UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

x                               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

or

o                                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                            to                           

Commission File No.                           

InfoSonics Corporation

(Exact name of registrant as specified in its charter)

 

5880 Pacific Center Blvd
San Diego, CA 92121

(Address of principal executive offices including zip code)

858-373-1600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x  Yes    o  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of  registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). o  Yes    x  No

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $9,255,200. This calculation is based upon the closing price of $4.60 of the stock on June 30, 2004 as reported by the American Stock Exchange. Without asserting that any director or executive officer of the registrant, or the beneficial owner of more than five percent of the registrant’s common stock, is an affiliate, the shares of which they are the beneficial owners have been deemed to be owned by affiliates solely for this calculation.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:  5,212,000 shares of our common stock were issued and outstanding as of March 31, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes.

None

 

[TO BE UPDATED]
InfoSonics Corporation
Form 10-K for the Year Ended December 31, 2004

Table of Contents

		Page No.
	PART I
Item 1.	Business		1
Item 2.	Properties		15
Item 3.	Legal Proceedings		15
Item 4.	Submission of Matters to a Vote of Security Holders		15
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		16
Item 6.	Selected Financial Data		17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 8.	Financial Statements and Supplementary Data		24
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		24
Item 9A.	Controls and Procedures		24
Item 9B	Other Information		25
	PART III
Item 10.	Directors and Executive Officers of Registrant		26
Item 11.	Executive Compensation		28
Item 12.	Security Ownership of Certain Beneficial Owners and Management		32
Item 13.	Certain Relationships and Related Transactions		33
Item 14.	Principal Accounting Fees and Services		35
	Part IV
Item 15.	Exhibits, Financial Statement Schedules		36
Signatures			37
Exhibits
Rule 13a-14(a)/15d-14(a) Certification of CEO
Rule 13a-14(a)/15d-14(a) Certification of CFO
Section 1350 Certifications of CEO and CFO

 

PART I

Item 1.        Business

Company Overview

InfoSonics is one of the largest distributors of wireless handsets and accessories in the United States and Latin America. We distribute products of several key manufacturers, including Audiovox, Kyocera, LG, Motorola, Nokia, Samsung, VK Mobile, and others. As an integral part of our customers supply chain, we perform value added services and customization processes. Our distribution services include the purchasing, marketing, selling, software customization, warehousing, light assembly, programming, packing, shipping and delivery of handsets for wireless telecommunications from manufacturers to carriers (wireless network operators), agents, resellers, distributors, independent dealers and retailers in the United States and Latin America.

In October 2004, we transferred to an unrelated third party, leases for six of our ten mall-based retail kiosk locations, which had been operated by our wholly owned subsidiary, Axcess Mobile, LLC. The remaining four locations were closed in October 2004. Combined, the retail locations accounted for, and 3% of our revenue for the year ended December 31, 2004. For the fiscal years ended December 31, 2003, and December 31, 2002, approximately 7% and 8%, respectively, of our total revenue was derived from our retail kiosk activities. The decision to discontinue our retail kiosk business was based on our strategy to place a greater emphasis on our core business of distribution and also based on the fact that our retail kiosk business was incurring losses. Please see Note 3 to our consolidated financial statements, included in this report.

Financial information about industry segments.   During fiscal 2004, the Company had two reportable segments that are separate business units, wholesale distribution and retail kiosks. For the first nine months of fiscal 2004, we owned and operated a retail kiosk business, then in October we discontinued those operations, to focus our efforts on our wholesales distribution activities. Please see Note 11 to our consolidated financial statements, included in this report.

Distribution.   We operate distribution hubs in San Diego, California and Miami, Florida. The San Diego facility primarily serves the needs of our West Coast and Midwest customers, and the Florida location services customers primarily on the East Coast and in Latin America. Our distribution services include the purchasing, marketing, selling, software customization, warehousing, light assembly, programming, packing, shipping, and delivery of handsets for wireless telecommunications from leading manufacturers to carriers, agents, resellers, distributors, independent dealers and retailers in the United States and Latin America. We have wholly owned subsidiaries in Latin America which conduct some of our business activities in their respective regions of Latin America. These subsidiaries are included in our consolidated financial statements. Our services are intended to provide value to wireless handset manufacturers and wireless network operators by allowing them to focus on their core businesses of manufacturing and service provision, respectively.

We continually review and evaluate wireless telecommunications products in determining our mix of offered products and seek to acquire distribution rights for products that we believe have the potential for significant market penetration. Through the distribution of wireless telecommunications products, we attempt to assist manufacturers in achieving their business objectives of increasing unit sales volume and market share at the points of sale.

Overview of Wireless Telecommunications Industry

Rapid technical developments over the last few years within the wireless telecommunications industry have allowed wireless subscribers to talk, send and receive text messages, send and receive e-mails, capture and transmit digital images, send and receive multimedia messages, play games, and browse the Internet using an all-in-one wireless device. Wireless devices and services also are being used around the world to

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provide monitoring, point-of-sale transaction processing, inter-device communications, local area networks, location monitoring, sales force automation, and customer relationship management. While there is currently not a demand for these advanced devices in the markets we service, as the demand develops in our markets, we believe that end-users will desire to take advantage of new services and will need handsets with updated technology. As a result of these advances and new services, we believe that the handset replacement cycle will continue to shorten, as consumers adapt to the utilization of these services, which will require new and more advanced handsets, thus leading to increased handset sales. As these new services and the respective handsets become available in the markets we service, we will distribute the handsets in the same manner that we currently distribute. In addition to our current distribution services; we engage in technical and other high-level customization services in order to prepare products for the different network operators. We expect that these customization upgrades and services will result in innovative new products, which we will be able to offer to current and new customers in the geographic regions we operate. They will be additives or replacements for the products we currently market.

The wireless telecommunications industry and its participants have experienced a number of trends in recent years, including

·       the change in focus from subscriber acquisition to subscriber retention and expansion of service offerings;

·       consolidation among wireless network operators;

·       the convergence of the telecommunications, data and media domains;

·       advances in and development of next generation systems technology, including increasing bandwidth;

·       the increasing variety of handset forms and configurations;

·       new manufacturers and wireless service resellers; and

·       the increasing affordability of wireless airtime.

According to U.S. Bancorp Piper Jaffray in its 2005 Global Wireless Handset Report dated February 2005, the worldwide mobile subscriber base is estimated to double from approximately 1.1 billion subscribers in 2002 to in excess of 2.1 billion by 2006. The North American subscriber base is expected to increase from approximately 150 million in 2002 to approximately 245 million by 2006. The Latin American subscriber base is expected to increase from approximately 100 million in 2002 to approximately 240 million by 2006. The chart below summarizes these and other growth trends.

Worldwide Mobile Subscriber Forecast 
(Estimated Subscribers in Millions)

		2002		2003		2004		2005 E		2006 E
North America		150		165		190		220		245
Year over Year Growth				10	%	15	%	11	%	11	%
Net Additions				15		25		20		25
Latin America		100		125		165		210		240
Year over Year Growth				25	%	32	%	27	%	14	%
Net Additions				25		40		45		30
Total Subscribers		1,141		1,386		1,647		1,935		2,164
Year over Year Growth				21	%	19	%	17	%	12	%
Net Additions				245		261		288		229

Source: U.S. Bancorp Piper Jaffray

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In addition to the continued growth of subscribers worldwide, the growth rate of number of handsets sold is expected to increase. Users are expected to accelerate the replacement of handsets due to a number of factors including the normal end of life of older handsets in the population, the existence of phone number portability that began in late November    2003, and the continued addition of advanced features such as color screens, advanced messaging, embedded cameras, more reliable and powerful chipsets and a higher speed access rate to the internet, opening a variety of business and personal applications to the consumer. The chart below summarizes the estimated sales of handsets for the periods indicated.

Mobile Phone Forecast
(Estimated Number of Handsets in Millions)

		2002		2003		2004		2005 E				2006 E
North America Sales		79		112		123			132				137
Year over year %				42	%	10	%		7	%			4	%
Replacement sales %		80	%	83	%	76	%		85	%			84	%
Latin America Sales		28		34		62			72				74
Year over year %				21	%	82	%		16	%			3	%
Replacement sales %		54	%	35	%	34	%		38	%			62	%
Worldwide Handset Sales		433		527		660			735				787
Year over year %				22	%	25	%		11	%