balance sheet arrangements,
transactions, obligations or other relationships with unconsolidated entities
that would be expected to have a material current or future effect upon our
financial condition or results of operations.
Related Party Transactions
The Company has entered into several related party transactions which are
described below.
Leasing Transactions
During 1998, the Company entered into a 30-year capital lease for a
building with its principal stockholder and chief executive officer, which is
the headquarters of the Wireless operation. Payments on the lease were based
upon the construction costs of the building and the then-current interest rates.
The effective interest rate on the capital lease obligation is 8%.
During 1998, the Company entered into a sale/leaseback transaction with its
principal stockholder and chief executive officer for $2,100 of equipment, which
has been classified as an operating lease. The lease has monthly payments of $34
and expires on March 31, 2005. No gain or loss was recorded on the transaction
as the book value of the equipment equaled the fair market value.
47
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 August 31, 2009 and thereafter are
$4,162.
Transactions with Toshiba Corporation
On June 8, 2004, prior to the execution of the definitive asset purchase
agreement with UTSI, Audiovox purchased 5% of ACC stock from Toshiba, a minority
shareholder in ACC, for $1,410. Toshiba's 5% minority interest in ACC had a book
value of $1,234 at the time of purchase, resulting in goodwill of $176 (see Note
7 of Notes to Consolidated Financial Statements). As a result of this purchase,
Audiovox currently owns 80% of ACC's stock and Toshiba the remaining 20%. As
discussed in Note 2 of Notes to Consolidated Financial Statements, Audiovox and
Toshiba subsequently entered into an Agreement pursuant to which Toshiba would
sell its remaining 20% of ACC's stock to Audiovox at the closing of the
Agreement between Audiovox, ACC and UTSI for total cash consideration of $13,590
pursuant to its agreements with Audiovox and ACC, including repayment of an
$8,107 convertible subordinated note from ACC to Toshiba.
Inventory on hand (included in assets held-for-sale in the accompanying
consolidated balance sheets) at November 30, 2003 and August 31, 2004 purchased
from Toshiba approximated $22,405 and $42,244, respectively. At November 30,
2003 and August 31, 2004, the Company recorded receivables from Toshiba
aggregating approximately $709 and $88, respectively, primarily for software
upgrades.
At November 30, 2003 and August 31, 2004, the Company had outstanding
payables (included in liabilities related to assets held-for-sale in the
accompanying consolidated balance sheets) in the amount of $18,841 and $19,911,
respectively, for inventory purchases from Toshiba. The payment terms are such
that the payable is non-interest bearing and is payable in accordance with the
terms established in the distribution agreement between the parties, which is 30
days.
On occasion, the Company negotiates to receive price protection in the
event the selling price to its customers is less than the purchase price from
Toshiba. The Company will record such price protection, if necessary, at the
time of the sale of the units.
Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51",
which addresses consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46 (Revised
Interpretations) resulting in multiple effective dates based on the nature as
well as the creation date of the VIE. The adoption of FIN 46 did not have an
impact on the Company's consolidated financial statements.
48
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
"Revenue Recognition" (SAB No. 104), which codifies, revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition", in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on our consolidated results of operations,
consolidated financial position or consolidated cash flows.
Forward-Looking Statements
Except for historical information contained herein, statements made in this
Form 10-Q that would constitute forward-looking statements may involve certain
risks such as our ability to keep pace with technological advances, significant
competition in the wireless, mobile and consumer electronics businesses, quality
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
dependency on key executives, 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/A for the fiscal year ended November 30, 2003. These factors, among
others, may cause actual results to differ materially from the results suggested
in the forward-looking statements. Forward-looking statements include statements
relating to, among other things:
o growth trends in the wireless, mobile and consumer electronic
businesses
o technological and market developments in the wireless, automotive and
consumer electronics businesses
o liquidity
o availability of key employees
o expansion into international markets
o the availability of new consumer electronic products
o the availability of new wireless products
These forward-looking statements are subject to numerous risks,
uncertainties and assumptions about the Company including, among other things:
o the ability to keep pace with technological advances
o impact of future selling prices on Company profitability and inventory
carrying value
o significant competition in the wireless, automotive and consumer
electronics businesses
o quality and consumer acceptance of newly introduced products
o the relationships with key suppliers
o the relationships with key customers
o possible increases in warranty expense
o changes in the Company's business operations
o the loss of key employees
o our wireless business depends heavily on Philip Christopher and his
personally-held intangibles
o the ability to maintain an internal control framework compliant with
Sarbanes-Oxley Section 404
o foreign currency risks
49
o political instability
o changes in U.S. federal, state and local and foreign laws
o changes in regulations and tariffs
o seasonality and cyclicality
o inventory obsolescence and availability
o consolidations in the wireless and retail industries, causing a
decrease in the number of carriers and retail stores that carry our
products
o changes in global or local economic conditions
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Sensitive Instruments
The market risk inherent in the Company's market risk sensitive instruments
and positions is the potential loss arising from adverse changes in marketable
equity security prices, foreign currency exchange rates and interest rates.
Marketable Securities
Marketable securities at November 30, 2003 and August 31, 2004, which are
recorded at fair value of $9,512 and $7,548, respectively, include an unrealized
gain (loss) of $1,831 and $(932), respectively, and have exposure to price risk.
This risk is estimated as the potential loss in fair value resulting from a
hypothetical 10% adverse change in prices quoted by stock exchanges and amounts
to $951 and $755 as of November 30, 2003 and August 31, 2004, respectively.
Actual results may differ.
Interest Rate Risk
The Company's bank loans expose earnings to changes in short-term interest
rates since interest rates on the underlying obligations are either variable or
fixed for such a short period of time as to effectively become variable. The
fair values of the Company's bank loans are not significantly affected by
changes in market interest rates.
Foreign Exchange Risk
In order to reduce the risk of foreign currency exchange rate fluctuations,
the Company hedges transactions denominated in a currency other than the
functional currencies applicable to each of its various entities. The
instruments used for hedging are forward contracts with banks. The Company does
not obtain collateral to support financial instruments, but monitors the credit
standing of the financial institution. The changes in market value of such
contracts have a high correlation to price changes in the currency of the
related hedged transactions. Intercompany transactions with foreign subsidiaries
and equity investments are typically not hedged. There were no hedge
transactions at November 30, 2003 or August 31, 2004. Therefore, the potential
loss in fair value for a net currency position resulting from a 10% adverse
change in quoted foreign currency exchange rates as of November 30, 2003 and
August 31, 2004 is not applicable.
50
The Company is subject to risk from changes in foreign exchange rates for
its subsidiaries and equity investments that use a foreign currency as their
functional currency and are translated into U.S. dollars. These changes result
in cumulative translation adjustments which are included in accumulated other
comprehensive income. On November 30, 2003 and August 31, 2004, the Company had
translation exposure to various foreign currencies with the most significant
being the Euro, Malaysian ringgit, Thailand baht and Canadian dollar. The
potential loss resulting from a hypothetical 10% adverse change in quoted
foreign currency exchange rates, as of November 30, 2003 and August 31, 2004,
amounts to $3,410 and $3,453, respectively. Actual results may differ.
ITEM 4. CONTROLS AND PROCEDURES
Under the direction of our Chief Executive Officer and Chief Financial
Officer, we evaluated the design and operation of our disclosure controls and
procedures and internal control over financial reporting and concluded it only
provides reasonable assurance that (i) our disclosure controls and procedures
were effective at a reasonable assurance level as of August 31, 2004, and (ii)
no changes in internal control over financial reporting occurred during the
quarter ended August 31, 2004 that has materially affected, or is reasonably
likely to materially affect, such internal control over financial reporting.
During the course of our evaluation and testing of internal controls over
financial reporting in connection with Section 404 of the Sarbanes-Oxley Act of
2002, the Company is in the process of implementing changes in the design and
operation of internal controls to increase their effectiveness.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently, and has in the past been, a party to routine
litigation incidental to its business. From time to time, the Company receives
notification of alleged violations of registered patent holders' rights. The
Company has either been indemnified by its manufacturers in these matters,
obtained the benefit of a patent license or has decided to vigorously defend
such claims.
The Company and ACC, along with other manufacturers of wireless phones and
cellular service providers, were named as defendants in two class action
lawsuits alleging non-compliance with FCC ordered emergency 911 call processing
capabilities. These lawsuits were consolidated and transferred to the United
States District Court for the Northern District of Illinois, which in turn
referred the cases to the Federal Communications Commission ("FCC") to determine
if the manufacturers and service providers are in compliance with the FCC's
order on emergency 911 call processing capabilities. On July 22, 2004, the FCC
responded to the questions referred by the court, in most part, in favor of the
defendants and any damages in an amount would be determined by the court.
Plaintiffs have recently moved for leave to file a consolidated amended
complaint. The Company and ACC intend to vigorously defend this matter. However,
no assurances regarding the outcome of this matter can be given at this point in
the litigation.
During 2001, the Company, along with other suppliers, manufacturers and
distributors of hand-held wireless telephones, was named as a defendant in five
class action lawsuits alleging damages relating to exposure to radio frequency
51
radiation from hand-held wireless telephones. These class actions have been
consolidated and transferred to a Multi-District Litigation Panel before the
United States District Court of the District of Maryland. On March 5, 2003,
Judge Catherine C. Blake of the United States District Court for the District of
Maryland granted the defendants' consolidated motion to dismiss these
complaints. Plaintiffs have appealed to the United States Circuit Court of
Appeals, Fourth Circuit. The appeal pending before the United States Circuit
Court of Appeals, Fourth Circuit in the consolidated class action lawsuits
(Pinney, Farina, Gilliam, Gimpelson and Naquin) against ACC and other suppliers,
manufacturers and distributors as well as wireless carriers of hand-held
wireless telephones alleging damages relating to risk of exposure to radio
frequency radiation from the wireless telephones has not yet been heard and any
damages in an amount would be determined by the court. An appeal was heard on
October 1, 2004, and the Company is awaiting a ruling on this matter.
During the third quarter of fiscal 2003, a certain Venezuelan employee, who
is also a minority shareholder in Audiovox Venezuela, submitted a claim to the
Venezuela Labor Court for severance compensation of approximately $560. The
Court approved the claim and it was paid and expensed by Audiovox Venezuela in
the third quarter of fiscal 2003. The Company is challenging the payment of this
claim and will seek reimbursement from the Venezuelan shareholder or the
Company's insurance carrier.
During the second quarter of fiscal 2004, the Company, AEC and one of its
distributors of car security products, were named as defendants in a lawsuit
brought by Magnadyne Corporation in the United States District Court, Central
District of California alleging patent infringement and seeking damages and
injunctive relief in an amount to be determined by the court. The Company has
answered the amended complaint, asserted various affirmative defenses and
interposed counterclaims alleging non-infringement, invalidity and
non-enforceability. AEC answered the amended complaint and asserted affirmative
defenses and interposed counterclaims. Discovery in this matter recently
commenced. The Company and AEC intend to vigorously defend this matter. However,
no assurances regarding the outcome of this matter can be given at this point in
the litigation.
On September 17, 2004, Shintom Co. Ltd. commenced action against Audiovox
Corporation in the Chancery Court of the State of Delaware, New Castle County,
seeking recovery of the greater of the sum of $2,500,000 or the value of
Audiovox preferred stock determined as of April 16, 1987 (the date of the merger
of Audiovox Corp., a New York Corporation, with Audiovox Corporation, a Delaware
corporation) which preferred stock was purchased by Shintom from Audiovox in
April 1981. The Company believes that the lawsuit is baseless and it intends to
vigorously defend this matter. However, no assurance regarding the outcome of
this matter can be given at this point in the litigation.
On August 5, 2004, Compression Labs, Inc. ("CLI") commenced an action
against Audiovox Corporation and other suppliers, manufacturers and distributors
of products alleged to incorporate CLI's patented technology in the United
States District Court for the Eastern District of Texas, alleging patent
infringement and seeking damages and injunctive relief in an amount to be
determined by the court. The Company has filed a motion to dismiss the
complaint. The Company intends to vigorously defend this matter. However, no
assurances regarding the outcome of this matter can be given at this point in
the litigation.
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The Company does not expect the outcome of any pending litigation,
separately and in the aggregate, to have a material adverse effect on its
business, consolidated financial position or results of operations.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit Number Description
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934 (furnished herewith)
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934 (furnished herewith)
32.1 Certification Pursuant to Rule 13a-14(a) And Rule 15d-14(a)
Section 1350, Chapter 63 of Title 18 of The United States
Code, As Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2 Certification Pursuant to Rule 13a-14(a) And Rule 15d-14(a)
Section 1350, Chapter 63 of Title 18 of The United States
Code, As Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002 (furnished herewith)
(b) Reports on Form 8-K
During the third quarter ended August 31, 2004, the Company filed five
reports on Form 8-K:
The Form 8-K, filed June 14, 2004 and dated June 11, 2004, reported that
the Company and its majority-owned subsidiary, Audiovox Communications Corp.
(ACC) had entered into a definitive agreement to sell certain assets and
liabilities to UTStarcom, Inc. (the Asset Purchase Agreement). Copies of the
Asset Purchase Agreement and other definitive agreements executed in connection
with the Asset Purchase Agreement were attached to the Form 8-K as Exhibits 99.1
through 99.6. The Company also attached a copy of the Press Release announcing
the Asset Purchase Agreement as Exhibit 99.7.
The Form 8-K filed on June 22, 2004 and dated June 16, 2004, reported that
the Company and its Lenders had executed an Eleventh Amendment to the Fourth
Amended and Restated Credit Agreement (the "Amendment"). The Amendment permits
the Company to sell certain of its accounts receivable free of the Lenders'
security interest. A copy of the Amendment was attached to the Form 8-K as
Exhibit 99.1.
The Form 8-K filed on July 15, 2004 and dated July 15, 2004, stated that
the Company issued a press release reporting on the Company's results for the
fiscal second quarter 2004. A copy of the press release was attached to the Form
8-K as Exhibit 99.1.
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The Form 8-K filed on July 20, 2004 and dated July 15, 2004, reported that
the Company had executed the Fifth Amended and Restated Credit Agreement with
various banks and lenders (the "Credit Agreement"), which, among other things,
provides for aggregate borrowings of $150,000,000. The Credit Agreement contains
various covenants and will expire on the earlier of July 15, 2005 or the date of
consummation of the sale of substantially all the assets of Audiovox
Communications Corp. to UTStarcom, Inc. and/or the purchase by the Company of
Toshiba Corporation's interest in Audiovox Communications Corp. For the full
terms of the Credit Agreement and the Guarantee and Collateral Agreement signed
by certain of the Company's subsidiaries, please see copies of these documents
which were attached to the Form 8-K as Exhibits 99.1 and 99.2, respectively.
The Form 8-K filed August 10, 2004 and dated June 11, 2004, which reported
that certain exhibits, among others, to the Asset Purchase Agreement (defined
above) would be entered into at the closing of the Asset Purchase Agreement. The
forms of the Escrow Agreement, Transition Services Agreement and Trademark
License Agreement were attached to the Form 8-K as Exhibits 99.1, 99.2 and 99.3.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUDIOVOX CORPORATION
By:/s/John J. Shalam
--------------------
John J. Shalam
President and Chief
Executive Officer
Dated: October 15, 2004
By:/s/Charles M. Stoehr
------------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
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