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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q/A


ý

Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934

For Quarter Ended February 29, 2004

Commission file number 0-28839


AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)
  13-1964841
(I.R.S. Employer Identification No.)

150 Marcus Blvd., Hauppauge, New York
(Address of principal executive offices)

 

11788
(Zip Code)

(631) 231-7750
Registrant's telephone number, including area code

        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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 126 of the Exchange Act) Yes ý    No o

        Number of shares of each class of the registrant's Common Stock outstanding as of the latest practicable date.

 
  Class Outstanding at April 9, 2004
Class A Common Stock   20,773,338 Shares
Class B Common Stock   2,260,954 Shares




AUDIOVOX CORPORATION


I N D E X

 
   
  Page
Number

PART I—FINANCIAL INFORMATION   1
 
ITEM 1

 

FINANCIAL STATEMENTS

 

1

 

 

Consolidated Balance Sheets at November 30, 2003 and February 29, 2004 (unaudited)

 

1

 

 

Consolidated Statements of Operations (unaudited) for the Three Months Ended February 28, 2003 and February 29, 2004

 

2

 

 

Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended February 28, 2003 and February 29, 2004

 

3

 

 

Notes to Consolidated Financial Statements

 

4
 
ITEM 2

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

16
 
ITEM 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

30
 
ITEM 4

 

CONTROLS AND PROCEDURES

 

31

PART II—OTHER INFORMATION

 

32
 
ITEM 1

 

LEGAL PROCEEDINGS

 

32
 
ITEM 6

 

EXHIBITS AND REPORTS ON FORM 8-K

 

33

SIGNATURES

 

34


PART I—FINANCIAL INFORMATION

ITEM 1    FINANCIAL STATEMENTS

AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)

 
  November 30,
2003

  February 29,
2004

 
 
   
  (unaudited)

 
Assets              
Current assets:              
  Cash   $ 4,702   $ 4,981  
  Accounts receivable, net     266,421     183,782  
  Inventory, net     219,664     265,917  
  Receivables from vendors     7,830     14,018  
  Prepaid expenses and other current assets     12,371     15,412  
  Deferred income taxes     9,531     8,437  
   
 
 
    Total current assets     520,519     492,547  
Investment securities     9,512     9,977  
Equity investments     13,142     11,613  
Property, plant and equipment, net     20,242     20,069  
Excess cost over fair value of assets acquired     7,532     7,022  
Intangible assets     8,043     8,043  
Other assets     713     650  
   
 
 
    $ 579,703   $ 549,921  
   
 
 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 
Current liabilities:              
  Accounts payable   $ 94,864   $ 80,011  
  Accrued expenses and other current liabilities     42,816     40,230  
  Accrued sales incentives     21,894     10,481  
  Income taxes payable     13,218     10,872  
  Bank obligations     39,940     40,599  
  Current portion of long-term debt     3,433     2,555  
   
 
 
    Total current liabilities     216,165     184,748  
Long-term debt     18,289     17,236  
Capital lease obligation     6,070     6,054  
Deferred income taxes     3,178     2,360  
Deferred compensation     5,280     6,096  
   
 
 
    Total liabilities     248,982     216,494  
   
 
 
Minority interest     4,993     5,378  
   
 
 
Commitments and contingencies              
Stockholders' equity:              
  Preferred stock, $50 par value; 50,000 shares authorized and outstanding, liquidation preference of $2,500 per share     2,500     2,500  
  Series preferred stock $.01 par value, 1,500,000 shares authorized; no shares issued or outstanding          
  Common stock:              
    Class A $.01 par value; 60,000,000 shares authorized; 20,728,382 and 20,735,846 shares issued at November 30, 2003 and February 29, 2004, respectively; and 19,655,645 and 19,664,889 shares outstanding at November 30, 2003 and February 29, 2004, respectively     207     207  
    Class B $.01 par value convertible; 10,000,000 shares authorized; 2,260,954 shares issued and outstanding     22     22  
Paid-in capital     252,104     252,203  
Retained earnings     80,635     82,505  
Accumulated other comprehensive loss     (1,229 )   (891 )
Treasury stock, at cost, 1,072,737 and 1,070,957 shares of Class A common stock at November 30, 2003 and February 29, 2004, respectively     (8,511 )   (8,497 )
   
 
 
    Total stockholders' equity     325,728     328,049  
   
 
 
    Total liabilities and stockholders' equity   $ 579,703   $ 549,921  
   
 
 

See accompanying notes to consolidated financial statements.

1



AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months Ended February 28, 2003 and February 29, 2004
(In thousands, except share and per share data)
(unaudited)

 
  Three Months Ended
 
 
  February 28,
2003

  February 29,
2004

 
Net sales   $ 296,818   $ 376,884  
Cost of sales     271,350     345,518  
   
 
 
Gross profit     25,468     31,366  
   
 
 

Operating expenses:

 

 

 

 

 

 

 
  Selling     7,303     9,920  
  General and administrative     12,305     17,106  
  Warehousing and technical support     1,399     1,703  
   
 
 
    Total operating expenses     21,007     28,729  
   
 
 

Operating income

 

 

4,461

 

 

2,637

 
   
 
 

Other income (expense):

 

 

 

 

 

 

 
  Interest and bank charges     (1,105 )   (1,435 )
  Equity in income of equity investees     371     1,003  
  Other, net     (1,099 )   851  
   
 
 
    Total other income (expense), net     (1,833 )   419  
   
 
 

Income before provision for income taxes and minority interest

 

 

2,628

 

 

3,056

 
Provision for income taxes     1,040     800  
Minority interest expense     (380 )   (386 )
   
 
 

Net income

 

$

1,208

 

$

1,870

 
   
 
 

Net income per common share (basic)

 

$

0.06

 

$

0.09

 
   
 
 

Net income per common share (diluted)

 

$

0.05

 

$

0.08

 
   
 
 

Weighted average number of common shares outstanding (basic)

 

 

21,830,480

 

 

21,922,100

 
   
 
 
Weighted average number of common shares outstanding (diluted)     22,021,548     22,254,488  
   
 
 

See accompanying notes to consolidated financial statements.

2



AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended February 28, 2003 and February 29, 2004
(In thousands)
(unaudited)

 
  Three Months Ended
 
 
  February 28,
2003

  February 29,
2004

 
Cash flows from operating activities:              
  Net income   $ 1,208   $ 1,870  
  Adjustments to reconcile net income to net cash flows provided by operating activities              
    Depreciation and amortization     1,030     1,086  
    Provision for bad debt expense     48     58  
    Equity in income of equity investees     (371 )   (1,003 )
    Minority interest     380     386  
    Deferred income tax expense, net     79     440  
    Loss on disposal of property, plant and equipment, net     116      
    Tax benefit on stock options exercised         21  
    Non-cash stock compensation         268  
  Changes in operating assets and liabilities              
    Accounts receivable     81,337     82,753  
    Inventory     76,436     (46,225 )
    Receivables from vendors     12,252     (6,187 )
    Prepaid expenses and other assets     (6,087 )   (1,740 )
    Investment securities-trading     (65 )   (815 )
    Accounts payable, accrued expenses and other current liabilities and accrued sales incentives     (93,551 )   (28,446 )
    Income taxes payable     4,369     (2,326 )
   
 
 
      Net cash provided by operating activities     77,181     140  
   
 
 

Cash flows from investing activities:

 

 

 

 

 

 

 
  Purchases of property, plant and equipment     (90 )   (909 )
  Proceeds from sale of property, plant and equipment     183     18  
  Proceeds from distribution from an equity investee     70     2,526  
  Proceeds from reduction of purchase price of acquired business         510  
   
 
 
      Net cash provided by investing activities     163     2,145  
   
 
 

Cash flows from financing activities:

 

 

 

 

 

 

 
  Borrowings from bank obligations     149,546     253,098  
  Repayments on bank obligations     (186,495 )   (252,638 )
  Principal payments on capital lease obligation     (15 )   (16 )
  Proceeds from exercise of stock options and warrants         71  
  Principal payments on debt         (2,697 )
   
 
 
      Net cash used in financing activities     (36,964 )   (2,182 )
   
 
 

Effect of exchange rate changes on cash

 

 

(5

)

 

176

 
   
 
 

Net increase in cash

 

 

40,375

 

 

279

 
Cash at beginning of period     2,758     4,702  
   
 
 

Cash at end of period

 

$

43,133

 

$

4,981

 
   
 
 

See accompanying notes to consolidated financial statements.

3



AUDIOVOX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements,

Three Months Ended February 28, 2003 and February 29, 2004

(Dollars in thousands, except share and per share data)

(1)    Basis of Presentation

        The accompanying consolidated financial statements of Audiovox Corporation and subsidiaries (the Company) were prepared in accordance with accounting principles generally accepted in the United States of America and include all adjustments (consisting of normal recurring adjustments), which, in the opinion of management, are necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year.

        These consolidated financial statements do not include all disclosures associated with consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. Accordingly, these statements should be read in conjunction with the Company's consolidated financial statements and notes thereto contained in the Company's Form 10-K for the year ended November 30, 2003.

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements as well as the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. These judgments can be subjective and complex, and consequently actual results could differ from those estimates and assumptions. Significant estimates made by the Company include the allowance for doubtful accounts, allowance for cellular deactivations, inventory valuation, recoverability of deferred tax assets, valuation of long-lived assets, accrued sales incentives and warranty reserves.

        A summary of the Company's significant accounting policies is identified in Note 1 of the Notes to Consolidated Financial Statements included in the Company's 2003 Annual Report filed on Form 10-K. There have been no changes to the Company's significant accounting policies subsequent to November 30, 2003.

(2)    Net Income Per Common Share

        Basic net income per common share is based upon the weighted average number of common shares outstanding during the period. Diluted net income per common share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.

4



        A reconciliation between the numerators and denominators of the basic and diluted income per common share is as follows:

 
  Three Months Ended
 
  February 28,
2003

  February 29,
2004

Net income (numerator)   $ 1,208   $ 1,870
   
 
Weighted average number of common shares outstanding (denominator for net income per common share, basic)     21,830,480     21,922,100
Effect of dilutive securities:            
  Stock options and warrants     191,068     332,388
   
 
Weighted average number of common shares and potential common shares outstanding (denominator for net income per common share, diluted)     22,021,548     22,254,488
   
 
Net income per common share (basic)   $ 0.06   $ 0.09
   
 
Net income per common share (diluted)   $ 0.05   $ 0.08
   
 

        Stock options and warrants totaling 1,588,200 and 1,465,000 for the three months ended February 28, 2003 and February 29, 2004, respectively, were not included in the net income per common share calculation because their effect would have been anti-dilutive.

(3)    Accumulated Other Comprehensive Loss

        Accumulated other comprehensive loss of $1,229 and $891 at November 30, 2003 and February 29, 2004, respectively, on the accompanying consolidated balance sheets includes the net accumulated unrealized gain on the Company's available-for-sale investment securities of $1,135 and $928 at November 30, 2003 and February 29, 2004, respectively, offset by foreign currency translation adjustments of $(2,364) and $(1,819) at November 30, 2003 and February 29, 2004, respectively.

        The Company's total comprehensive income was as follows:

 
  Three Months Ended
 
 
  February 28,
2003

  February 29,
2004

 
Net income   $ 1,208   $ 1,870  
Other comprehensive income:              
  Foreign currency translation adjustments     685     545  
  Unrealized holding gain (loss) on available-for-sale investment securities arising during period, net of tax     122     (207 )
   
 
 
Other comprehensive income, net of tax     807     338  
   
 
 
Total comprehensive income   $ 2,015   $ 2,208  
   
 
 

5


        The change in the net unrealized gain (loss) on marketable securities arising during the periods presented above are net of a tax provision (benefit) of $75 and $(127) for the three months ended February 28, 2003 and February 29, 2004, respectively.

(4)    Supplemental Cash Flow Information

        The following is supplemental information relating to the consolidated statements of cash flows:

 
  Three Months Ended
 
  February 28,
2003

  February 29,
2004

Cash paid during the period:            
  Interest (excluding bank charges)   $ 682   $ 1,000
  Income taxes (net of refunds)   $ 2,408   $ 3,030

        During the three months ended February 29, 2004, 7,464 stock options were exercised into shares of Class A Common Stock aggregating proceeds of $71 to the Company.

        During the three months ended February 28, 2003 and February 29, 2004, the Company recorded an unrealized holding gain (loss) relating to available-for-sale marketable investment securities, net of deferred taxes, of $122 and $(207), respectively, as a component of accumulated other comprehensive loss.

        During the three months ended February 29, 2004, the Company recorded a non-cash stock compensation charge of $268 related to the rights under the call/put options previously granted to employees of Audiovox German Holdings GmbH (Audiovox Germany) (Note 5).

        As a result of stock option exercises, the Company recorded a tax benefit of $20 during the three months ended February 29, 2004 which is included in paid-in capital in the accompanying consolidated financial statements.

(5)    Business Acquisitions

        On March 15, 2002, Code Systems, Inc. (Code), a wholly-owned subsidiary of Audiovox Electronics Corp. (AEC), a wholly-owned subsidiary of the Company, purchased certain assets of Code-Alarm, Inc., an automotive security product company. The purpose of this acquisition was to expand brand recognition and improve OEM production with manufacturers. The results of operations of Code-Alarm, Inc. are included in the accompanying consolidated financial statements from the date of purchase. The purchase price consisted of approximately $7,100, paid in cash at the closing, and a debenture (CSI Debenture) whose value is linked to the future earnings of Code. The payment of any amount under the terms of the CSI Debenture is based on performance and is scheduled to occur in the first calendar quarter of 2006.

6


        The Company accounted for the transaction in accordance with the purchase method of accounting. An adjustment to the allocation of the purchase price was made to certain acquired assets resulting in an increase to goodwill of $706 during the year ended November 30, 2003. During the quarter ended February 29, 2004, an adjustment to the purchase price was made due to the collection of monies held in escrow at the time of closing, resulting in a $510 decrease to goodwill. As a result of the acquisition, goodwill, as adjusted, of $2,050 was recorded.

        Simultaneous with this business acquisition, the Company entered into a purchase and supply agreement with a third party. Under the terms of this agreement, the third party will purchase or direct its suppliers to purchase certain products from the Company. In exchange for entering into this agreement, the Company issued 50 warrants in its subsidiary, Code, which vest immediately. These warrants were deemed to have minimal value based upon the then current value of Code. Furthermore, the agreement calls for the issuance of additional warrants based upon the future operating performance of Code.

        Based upon the contingent nature of the debenture and warrants, no recognition was given to the CSI debenture or warrants as the related contingencies were not considered probable and such warrants had not vested at November 30, 2003 or February 29, 2004.

Recoton Audio Group

        On July 8, 2003, the Company, through a newly-formed, wholly-owned subsidiary, acquired in cash (i) certain accounts receivable, inventory and trademarks from the U.S. audio operations of Recoton Corporation (the "U.S. audio business") or (Recoton) and (ii) the outstanding capital stock of Recoton German Holdings GmbH (the "international audio business"), the parent holding company of Recoton Corporation's Italian, German and Japanese subsidiaries, for $40,046, net of cash acquired, including transaction costs of $1.9 million. The primary reason for this transaction was to expand the product offerings of AEC and to obtain certain long-standing trademarks such as Jensen®, Acoustic Research® and others. The Company also acquired an obligation with a German financial institution as a result of the purchase of the common stock of Recoton German Holdings GmbH. This obligation is secured by the acquired company's accounts receivable and inventory.

        The results of operations of this acquisition have been included in the consolidated financial statements from the date of acquisition (July 8, 2003).

        The following unaudited pro-forma financial information for the three months ended February 28, 2003 represents the combined results of the Company's operations and the Recoton acquisition as if the Recoton acquisition had occurred at the beginning of the year of acquisition (December 1, 2002). The unaudited pro-forma financial information does not necessarily reflect the results of operations that would have occurred had the Company constituted a single entity during such period.

 
  Three Months Ended
February 28, 2003

 
Revenue   $ 316,224  
Net loss   $ (4,873 )
Net loss per share-basic and diluted   $ (0.22 )

7


        On August 29, 2003, the Company entered into a call/put option agreement with certain employees of Audiovox Germany, whereby these employees can acquire up to a maximum of 20% of the Company's stated share capital in Audiovox Germany at a call price equal to the same proportion of the actual price paid by the Company for Audiovox Germany. The put options cannot be exercised until the later of (i) November 30, 2008 or (ii) the full repayment (including interest) of an inter-company loan granted to Audiovox Germany in the amount of 5.3 million Euros. Notwithstanding the lapse of these time periods, the put options become immediately exercisable upon (i) the sale of Audiovox Germany or (ii) the termination of employment or death of the employee. The put price to be paid to the employee upon exercise will be the then net asset value per share of Audiovox Germany. Accordingly, the Company recognizes compensation expense based on 20% of the increase in Audiovox Germany's net assets representing the incremental change of the put price over the call option price. Compensation expense for these options amounted to $268 for the three months ended February 29, 2004.

(6)    Goodwill and Other Intangible Assets

        The change in the carrying amount of goodwill is as follow:

Net beginning balance at November 30, 2003   $ 7,532  
Escrow monies collected in connection with Code-Alarm (Note 5)     (510 )
   
 
Net ending balance at February 29, 2004   $ 7,022  
   
 

        At November 30, 2003 and February 29, 2004, intangible assets consisted of the following:

 
  November 30, 2003
and February 29, 2004

 
  Gross
Carrying
Value

  Accumulated
Amortization

  Total Net
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 February 29, 2004, all intangible assets subject to amortization have been fully amortized.

(7)    Segment Information

        The Company has two reportable segments which are organized by products: Wireless and Electronics. The Wireless Segment markets wireless handsets and accessories through domestic and international wireless carriers and their agents, independent distributors and retailers. The Electronics Segment sells autosound, mobile electronics and consumer electronics, primarily to mass merchants, specialty retailers, new car dealers, original equipment manufacturers (OEM), independent installers of automotive accessories and the U.S. military.

8



        The Company's chief decision maker evaluates performance of the segments based upon income before provision for income taxes and minority interest. The accounting policies of the segments are the same as those for the Company as a whole. The Company allocates interest and certain shared expenses, including treasury, legal and human resources, to the segments based upon estimated usage. Intersegment sales are reflected at cost and have been eliminated in consolidation. A royalty fee on the intersegment sales, which is eliminated in consolidation, is recorded by the segments and included in other income (expense). Certain items are maintained at the Company's corporate headquarters (Corporate) and are not allocated to the segments. Such items primarily include costs associated with accounting and certain executive officer salaries and bonuses and certain items including investment securities, equity investments, deferred income taxes, jointly-used fixed assets and debt. The jointly-used fixed assets are the Company's management information systems, which are used by the Wireless and Electronics Segments and Corporate. A portion of the management information systems costs, including depreciation and amortization expense, are allocated to the segments based upon estimates made by management. During the three months ended February 28, 2003 and February 29, 2004, certain advertising costs were not allocated to the segments. These costs pertained to an advertising campaign that was intended to promote overall Company awareness, rather than individual segment products. During the three months ended February 29, 2004, the corporate allocation to the Electronics Segment was reduced by $618 in order to offset costs incurred in the Company's Venezuelan subsidiary that were considered to be a consolidated cost of the Company. Segment identifiable assets are those which are directly used in or identified to segment operations.

Three Months Ended February 28, 2003

  Wireless
  Electronics
  Corporate
  Consolidated
Totals

Net sales   $ 216,562   $ 80,256   $   $ 296,818
Income before provision for income taxes and minority interest     3,250     2,490     (3,112 )   2,628
Total assets     177,693     170,817     77,112     425,622
Goodwill, net         2,786     4,602     7,388
Three Months Ended February 29, 2004

  Wireless
  Electronics
  Corporate
  Consolidated
Totals

Net sales   $ 240,335   $ 136,549   $   $ 376,884
Income before provision for income taxes and minority interest     1,520     5,154     (3,618 )   3,056
Total assets     220,266     286,484     43,171     549,921
Goodwill, net         2,420     4,602     7,022

(8)    Equity Investments

        As of November 30, 2003 and February 29, 2004, the Company's 72% owned subsidiary, Audiovox Communications Sdn. Bhd., had a 29% ownership interest in Avx Posse (Malaysia) Sdn. Bhd. (Posse) which monitors car security commands through a satellite based system in Malaysia. In addition, the Company had a 20% ownership interest in Bliss-tel which distributes cellular telephones and accessories in Thailand, and the Company had 50% non-controlling ownership interests in two other entities: Audiovox Specialized Applications, Inc. (ASA) which acts as a distributor to specialized

9



markets for specialized vehicles, such as RV's and van conversions, of televisions and other automotive sound, security and accessory products; and G.L.M. Wireless Communications, Inc. (G.L.M.) which is in the cellular telephone, pager and communications business in the New York metropolitan area.

        The following presents summary financial information for ASA. Such summary financial information has been provided herein based upon the individual significance of this unconsolidated equity investment to the consolidated financial information of the Company. Furthermore, based upon the lack of significance to the consolidated financial information of the Company, no summary financial information for the Company's other equity investments has been provided herein:

 
  November 30,
2003

  February 29,
2004

Current assets   $ 22,518   $ 19,397
Non-current assets     4,803     4,626
Current liabilities     4,640     4,398
Members' equity     22,681     19,625
 
  Three Months Ended
 
  February 28,
2003

  February 29,
2004

Net sales   $ 10,025   $ 13,966
Gross profit     2,811     4,432
Operating income     392     1,537
Net income     728     1,994

        The Company's share of income from this unconsolidated equity investment for the three months ended February 28, 2003 and February 29, 2004 was $364 and $997, respectively.

(9)    Income Taxes

        Quarterly tax provisions are generally based upon an estimated annual effective tax rate per taxable entity, including evaluations of possible future events and transactions, and are subject to subsequent refinement or revision. When the Company is unable to estimate a part of its annual income or loss, or the related tax expense or benefit, the tax expense or benefit applicable to that item is reported in the interim period in which the income or loss occurs.

        A reconciliation of the provision for income taxes computed at the Federal statutory rate to the reported provision for income taxes is as follows:

 
  Three Months Ended
 
 
  February 28,
2003

  February 29,
2004

 
Tax provision at Federal statutory rate   $ 920   35.0 % $ 1,070   35.0 %
State income taxes, net of Federal benefit     219   8.3     144   4.7  
Decrease in beginning-of-the-year balance of the valuation allowance for deferred tax assets     (439 ) (16.7 )   (529 ) (17.3 )
Foreign tax rate differential     467   17.8     (105 ) (3.4 )
Non-deductible, changes in rates and other, net     (127 ) (4.8 )   220   7.2  
   
 
 
 
 
    $ 1,040   39.6 % $ 800   26.2 %
   
 
 
 
 

10


        Other is a combination of various factors, including changes in the taxable income or loss between various tax entities with differing effective tax rates, changes in the allocation and apportionment factors between taxable jurisdictions with differing tax rates of each tax entity, changes in tax rates and other legislation in the various jurisdictions, and other items.

        The effective tax rate for the three months ended February 29, 2004, was 26.2% compared to last year's 39.6% for the comparable period.

        The net change in the total valuation allowance for the three months ended February 29, 2004, was a decrease of $529. A valuation allowance is provided when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The Company has established valuation allowances for net operating loss carryforwards as well as other deferred tax assets of the Wireless Segment. Based on the Electronics Segment's ability to carry back future reversals of deductible temporary differences to taxes paid in current and prior years and the Electronics Segment's historical taxable income record, adjusted for unusual items, management believes it is more likely than not that the Electronics Segment will realize the benefit of the net deferred tax assets existing at February 29, 2004.

(10)    Accrued Sales Incentives

        A summary of the activity with respect to sales incentives for the three months ended February 28, 2003 and February 29, 2004, respectively, on a segment and consolidated basis is provided below:

For the three months ended February 28, 2003

 
  Wireless
  Electronics
  Total
 
Opening balance   $ 7,525   $ 4,626   $ 12,151  
Accruals     5,552     1,965     7,517  
Payments     (4,273 )   (1,299 )   (5,572 )
Reversals for unclaimed sales incentives     (163 )   (731 )   (894 )
   
 
 
 
Ending balance   $ 8,641   $ 4,561   $ 13,202  
   
 
 
 

For the three months ended February 29, 2004

 
  Wireless
  Electronics
  Total
 
Opening Balance   $ 7,289   $ 14,605   $ 21,894  
Accruals     3,623     2,967     6,590  
Payments     (6,581 )   (8,322 )   (14,903 )
Reversals for unearned sales incentives     (658 )   (1,370 )   (2,028 )
Reversals for unclaimed sales incentives     (18 )   (1,054 )   (1,072 )
   
 
 
 
Ending balance   $ 3,655   $ 6,826   $ 10,481  
   
 
 
 

11


        The majority of the reversals of previously established sales incentive liabilities pertain to sales recorded in prior periods.

(11)    Product Warranties and Product Repair Costs

        The following table provides a summary of the activity with respect to the Company's product warranties and product repair costs:

 
  Three Months Ended
 
 
  February 28,
2003

  February 29,
2004

 
Opening balance   $ 15,410   $ 18,512  
Liabilities accrued for warranties issued during the period     1,958     2,934  
Warranty claims paid during the period     (1,088 )   (1,755 )
   
 
 
Ending balance   $ 16,280   $ 19,691  
   
 
 

(12)    Financing Arrangements

        The Company's principal source of liquidity is its revolving credit agreement which expires July 27, 2004. The Company is currently negotiating with the bank to extend this agreement for an additional three years, of which no assurance can be given. At November 30, 2003 and February 29, 2004, the credit agreement provided for $150,000 of available credit, including $10,000 for foreign currency borrowings.

        Under the credit agreement, the Company may obtain credit through direct borrowings and letters of credit. The obligations of the Company under the credit agreement are guaranteed by certain of the Company's subsidiaries and are secured by accounts receivable, inventory and the Company's shares of ACC common stock. The credit agreement also allows for commitments up to $50,000 in forward exchange contracts.

        Outstanding domestic obligations under the credit agreement at November 30, 2003 and February 29, 2004 were as follows:

 
  November 30,
2003

  February 29,
2004

Revolving Credit Notes   $ 11,709   $ 22,226
Eurodollar Notes     20,000     10,000
   
 
    $ 31,709   $ 32,226
   
 

        The Company's ability to borrow under its credit facility is a maximum aggregate amount of $150,000, subject to certain conditions, based upon a formula taking into account the amount and quality of its accounts receivable and inventory. The credit agreement contains several covenants

12



requiring, among other things, minimum levels of pre-tax income and minimum levels of net worth. Additionally, the agreement includes restrictions and limitations on payments of dividends, stock repurchases and capital expenditures.

        The Company was in compliance with its bank covenants at November 30, 2003 and February 29, 2004. While the Company has historically been able to obtain waivers for compliance violations, there can be no assurance that future negotiations with its lenders would be successful or that the Company will not violate covenants in the future, therefore, resulting in amounts outstanding to be payable upon demand. This credit agreement has no cross covenants with other credit facilities.

        The Company also has revolving credit facilities in Malaysia (Malaysian Credit Agreement) to finance additional working capital needs. The credit facilities are partially secured by two standby letters which approximate $800 each and expire in July 2004. In addition, the obligations of the Company are also secured by the property and building owned by Audiovox Communications Sdn. Bhd. Outstanding obligations under the Malaysian Credit Agreement at November 30, 2003 and February 29, 2004 were approximately $2,721 and $2,671, respectively.

        At February 29, 2004, the Company had additional outstanding standby letters of credit aggregating $694 which expire on various dates from May to July 2004.

        On September 2, 2003, the Company's subsidiary, Audiovox German Holdings GmbH, (Audiovox Germany) borrowed 12 million Euros under a new term loan agreement. This agreement was for a 5-year term loan with a financial institution consisting of two tranches. Tranche A is for 9 million Euros and Tranche B is for 3 million Euros. The term loan matures on August 30, 2008. Payments are due in 60 monthly installments and interest accrues at (i) 2.75% over the Euribor rate for Tranche A and (ii) 3.5% over the three months Euribor rate for Tranche B. Any amount repaid may not be reborrowed. The term loan becomes immediately due and payable if a change of control occurs without permission of the financial institution.

        Audiovox Corporation guarantees 3 million Euros of this term loan. The term loan is secured by the pledge of the stock of Audiovox German Holdings GmbH and on all brands and trademarks of the Audiovox German Holdings Group. The term loan requires the maintenance of certain yearly financial covenants that are calculated according to German Accounting Standards for Audiovox German Holdings. Should any of the financial covenants not be met, the financial institution may charge a higher interest rate on any outstanding borrowings. The short and long term amounts outstanding under this agreement were $3,226 and $9,736, respectively, at November 30, 2003 and $2,555 and $8,411, respectively, at February 29, 2004, and have been included in the accompanying consolidated balance sheet.

        The Company has available a 16,000 Euro factoring arrangement and 5,000 Euro working capital arrangement with a German financial institution for its German operations. Selected accounts receivable are purchased from the Company on a non-recourse basis at 80% of face value and payment

13



of the remaining 20% upon receipt from the customer of the balance of the receivable purchased. The rate of interest is Euribor plus 2.5%, and the Company pays 0.4% of its gross sales as a fee for this arrangement. The amount outstanding under the working capital agreement was $5,510 and $5,702 at November 30, 2003 and February 29, 2004, respectively, and has been included in bank obligations in the accompanying consolidated balance sheet.

(13)    Commitments and Contingencies

        The Company is currently, and has in the past been, a party to routine litigation incidental to its business. From time to time, the Company receives notification of alleged violations of registered patent holders' rights. The Company has either been indemnified by its manufacturers in these matters, obtained the benefit of a patent license or has decided to vigorously defend such claims.

14


(14)    New Accounting Pronouncements

        In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51", which addresses consolidation by business enterprises of variable interest entities (VIEs) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. The adoption of FIN 46 did not have an impact on the Company's consolidated financial statements.

        In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition" (SAB No. 104), which codifies, revises and rescinds certain sections of SAB No. 101, "Revenue Recognition", in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on our consolidated results of operations, consolidated financial position or consolidated cash flows.

(15)    Potential Sale of ACC

        On February 19, 2004, the Company announced that it had signed a non-binding letter of intent to sell a controlling interest in its Wireless subsidiary, ACC, to Curitel Communications, Inc., a leading South Korean mobile phone maker (Curitel). As announced on that date, Audiovox Corporation must also consider all proposals submitted.

        The transaction is subject to a number of contingencies, including satisfactory completion of due diligence, negotiation and signing of definitive agreements and requisite approvals from the Board of Directors and Shareholders. The terms of the transaction have not been finalized. The Company must also consider all proposals submitted and there can be no assurances that this, or any other transaction, will be completed or as to any terms that may be negotiated.

15


ITEM 2    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The Company markets its products under the Audiovox® brand name and other brand names, such as Jensen®, Magnate®, Mac Audio®, Heco®, Acoustic Research® and Advent®, as well as private labels through a large and diverse distribution network both domestically and internationally. The Company operates through two primary marketing groups: Wireless and Electronics.

        Wireless consists of Audiovox Communications Corp. (ACC), a 75%-owned subsidiary of Audiovox Corporation, and Quintex Mobile Communications Corp. (Quintex), which is a wholly-owned subsidiary of ACC. ACC markets wireless handsets and accessories primarily on a wholesale basis to wireless carriers in the United States and carriers overseas primarily in the CDMA (Code Division Multiple Access) market. Quintex is a small operation for the direct sale of handsets, accessories and wireless telephone service. Quintex also receives customer service awards (residual fees) and activation commissions from the carriers. Residuals are paid by the carriers based upon the pricing plan of customers activated by Quintex for a period of time (1-3 years). Quintex also sells a small volume of electronics products not related to wireless which are categorized as "other sales".

        The Electronics Group consists of four wholly-owned subsidiaries: Audiovox Electronics Corporation (AEC), American Radio Corp., Code Systems, Inc. (Code) and Audiovox German Holdings GmbH (Audiovox Germany) and three majority-owned subsidiaries: Audiovox Communications (Malaysia) Sdn. Bhd., Audiovox Holdings (M) Sdn. Bhd. and Audiovox Venezuela, C.A. The Electronics Group markets, both domestically and internationally, automotive sound and security systems, electronic car accessories, home and portable sound products, two-way radios, in-vehicle video systems, flat-screen televisions, DVD players and navigation systems. Sales are made through an extensive distribution network of mass merchandisers and others. In addition, the Company sells some of its products directly to automobile manufacturers on an OEM basis. American Radio Corp. is also involved on a limited basis in the wireless marketplace and these sales are categorized as "other sales".

        The Company allocates interest and certain shared expenses, including treasury, legal, human resources and information systems, to the marketing groups based upon both actual and estimated usage. General expenses and other income items that are not readily allocable are not included in the results of the two marketing groups.

Critical Accounting Policies

        As disclosed in the annual report on Form 10-K for the fiscal year ended November 30, 2003, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies relate to revenue recognition; sales incentives; accounts receivable; inventory; goodwill and other intangible assets; warranties and income taxes. 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.

16



Results of Operations

        The following table sets forth, for the periods indicated, certain statement of operations data for the Company expressed as a percentage of net sales:

 
  Three Months Ended
 
 
  February 28,
2003

  February 29,
2004

 
Net sales:          
  Wireless          
    Wireless products   70.9 % 62.2 %
    Activation commissions   1.8   1.4  
    Residual fees   0.2   0.2  
    Other   0.1    
   
 
 
      Total Wireless   73.0   63.8  
   
 
 
  Electronics          
    Mobile electronics   17.2   13.1  
    Consumer electronics   5.6   13.4  
    Sound   4.2   9.7  
    Other      
   
 
 
      Total Electronics   27.0   36.2  
   
 
 
      Total net sales   100.0   100.0  
   
 
 

Cost of sales

 

91.4

 

91.7

 
   
 
 
Gross profit   8.6   8.3  

Selling

 

2.5

 

2.6

 
General and administrative   4.1   4.5  
Warehousing and technical support   0.5   0.5  
   
 
 
      Total operating expenses   7.1   7.6  
   
 
 

Operating income

 

1.5

 

0.7

 
Interest and bank charges   (0.3 ) (0.4 )
Equity in income in equity investees   0.1   0.3  
Other, net   (0.4 ) 0.2  
   
 
 
Income before provision for income taxes   0.9   0.8  
Provision for income taxes   0.4   0.2  
Minority interest expense   (0.1 ) (0.1 )
   
 
 
Net income   0.4 % 0.5 %
   
 
 

Management Key Indicators

        Management reviews the following financial and non-financial indicators to assess the performance of the Company's operating results:

17


Consolidated Results
Three months ended February 28, 2003 compared to three months ended February 29, 2004

        The net sales and percentage of net sales by marketing group and product line for the three months ended February 28, 2003 and February 29, 2004 are reflected in the following table:

 
  Three Months Ended
 
 
  February 28, 2003
  February 29, 2004
 
Net sales:                      

Wireless

 

 

 

 

 

 

 

 

 

 

 
  Wireless products   $ 210,574   70.9 % $ 234,410   62.2 %
  Activation commissions     5,228   1.8     5,315   1.4  
  Residual fees     540   0.2     610   0.2  
  Other     220   0.1        
   
 
 
 
 
    Total Wireless     216,562   73.0     240,335   63.8  
   
 
 
 
 

Electronics

 

 

 

 

 

 

 

 

 

 

 
  Mobile electronics     51,090   17.2     49,549   13.1  
  Consumer electronics     16,495   5.6     36,470   9.7  
  Sound     12,544   4.2     50,530   13.4  
  Other     127          
   
 
 
 
 
    Total Electronics     80,256   27.0     136,549   36.2  
   
 
 
 
 
   
Total

 

$

296,818

 

100.0

%

$

376,884

 

100.0

%
   
 
 
 
 

Net Sales

        Net sales for the three months ended February 29, 2004 increased $80,066, or 27.0% to $376,884 as compared with $296,818 in 2003.

        Wireless Group sales were $240,335 for the three months ended February 29, 2004, an 11.0% increase from sales of $216,562 in 2003. Unit sales of wireless handsets increased 5.6% to approximately 1,258,000 units for the three months ended February 29, 2004 from approximately 1,191,000 units in 2003. This increase was primarily due to new product introductions of camera phones with CDMA 1x technology. The average selling price of the Company's handsets increased to $179 per unit for the three months ended February 29, 2004 from $171 per unit in 2003 due to higher selling prices of new product introductions.

18


        Electronics Group sales increased in all product lines, except mobile electronics, as sales for the three months ended February 29, 2004, were $136,549, a 70.1% increase from sales of $80,256 in 2003. This increase was largely due to increased sales in the sound and consumer electronics product lines as a result of new product introductions. Furthermore, this increase was also due to the addition of $15,733 in sales by Audiovox Germany, which was formed in July 2003 as a result of the acquisition of Recoton. (See Note 5 to the consolidated financial statements.) Excluding Audiovox Germany, sales by the Company's international subsidiaries decreased $381 or 15.9% during the three months ended February 29, 2004, primarily due to a $951 decrease in Malaysia as a result of lower OEM sales. This decrease was offset by a $682 increase in Venezuela due to the temporary shut-down of operations during the first quarter of fiscal 2003 attributable to political and economic instability. This situation did not recur for the three months ended February 29, 2004.

        Sales were also impacted by a $3,133 decrease in sales incentive expense as both the Wireless Group and Electronics Group experienced a decline. Trends will be discussed in further detail in each individual marketing group MD&A discussion.

Gross Profit

        Both the Wireless Group and the Electronics Group experienced a decline in margins, as the consolidated gross profit margin for the three months ended February 29, 2004 was 8.3%, compared to 8.6% in 2003. Margins in the Wireless Group were 4.2% compared to 5.5% in 2003. Margins in the Electronics Group were 15.6% compared to 16.9% in 2003. Even though margins are down in both Groups, the change in the mix of sales between Wireless and Electronics has affected the consolidated margins in a favorable way. The Electronics Group represented a larger percentage of sales in 2004 then 2003 and, since Electronics' products carry higher margins, it offset the decline in Wireless. Trends will be discussed in further detail in each individual marketing group MD&A discussion.

Operating Expenses

        Operating expenses increased $7,722 to $28,729 for the three months ended February 29, 2004, as compared to $21,007 in 2003. As a percentage of net sales, operating expenses increased to 7.6% for the three months ended February 29, 2004 from 7.1% in 2003. Major components of the increase in operating expenses were in commissions, advertising, executive and office salaries and professional fees, primarily in the Electronics Group as a result of recent acquisitions and general growth in business. Trends will be discussed in further detail in each individual marketing group MD&A discussion.

        Operating income for the three months ended February 29, 2004 was $2,637 compared to $4,461 for the prior year.

Other Income and Expense

        Interest expense and bank charges increased $330 during the three months ended February 29, 2004, primarily due to interest incurred on German debt acquired as a result of the Recoton acquisition, and increased average borrowings from the Company's primary credit facility during the first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003.

        Equity in income of equity investees increased $632 for the three months ended February 29, 2004 as compared to the three months ended February 28, 2003. The increase in equity in income of equity investees was due to an increase in the equity income of ASA as a result of increased sales and improvement in gross margins.

        Other income increased $1,950 during the first quarter of 2004 as compared to 2003. Increased royalty income of $720 during fiscal 2004 contributed to the increase in other income as a result of royalty rights received during the Recoton acquisition. In addition, the appreciation in the fair market

19



value of investment securities under the Company's deferred compensation plan resulted in a $513 increase to other income, which is offset by a corresponding increase to general and administrative expenses. Furthermore, other expense decreased $319 as a result of foreign exchange translation in our Venezuelan subsidiary due to the decreased devaluation of the Venezuela currency against the U.S. Dollar as compared to fiscal 2003. During the three months ended February 28, 2003, other expense was impacted by a $795 loss on foreign exchange translation due to devaluation of the Venezuela currency and a $283 reduction in the fair market value of investment securities.

        Minority interest expense remained fairly consistent for the three months ended February 29, 2004 compared to the three months ended February 28, 2003, primarily due to the decreased earnings of ACC offset by the increased earnings of Venezuela.

Provision for Income Taxes

        The effective tax rate for the three months ended February 29, 2004 was 26.2% compared to last year's 39.6% for the comparable period. The decrease in the effective tax rate was primarily due to the reduction of the Wireless Segment's valuation allowance and the Company's mix of foreign and domestic earnings.

Net Income

        As a result of strong sales in both divisions and increased other income offset by decreased gross margins and increased operating expenses, net income for the three months ended February 29, 2004 was $1,870 compared to $1,208 in 2003. Earnings per share for the three months ended February 29, 2004 was $0.09 (basic) and $0.08 (diluted) as compared to $0.06 (basic) and $0.05 (diluted) for 2003.

Wireless Results

Three months ended February 28, 2003 compared to three months ended February 29, 2004

        The following table sets forth for the periods indicated certain statements of operations data for Wireless expressed as a percentage of net sales:

 
  Three Months Ended
 
 
  February 28, 2003
  February 29, 2004
 
Net sales:                      
  Wireless products   $ 210,574   97.3 % $ 234,410   97.5 %
  Activation commissions     5,228   2.4     5,315   2.2  
  Residual fees     540   0.2     610   0.3  
  Other     220   0.1        
   
 
 
 
 
    Total net sales     216,562   100.0     240,335   100.0  
Gross profit     11,818   5.5     10,041   4.2  
Operating expenses                      
  Selling     2,663   1.2     2,708   1.1  
  General and administrative     4,330   2.0     4,496   1.9  
  Warehousing and technical support     714   0.3     734   0.3  
   
 
 
 
 
Total operating expenses     7,707   3.6     7,938   3.3  
   
 
 
 
 
Operating income     4,111   1.9     2,103   0.9  
Other expense     (861 ) (0.4 )   (583 ) (0.2 )
   
 
 
 
 
Pre-tax income   $ 3,250   1.5 % $ 1,520   0.7 %
   
 
 
 
 

        Wireless is comprised of ACC and Quintex, both subsidiaries of the Company.

20



Net Sales

        Net sales increased $23,773, or 11.0% to $240,335 for the three months ended February 29, 2004, from 2003. Unit sales of wireless handsets increased by approximately 67,000 units for the three months ended February 29, 2004, or 5.6%, to approximately 1,258,000 units from 1,191,000 units in 2003. This increase was primarily due to new product introductions of camera phones with CDMA 1x technology. The average selling price of the Company's handsets increased to $179 per unit for the three months ended February 29, 2004 from $171 per unit in 2003. This increase was due to higher selling prices of newly-introduced models, such as the camera phone. The Company expects selling prices for digital phones to increase as enhancements in digital technology expand digital capabilities.

        Net sales were also impacted by a decrease in sales incentives expense of $2,442, net of reversals of $676. This decrease was primarily due to a decline in sales incentive programs with large wireless carriers as compared to the prior year. Sales incentive programs are expected to continue as the Company introduces new technology and products. The Company expects, due to market conditions, customer consolidation and planned introductions of new products, it could experience higher sales incentives expense in the future.

Gross Profit

        Gross profit margins decreased to 4.2% for the three months ended February 29, 2004 from 5.5% in 2003, primarily due to a decline in margins of older phone models. As a result of increased price competition within the Wireless industry, older phone models are sold at lower prices due to short product life cycles and are negatively impacted by introductions of new phones with enhanced technology. The declining margins achieved on older phone models was offset by margins achieved on new product introductions with enhanced technologies, such as the camera phone. In addition, the decline in gross margin was offset by a $2,442 decrease in sales incentive expense, net of reversals of $676.

        No inventory write-downs were recorded by the Company during the first quarter of 2004 or 2003. At February 29, 2004, the Company had on hand approximately 15,500 units of previously written-down inventory which, after write-down, had an approximate extended value of $900. The Company plans to sell these items to its existing customers during the year. The Company expects that as new products are introduced, existing models on hand are effected by price competition from our competitors and demand by our customers, it could experience write- downs in the future.

        Gross margins included reimbursements from a vendor for software upgrades on sold inventory of $49 and $812 for the three months ended February 28, 2003 and February 29, 2004, respectively. The increase in upgrade reimbursements is due to the timing of product enhancements, and these reimbursements could fluctuate in the future depending on the amount of technology upgraded into each product. Without these reimbursements, gross margins would have been lower by 0.02% and 0.34% for the three months ended February 28, 2003 and February 29, 2004, respectively. On occasion, the Company negotiates to receive price protection in the event the selling price to its customers is less than the purchase price from the vendor. No such price protection was recorded by the Company during the first quarter of fiscal 2003 or 2004.

Operating Expenses

        Operating expenses increased $231 for the three months ended February 29, 2004 as compared to 2003. However, as a percentage of net sales, operating expenses decreased to 3.3% during three months ended February 29, 2004, compared to 3.6% in 2003.

21


        Selling expenses increased $45 for the three months ended February 29, 2004 compared to 2003, primarily as a result of:

        General and administrative expenses increased $166 for the three months ended February 29, 2004 compared to 2003 primarily as a result of:

        Warehousing and technical support expense remained consistent for the three months ended February 29, 2004 as compared to the similar period in the prior year. The minimal increase in warehouse and technical support expense of $20 was primarily due to an increase in direct labor as a result of a rise in employee wages.

Pre-Tax Income

        As a result of the decline in gross margins partially offset by increased sales and improved operating expense efficiency, pre-tax income for the three months ended February 29, 2004 was $1,520, compared to $3,250 for 2003.

        Management believes that the wireless industry is extremely competitive and that this competition could affect gross margins and the carrying value of inventories in the future as new competitors enter the marketplace. The Company competes against suppliers with significantly greater financial resources and who are able to offer more extensive advertising and greater promotions than the Company does. This pressure from increased competition is further enhanced by the consolidation of many of Wireless' customers into a smaller group, dominated by only a few, large customers. Also, timely delivery and carrier acceptance of new product could affect our quarterly performance. Our suppliers have to continually add new products in order for Wireless to improve its margins and gain market share. These new products require extensive testing and software development which could delay entry into the market and affect our sales in the future. In addition, given the anticipated emergence of new technologies in the wireless industry, the Company will need to sell existing inventory quantities of current technologies to avoid further write-downs to market.

22



Electronics Results

Three months ended February 28, 2003 compared to three months ended February 29, 2004

        The following table sets forth for the periods indicated certain statements of income data for the Electronics Group expressed as a percentage of net sales:

 
  Three Months Ended
 
 
  February 28, 2003
  February 29, 2004
 
Net sales:                      
  Mobile electronics   $ 51,090   63.7 % $ 49,549   36.3 %
  Consumer electronics     16,495   20.6     36,470   26.7  
  Sound     12,544   15.6     50,530   37.0  
  Other     127   0.1        
   
 
 
 
 
    Total net sales     80,256   100.0     136,549   100.0  

Gross profit

 

 

13,599

 

16.9

 

 

21,320

 

15.6

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 
  Selling     3,800   4.7     6,187   4.5  
  General and administrative     5,795   7.2     9,807   7.2  
  Warehousing and technical support     642   0.8     905   0.7  
   
 
 
 
 
Total operating expenses     10,237   12.7     16,899   12.4  
   
 
 
 
 

Operating income

 

 

3,362

 

4.2

 

 

4,421

 

3.2

 
Other income (expense)     (872 ) (1.1 )   733   0.5  
   
 
 
 
 
Pre-tax income   $ 2,490   3.1 % $ 5,154   3.8 %
   
 
 
 
 

Net Sales

        Net sales increased $56,293, or 70.1%, to $136,549 for the three months ended February 29, 2004, from net sales of $80,256 in 2003. Sales of Audiovox Germany accounted for $15,733, or 27.9%, of this increase as a result of the Recoton acquisition in July 2003. Sales for Consumer electronics increased $19,975 (121%) for the three months ended February 29, 2004 from 2003, primarily from sales of DVD players and flat panel TV's. These products were introduced during fiscal 2003 and strong customer demand has caused sales activity to increase during fiscal 2004. Sound sales increased $37,986 (303%) as a result of the Jensen®, Magnate®, Mac Audio®, Heco®, Acoustic Research® and Advent®, trademarks which usage right was acquired during the Recoton acquisition. In addition, sound sales were positively impacted by increased sales in the satellite radio product line. Mobile electronics sales decreased $1,541 (3%) for the three months ended February 29, 2004 from 2003. The decline in mobile video is due to a decrease in post holiday sales of video's in a bag as compared to the prior year. The Company does not expect the decrease in mobile video sales to be a future trend.

        Net sales of the Company's Malaysian subsidiary decreased from last year by approximately $951 primarily from a shift in the Malaysia business environment. Specifically, the OEM market in Malaysia has declined as more automakers are incorporating electronic products into vehicles at the factory rather than being sold in the aftermarket. In addition, importing of foreign products has become more prevalent, therefore reducing domestic distribution within Malaysia. This decrease was offset by a $682 increase in the Company's Venezuela subsidiary due to the temporary shut-down of operations during the first quarter of fiscal 2003 attributable to political and economic instability. The operations in Venezuela were re-opened subsequent to the first quarter of fiscal 2003 and the political and economic environment has since improved, resulting in fiscal 2004 sales to increase.

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        Sales incentives expense decreased $691, net of reversals of $2,424, to $543, due to increased reversals offset by higher sales volume. Specifically, reversals for unearned sales incentives for the three months ended February 29, 2004 increased $1,370 as compared to 2003 due to customers not purchasing the minimum quantities of product required during the program time period as a result of lower than expected post holiday sales. In addition, reversals for unclaimed sales incentives for 2004 increased $323 to $1,054 as compared to 2003. The Company believes that the reversal of earned but unclaimed sales incentives upon the expiration of the claim period is a disciplined, rational, consistent and systematic method of reversing unclaimed sales incentives. The majority of sales incentive programs are calendar-year programs. Accordingly, the program ends on the month following the fiscal year end and the claim period expires one year from the end of the program. The above reversals were partially offset by an increase in sales as many sales incentive programs are based on a percentage of sales. These sales incentive programs are expected to continue and will either increase or decrease based upon competition and customer demands.

Gross Profit

        Gross profit margins decreased to 15.6% for the three months ended February 29, 2004 compared to 16.9% in 2003. This decrease was due to an increase in consumer electronic products sold through consumer channels, which carry a lower gross margin as opposed to other product lines. Specifically, gross margins were adversely impacted by the sale of older DVD players, flat panel TV's and FRS radios as the selling price for these older items has declined as a result of new product introductions within these categories. This decrease was offset by margins achieved in Audiovox Germany from Jensen®, Magnate®, Mac Audio®, Heco®, Acoustic Research® and Advent® products as well as an increase in Code-Alarm margins due to a decline in production and warranty costs. In addition, there was a $691 decrease in sales incentive expense, net of reversals of $2,424, primarily due to increased reversals.

Operating Expenses

        Operating expenses increased $6,662 for the three months ended February 29, 2004 from 2003, a 65.1% increase compared to 2003. The AEC group (Audiovox Electronics, Code-Alarm and American Radio) accounted for $2,626 or 39.4% of the 2004 increase. The international group (Audiovox Germany, Malaysia and Venezuela) accounted for $4,036 or 60.6% of the 2004 increase which was primarily due to the operations of Audiovox Germany, which commenced as a result of the Recoton acquisition. As a percentage of net sales, operating expenses decreased to 12.4% for the three months ended February 29, 2004 compared to 12.7% in 2003.

        Selling expenses increased $2,387 during the first quarter of 2004 of which $1,111 (46.5%) and $1,276 (53.5%) was attributable to the AEC group and international group, respectively.

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        General and administrative expenses increased $4,012 of which $1,273 (31.7%) and $2,739 (68.3%) was attributable to the AEC group and international group, respectively.

        Warehousing and technical support increased $263, or 41.0%. This increase was primarily due to a $226 increase in direct labor and payroll taxes due to the hiring of additional employees and includes $73 of Audiovox Germany expenses. In addition, the increase in warehouse and technical support is due to the hiring of additional engineers as the increase in sales volume and product complexity has resulted in the Company providing added customer service.

Pre-Tax Income

        As a result of increased sales due to new product introductions and the Recoton acquisition, improved operating expense efficiency and increased other income due to royalties received for the Jensen trademarks offset by a decline in gross margins, pre-tax income for the three months ended February 29, 2004 was $5,154 compared to $2,490 for 2003. During the three months ended February 29, 2004, the corporate allocation to the Electronics Segment was reduced by $618 in order to offset costs incurred in the Company's Venezuelan subsidiary that were considered to be a consolidated cost of the Company.

        The Company believes that the Electronics Group has an expanding market with a certain level of volatility related to both domestic and international new car sales and general economic conditions. Also, all of its products are subject to price fluctuations which could affect the carrying value of inventories and gross margins in the future.

Liquidity and Capital Resources

Cash Flows, Commitments and Obligations

        The Company has historically financed its operations primarily through a combination of available borrowings under bank lines of credit and debt and equity offerings. The amount of financing is dependent primarily on the collection of accounts receivable and purchase of inventory. As of February 29, 2004, the Company had working capital of $307,799 which includes cash of $4,981 as compared with working capital of $304,354 and cash of $4,702 at November 30, 2003.

        Operating activities provided cash of $140 for the three months ended February 29, 2004 compared to $77,181 in 2003. The decrease in cash provided by operating activities as compared to the prior year is primarily due to the increase in Wireless inventory. Net income provided $1,870 for operating activities for the three months ended February 29, 2004 compared to $1,208 in 2003.

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        The following significant fluctuations in the balance sheet impacted cash flow from operations:

        Investing activities provided $2,145 during the three months ended February 29, 2004, primarily from the distribution from an equity investee, proceeds from the reduction of purchase price of acquired business, partially offset by the purchases of property, plant and equipment.

        Financing activities used $2,182 during the three months ended February 29, 2004, primarily from payments of debt, partially offset by net borrowings of bank obligations.

        The Company's principal source of liquidity is its revolving credit agreement, which expires July 27, 2004. The Company is currently negotiating with the bank to extend this agreement for an additional three years. At February 29, 2004, the credit agreement provided for $150,000 of available credit, including $10,000 for foreign currency borrowings. Under the credit agreement, the Company may obtain credit through direct borrowings and letters of credit. The obligations of the Company under the credit agreement are guaranteed by certain of the Company's subsidiaries and is secured by accounts receivable, inventory and the Company's shares of ACC. The Company's ability to borrow under its credit facility is a maximum aggregate amount of $150,000, subject to certain conditions, based upon a formula taking into account the amount and quality of its accounts receivable and inventory. The credit agreement also allows for commitments up to $50,000 in forward exchange contracts.

        The credit agreement contains several covenants requiring, among other things, minimum levels of pre-tax income and minimum levels of net worth. Additionally, the agreement includes restrictions and limitations on payments of dividends, stock repurchases and capital expenditures.

        The Company was in compliance with all of its bank covenants at February 29, 2004 and November 30, 2003. There can be no assurance that the Company will not violate covenants in the future, therefore, resulting in amounts outstanding to be payable upon demand. While the Company has historically been able to obtain waivers for violations, there can be no assurance that future

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negotiations with its lenders would be successful. This credit agreement has no cross covenants with other credit facilities.

        The Company also has revolving credit facilities in Malaysia and Germany to finance additional working capital needs. The Malaysian credit facility is partially secured by the Company under two standby letters of credit and are payable upon demand or upon expiration of the standby letters of credit. The obligations of the Company under the Malaysian credit facilities are secured by the property and building in Malaysia owned by Audiovox Communications Sdn. Bhd. The German credit facility consists of accounts receivable factoring up to 16,000 Euros and a working capital facility, secured by accounts receivable and inventory, up to 5,000 Euros. The German and Malaysia facilities are renewable on an annual basis.

        The Company has guaranteed the borrowings of one of its 50%-owned equity investees (GLM) at a maximum of $300. During fiscal 2003, the Company adopted FIN 45, "Guarantors Accounting and Disclosure Requirements for Guarantors, Including Guarantees of Indebtedness of Others" (FIN 45). The Company has not modified this guarantee after December 31, 2002. No liability has been recorded for this guarantee on the accompanying consolidated financial statements.

        The Company has certain contractual cash obligations and other commercial commitments which will impact its short and long-term liquidity. At February 29, 2004, such obligations and commitments are as follows:

 
  Payments Due By Period
Contractual Cash
Obligations

  Total
  Less than
1 Year

  1-3
Years

  4-5
Years

  After
5 Years

Capital lease obligations   $ 13,514   $ 553   $ 1,118   $ 1,158   $ 10,685
Operating leases     13,605     3,913     5,890     3,693     109
   
 
 
 
 
Total contractual cash obligations   $ 27,119   $ 4,466   $ 7,008   $ 4,851   $ 10,794
   
 
 
 
 
 
  Amount of Commitment
Expiration per period

Other Commercial
Commitments

  Total
Amounts
Committed

  Less than
1 Year

  1-3 Years
  4-5 Years
  Over
5 years

Lines of credit   $ 40,599   $ 40,599                
Standby letters of credit     2,294     2,294                
Guarantees     300     300                
Debt     19,791     2,555   $ 4,857   $ 12,379  
Commercial letters of credit     715     715          
   
 
 
 
 
Total commercial commitments   $ 63,699   $ 46,463   $ 4,857   $ 12,379  
   
 
 
 
 

        The Company regularly reviews its cash funding requirements and attempts to meet those requirements through a combination of cash on hand, cash provided by operations, available borrowings under bank lines of credit and possible future public or private debt and/or equity offerings. At times, the Company evaluates possible acquisitions of, or investments in, businesses that are complementary to those of the Company, which transaction may requires the use of cash. The Company believes that its cash, other liquid assets, operating cash flows, credit arrangements, access to equity capital markets, taken together, provide adequate resources to fund ongoing 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.

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No assurance can be given that additional financing will be available in the future or that if available, such financing will be obtainable on terms favorable to the Company when required.

Treasury Stock

        The Company's Board of Directors approved the repurchase of 1,563,000 shares of the Company's Class A common stock in the open market under a share repurchase program (the Program). No shares were purchased under the Program during fiscal 2003 or fiscal 2004. As of November 30, 2003 and February 29, 2004, 1,072,737 and 1,070,957 shares were repurchased under the Program at an average price of $7.93 per share for an aggregate amount of $8,511 and $8,497, respectively.

Off-Balance Sheet Arrangements

        The Company does not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.

Related Party Transactions

        The Company has entered into several related party transactions which are described below.

Leasing Transactions

        During 1998, the Company entered into a 30-year capital lease for a building with its principal stockholder and chief executive officer, which is the headquarters of the Wireless operation. Payments on the lease were based upon the construction costs of the building and the then-current interest rates. The effective interest rate on the capital lease obligation is 8%.

        During 1998, the Company entered into a sale/leaseback transaction with its principal stockholder and chief executive officer for $2,100 of equipment, which has been classified as an operating lease. The lease has monthly payments of $34 and expires on March 31, 2005. No gain or loss was recorded on the transaction as the book value of the equipment equaled the fair market value.

        The Company also leases certain facilities from its principal stockholder. Rentals for such leases are considered by management of the Company to approximate prevailing market rates. Total lease payments required under the leases for the five-year period ending February 29, 2009 and thereafter are $5,049.

Transactions with Toshiba Corporation

        Toshiba Corporation (Toshiba), a 25% shareholder of ACC, is a major supplier of ACC products. Inventory on hand at November 30, 2003 and February 29, 2004 purchased from Toshiba approximated $22,405 and $35,288, respectively. At November 30, 2003 and February 29, 2004, the Company recorded receivables from Toshiba aggregating approximately $709 and $829, respectively, primarily for software upgrades.

        At November 30, 2003 and February 29, 2004, the Company had inventory on hand in the amount of $18,841 and $28,240, respectively, which were purchased from Toshiba and have been recorded in inventory and accounts payable on the accompanying consolidated balance sheet. The payment terms are such that the payable is non-interest bearing and is payable in accordance with the terms established in the distribution agreement between the parties, which is 30 days.

        On occasion, the Company negotiates to receive price protection in the event the selling price to its customers is less than the purchase price from Toshiba. The Company will record such price protection, if necessary, at the time of the sale of the units.

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Recent Accounting Pronouncements

        In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51", which addresses consolidation by business enterprises of variable interest entities (VIEs) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest.    In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. The adoption of FIN 46 did not have an impact on the Company's consolidated financial statements.

        In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition" (SAB No. 104), which codifies, revises and rescinds certain sections of SAB No. 101, "Revenue Recognition", in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on our consolidated results of operations, consolidated financial position or consolidated cash flows.

Forward-Looking Statements

        Except for historical information contained herein, statements made in this Form 10-Q that would constitute forward-looking statements may involve certain risks such as our ability to keep pace with technological advances, significant competition in the wireless, mobile and consumer electronics businesses, quality and consumer acceptance of newly-introduced products, our relationships with key suppliers and customers, market volatility, non-availability of product, excess inventory, price and product competition, new product introductions, the uncertain economic and political climate in the United States and throughout the rest of the world and the potential that such climate may deteriorate further and other risks detailed in the Company's Form 10-K for the fiscal year ended November 30, 2003. These factors, among others, may cause actual results to differ materially from the results suggested in the forward-looking statements. Forward-looking statements include statements relating to, among other things:

        These forward-looking statements are subject to numerous risks, uncertainties and assumptions about the Company including, among other things:

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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 February 29, 2004, which are recorded at fair value of $9,512 and $9,977, respectively, include an unrealized gain of $1,831 and $1,497, respectively, and have exposure to price risk. This risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in prices quoted by stock exchanges and amounts to $951 and $998 as of November 30, 2003 and February 29, 2004, respectively. Actual results may differ.

Interest Rate Risk

        The Company's bank loans expose earnings to changes in short-term interest rates since interest rates on the underlying obligations are either variable or fixed for such a short period of time as to effectively become variable. The fair values of the Company's bank loans are not significantly affected by changes in market interest rates.

Foreign Exchange Risk

        In order to reduce the risk of foreign currency exchange rate fluctuations, the Company hedges transactions denominated in a currency other than the functional currencies applicable to each of its various entities. The instruments used for hedging are forward contracts with banks. The Company does not obtain collateral to support financial instruments, but monitors the credit standing of the financial institution. The changes in market value of such contracts have a high correlation to price changes in the currency of the related hedged transactions. There were no hedge transactions at

30



November 30, 2003. Intercompany transactions with foreign subsidiaries and equity investments are typically not hedged. At February 29, 2004, the Company had foreign currency contracts outstanding that have a notional amount of $1,643. The difference between the fair market value of the foreign currency contracts and the related commitments at inception and the fair market value of the contracts and the related commitments at February 29, 2004 was $27. The foreign currency included in these forward contracts consists of the Euro and expire during March 2004.

        The Company is subject to risk from changes in foreign exchange rates for its subsidiaries and equity investments that use a foreign currency as their functional currency and are translated into U.S. dollars. These changes result in cumulative translation adjustments which are included in accumulated other comprehensive income. On November 30, 2003 and February 29, 2004, the Company had translation exposure to various foreign currencies with the most significant being the Euro, Malaysian ringgit, Thailand baht and Canadian dollar. The potential loss resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates, as of November 30, 2003 and February 29, 2004, amounts to $1,195 and $899, respectively. Actual results may differ.

ITEM 4    CONTROLS AND PROCEDURES

        Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that (i) our disclosure controls and procedures were effective as of February 29, 2004, and (ii) no change in internal control over financial reporting occurred during the quarter ended February 29, 2004 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1    LEGAL PROCEEDINGS

        The Company is currently, and has in the past been, a party to routine litigation incidental to its business. From time to time, the Company receives notification of alleged violations of registered patent holders' rights. The Company has either been indemnified by its manufacturers in these matters, obtained the benefit of a patent license or has decided to vigorously defend such claims.

        The Company and Audiovox Communications Corp. (ACC), along with other manufacturers of wireless phones and cellular service providers, were named as defendants in two class action lawsuits alleging non-compliance with FCC ordered emergency 911 call processing capabilities. These lawsuits were consolidated and transferred to the United States District Court for the Northern District of Illinois, which in turn referred the cases to the Federal Communications Commission ("FCC") to determine if the manufacturers and service providers are in compliance with the FCC's order on emergency 911 call processing capabilities. The Company and ACC intend to vigorously defend this matter. However, no assurances regarding the outcome of this matter can be given at this point in the litigation.

        During 2001, the Company, along with other suppliers, manufacturers and distributors of hand-held wireless telephones, was named as a defendant in five class action lawsuits alleging damages relating to exposure to radio frequency radiation from hand-held wireless telephones. These class actions have been consolidated and transferred to a Multi-District Litigation Panel before the United States District Court of the District of Maryland. On March 5, 2003, Judge Catherine C. Blake of the United States District Court for the District of Maryland granted the defendants' consolidated motion to dismiss these complaints. Plaintiffs have appealed to the United States Circuit Court of Appeals, Fourth Circuit. The appeal pending before the United States Circuit Court of Appeals, Fourth Circuit in the consolidated class action lawsuits (Pinney, Farina, Gilliam, Gimpelson and Naquin) against ACC and other suppliers, manufacturers and distributors as well as wireless carriers of hand-held wireless telephones alleging damages relating to risk of exposure to radio frequency radiation from the wireless telephones has not yet been heard. It is anticipated that the appeal will be heard in June 2004.

        During the third quarter of fiscal 2003, a certain Venezuelan employee, who is also a minority shareholder in Audiovox Venezuela, submitted a claim to the Venezuela Labor Court for severance compensation of approximately $560. The Court approved the claim and it was paid and expensed by Audiovox Venezuela in the third quarter of fiscal 2003. The Company is challenging the payment of this claim and will seek reimbursement from the Venezuelan shareholder or the Company's insurance carrier.

        The Company does not expect the outcome of any pending litigation, separately and in the aggregate, to have a material adverse effect on its business, consolidated financial position or results of operations.

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ITEM 6    EXHIBITS AND REPORTS ON FORM 8-K


Exhibit Number

  Description

31.1

 

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (furnished herewith)

31.2

 

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (furnished herewith)

32.1

 

Certification Pursuant to Rule 13a-14(a) And Rule 15d-14(a) Section 1350, Chapter 63 of Title 18 of The United State Code, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (furnished herewith)

32.2

 

Certification Pursuant to Rule 13a-14(a) And Rule 15d-14(a) Section 1350, Chapter 63 of Title 18 of The United State Code, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (furnished herewith)

        During the first quarter ended February 29, 2004, the Company filed one (1) report on Form 8-K, dated and filed on February 25, 2004, reporting that two (2) press releases were issued. The first press release announced the signing of a non-binding letter of intent to sell a controlling interest in the Company's wireless subsidiary, Audiovox Communications Corp., and the second press release announced results for the fourth quarter and fiscal year ended November 30, 2003.

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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

 

 

By:

/s/  
CHARLES M. STOEHR      
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer

Dated: October 7, 2004

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QuickLinks

I N D E X
PART I—FINANCIAL INFORMATION
AUDIOVOX CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share and per share data)
AUDIOVOX CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations For the Three Months Ended February 28, 2003 and February 29, 2004 (In thousands, except share and per share data) (unaudited)
AUDIOVOX CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Three Months Ended February 28, 2003 and February 29, 2004 (In thousands) (unaudited)
AUDIOVOX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Three Months Ended February 28, 2003 and February 29, 2004 (Dollars in thousands, except share and per share data)
PART II—OTHER INFORMATION
SIGNATURES