UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2007
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-28839
Audiovox Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 231-7750
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer as defined in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Number of shares of each class of the issuer's common stock outstanding as of
the latest practicable date.
Class As of January 9, 2008
-------------------- ---------------------
Class A Common Stock 20,593,660 Shares
Class B Common Stock 2,260,954 Shares
1
Audiovox Corporation
INDEX
Page
----
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets at November 30, 2007 and
February 28, 2007............................................ 3
Consolidated Statements of Operations for the
Three and Nine Months Ended November 30, 2007 and 2006....... 5
Consolidated Statements of Cash Flows for the
Nine Months Ended November 30, 2007 and 2006................. 6
Notes to Consolidated Financial Statements..................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................. 40
ITEM 4. CONTROLS AND PROCEDURES........................................ 40
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................ 41
ITEM 1A. RISK FACTORS.................................................. 41
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS................................................ 41
ITEM 6. EXHIBITS....................................................... 42
SIGNATURES............................................................. 43
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Audiovox Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
November 30, February 28,
2007 2007
--------------- -------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents .................................................. $ 20,669 $ 15,473
Short-term investments ..................................................... 8,277 140,872
Accounts receivable, net ................................................... 157,664 86,003
Inventory .................................................................. 147,830 104,972
Receivables from vendors ................................................... 26,701 13,935
Prepaid expenses and other current assets .................................. 12,652 11,427
Income tax receivable ...................................................... 581 3,518
Deferred income taxes ...................................................... 2,705 2,492
-------- --------
Total current assets ...................................................... 377,079 378,692
Investment securities ....................................................... 14,353 13,179
Equity investments .......................................................... 13,064 11,353
Property, plant and equipment, net .......................................... 21,181 18,019
Goodwill .................................................................... 40,009 17,514
Intangible assets ........................................................... 58,101 57,874
Deferred income taxes ....................................................... 2,503 1,858
Other assets ................................................................ 649 631
-------- --------
Total assets .............................................................. $526,939 $499,120
======== ========
See accompanying notes to consolidated financial statements.
3
Audiovox Corporation and Subsidiaries
Consolidated Balance Sheets, continued
(In thousands, except share data)
November 30, February 28,
2007 2007
---------------- --------------
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................................................... $ 39,664 $ 34,344
Accrued expenses and other current liabilities ................................. 25,319 26,564
Accrued sales incentives ....................................................... 14,937 7,410
Bank obligations ............................................................... 3,929 2,890
Current portion of long-term debt .............................................. 79 1,524
------------ ------------
Total current liabilities ..................................................... 83,928 72,732
Long-term debt .................................................................. 2,236 5,430
Other tax liabilities ........................................................... 4,450 3,347
Capital lease obligation ........................................................ 5,625 5,676
Deferred compensation ........................................................... 8,618 7,573
------------ ------------
Total liabilities ............................................................. 104,857 94,758
Commitments and contingencies
Stockholders' equity:
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, 22,414,212 and
22,005,346 shares issued, 20,593,660 and 20,312,299 shares
outstanding at November 30, 2007 and February 28, 2007, respectively ........ 224 220
Class B convertible, $.01 par value; 10,000,000 shares authorized,
2,260,954 shares issued and outstanding ..................................... 22 22
Paid-in capital ................................................................ 275,830 271,056
Retained earnings .............................................................. 161,873 151,363
Accumulated other comprehensive income (loss) .................................. 2,537 (1,320)
Treasury stock, at cost, 1,820,552 and 1,693,047 shares of Class A
common stock at November 30, 2007 and February 28, 2007,
respectively ................................................................. (18,404) (16,979)
------------ ------------
Total stockholders' equity ...................................................... 422,082 404,362
------------ ------------
Total liabilities and stockholders' equity ...................................... $ 526,939 $ 499,120
============ ============
See accompanying notes to consolidated financial statements.
4
Audiovox Corporation and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended November 30, 2007 and 2006
(In thousands, except share and per share data)
(unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
---------------------------- -----------------------------
2007 2006 2007 2006
------------ ------------ ----------- -------------
Net sales .......................................................... $ 183,563 $ 151,833 $ 460,085 $ 360,556
Cost of sales ...................................................... 148,572 126,462 373,431 299,332
------------ ------------ ------------ ------------
Gross profit ....................................................... 34,991 25,371 86,654 61,224
------------ ------------ ------------ ------------
Operating expenses:
Selling ........................................................... 9,828 8,114 26,534 21,626
General and administrative ........................................ 16,948 13,649 45,153 36,682
Engineering and technical support ................................. 2,600 1,888 7,010 5,418
------------ ------------ ------------ ------------
Total operating expenses ......................................... 29,376 23,651 78,697 63,726
------------ ------------ ------------ ------------
Operating income (loss) ............................................ 5,615 1,720 7,957 (2,502)
------------ ------------ ------------ ------------
Other income (expense):
Interest and bank charges ......................................... (723) (429) (2,087) (1,491)
Equity in income of equity investees .............................. 1,011 659 2,927 2,423
Other, net ........................................................ 816 1,118 3,444 4,827
------------ ------------ ------------ ------------
Total other income, net .......................................... 1,104 1,348 4,284 5,759
------------ ------------ ------------ ------------
Income from continuing operations before income taxes .............. 6,719 3,068 12,241 3,257
Income tax (expense) benefit ....................................... (2,039) 780 (3,709) 740
------------ ------------ ------------ ------------
Net income from continuing operations ............................. 4,680 3,848 8,532 3,997
Net income (loss) from discontinued operations, net of tax ......... -- 6 2,111 (576)
------------ ------------ ------------ ------------
Net income ........................................................ $ 4,680 $ 3,854 $ 10,643 $ 3,421
============ ============ ============ ============
Net income (loss) per common share (basic):
From continuing operations ........................................ $ 0.20 $ 0.17 $ 0.38 $ 0.18
From discontinued operations ...................................... -- -- 0.09 (0.03)
------------ ------------ ------------ ------------
Net income per common share (basic) .............................. $ 0.20 $ 0.17 $ 0.47 $ 0.15
============ ============ ============ ============
Net income (loss) per common share (diluted):
From continuing operations ........................................ $ 0.20 $ 0.17 $ 0.38 $ 0.18
From discontinued operations ...................................... -- -- 0.09 (0.03)
------------ ------------ ------------ ------------
Net income per common share (diluted) .............................. $ 0.20 $ 0.17 $ 0.47 $ 0.15
============ ============ ============ ============
Weighted-average common shares outstanding (basic) ................. 22,852,781 22,234,399 22,853,108 22,345,183
============ ============ ============ ============
Weighted-average common shares outstanding (diluted) ............... 22,857,355 22,445,164 22,880,263 22,540,476
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
Audiovox Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended November 30, 2007 and 2006
(In thousands)
(unaudited)
2007 2006
----------- -----------
Cash flows from operating activities:
Net income .......................................................................................... $ 10,643 $ 3,421
Net (income) loss from discontinued operations ...................................................... (2,111) 576
--------- ---------
Net income from continuing operations ............................................................... 8,532 3,997
Adjustments to reconcile net income to net cash used in continuing operating activities:
Depreciation and amortization ...................................................................... 3,782 2,863
Bad debt expense (recovery) ........................................................................ 166 (51)
Equity in income of equity investees ............................................................... (2,927) (2,423)
Non-cash compensation adjustment ................................................................... (212) 231
Non-cash stock based compensation and warrant expense .............................................. 609 432
Loss on disposal of property, plant and equipment .................................................. 14 33
Tax benefit on stock options exercised ............................................................. (1,020) (22)
Changes in operating assets and liabilities (net of assets and liabilities acquired):
Accounts receivable ................................................................................ (62,762) (44,996)
Inventory .......................................................................................... (33,995) 8,562
Receivables from vendors ........................................................................... (12,696) 274
Prepaid expenses and other ......................................................................... 2,602 (2,502)
Investment securities-trading ...................................................................... (1,042) (757)
Accounts payable, accrued expenses, accrued sales incentives and other current liabilities ......... 2,947 12,412
Income taxes payable ............................................................................... 3,132 518
--------- ---------
Net cash used in operating activities .............................................................. (92,870) (21,429)
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment .......................................................... (5,772) (1,917)
Proceeds from sale of property, plant and equipment ................................................. 43 24
Proceeds from distribution from an equity investee .................................................. 1,215 2,589
Proceeds from a liquidating distribution from an available-for-sale security ........................ 645 --
Purchase of short-term investments .................................................................. (13,775) (66,905)
Proceeds from sale of short-term investments ........................................................ 146,255 91,900
Purchase of patents ................................................................................. -- (475)
Purchase of long term investment .................................................................... -- (1,000)
Purchase of acquired businesses, less cash acquired ................................................. (28,387) --
--------- ---------
Net cash provided by investing activities .......................................................... 100,224 24,216
--------- ---------
6
Audiovox Corporation and Subsidiaries
Consolidated Statements of Cash Flows, continued
For the Nine Months Ended November 30, 2007 and 2006
(In thousands)
(unaudited)
2007 2006
------------- ------------
Cash flows from financing activities:
Repayments on bank obligations .................................................... (860) (1,425)
Principal payments on capital lease obligation .................................... (50) (64)
Proceeds from exercise of stock options and warrants .............................. 3,148 1,444
Principal payments on debt ........................................................ (4,240) (1,089)
Repurchase of Class A common stock ................................................ (1,425) (4,155)
Repurchase of preferred stock ..................................................... -- (5)
Tax benefit on stock options exercised ............................................ 1,020 22
-------- --------
Net cash used in financing activities ............................................ (2,407) (5,272)
-------- --------
Effect of exchange rate changes on cash ............................................ 249 83
-------- --------
Net increase (decrease) in cash and cash equivalents ............................... 5,196 (2,402)
Cash and cash equivalents at beginning of period ................................... 15,473 16,280
-------- --------
Cash and cash equivalents at end of period ......................................... $ 20,669 $ 13,878
======== ========
See accompanying notes to consolidated financial statements.
7
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
(1) Basis of Presentation
---------------------
The accompanying unaudited interim consolidated financial statements of
Audiovox Corporation and subsidiaries ("Audiovox" or the "Company") have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and 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 audited
consolidated financial statements and notes thereto contained in the
Company's Form 10-K for the fiscal year ended February 28, 2007. Certain
reclassifications have been made to prior year amounts on the accompanying
balance sheet in order to conform to the current year presentation (see
Note 10).
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, inventory valuation,
fair value of stock based compensation, income taxes, 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 Consolidated Financial Statements in the Company's Form 10-K
for the fiscal year ended February 28, 2007. There have been no changes to
the Company's significant accounting policies subsequent to February 28,
2007, except for the accounting for uncertain tax positions (see Note 10).
The Company has one reportable segment, the Electronics Group, which is
organized by product category. The Electronics Group consists of seven
wholly-owned subsidiaries: American Radio Corp., Audiovox Electronics
Corporation, Audiovox Consumer Electronics, Inc., Audiovox Accessories
Corporation, Audiovox German Holdings GmbH, Audiovox Venezuela, C.A. and
Code Systems, Inc. The Company markets its products under the Audiovox(R)
and other brand names. Unless specifically indicated otherwise, all amounts
and percentages presented in the notes below are exclusive of discontinued
operations.
(2) Accounting for Stock-Based Compensation
---------------------------------------
The Company has various stock based compensation plans, which are more
fully described in Note 1 of the Company's Form 10-K for the fiscal year
ended February 28, 2007.
8
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
Stock-Based Compensation Expense
--------------------------------
The Company recognized stock-based compensation (before deferred income tax
benefits) for awards granted under the Company's Stock Option Plans in the
following line items in the Consolidated Statement of Operations:
Three Months ended Nine Months ended
November 30, November 30,
---------------------- ----------------------
2007 2006 2007 2006
--------- --------- --------- --------
Cost of sales .................................................. $ 5 $ 21 $ 10 $ 21
Selling expenses ............................................... 64 156 128 156
General and administrative expenses ............................ 202 207 404 245
Engineering and technical support .............................. 5 10 10 10
---- ---- ---- ----
Stock-based compensation expense before income tax benefit...... $276 $394 $552 $432
==== ==== ==== ====
The Company granted 257,500 stock options during August 2007, which vest
one-third on August 31, 2007, one-third on November 30, 2007, and one-third
on February 28, 2008, expire three years from date of vesting (August 31,
2010, November 30, 2010, and February 28, 2011, respectively), have an
exercise price equal to $1.00 above the lowest sales price of the Company's
stock on the day prior to the date of grant ($10.90), have a contractual
term between 2 years and 3.7 years and a grant date fair value of $3.26 per
share determined based upon a Black-Sholes valuation model (refer to the
table below for assumptions used to determine fair value). In connection
with this option grant, there were also 15,000 options granted to an
outside director that expire on September 9, 2009, which have a contractual
life of 2.1 years and a grant date fair value of $2.57 per share.
In addition, the Company issued 17,500 warrants to purchase the Company's
common stock at an exercise price of $10.90 per share as consideration for
past legal services rendered. The warrants are exercisable immediately,
expire three years from date of issuance and have a fair value on issuance
date of $3.26 per warrant determined based upon a Black-Sholes valuation
model (refer to the table below for assumptions used to determine fair
value). Accordingly, the Company recorded additional legal expense in the
amount of approximately $57 during the nine months ended November 30, 2007,
representing the fair value of the warrants issued. These warrants are
included in the outstanding options and warrant table below and considered
exercisable at November 30, 2007.
The fair value of stock options and warrants on the date of grant, and the
assumptions used to estimate the fair value of the stock options and
warrants using the Black-Sholes option valuation model granted during the
period was as follows:
Nine Months Ended
November 30, 2007
-----------------------
Dividend yield 0%
Weighted-average expected volatility 47.0%
Risk-free interest rate . 4.57%
Expected life of options (in years) 2.00 - 3.00
Fair value of options/warrants granted $3.26 (3 year option)
$2.57 (2 year option)
The Company granted 105,000 stock options during the three and nine months
ended November 30, 2006, which vested immediately, had exercise prices
9
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
equal to the fair market value of the stock on the date of grant and a
contractual term of two years. The per share fair value of stock options
granted during the three and nine months ended November 30, 2006 was $4.15
and $3.75. These fair values were determined using the Black-Sholes option
valuation model with the following assumptions:
Three Months Ended Nine Months Ended
November 30, 2006 November 30, 2006
----------------- -----------------
Dividend yield ................................ 0% 0%
Weighted-average expected volatility .......... 49.9% 48.8%
Risk-free interest rate ....................... 4.67% 4.97%
Expected life of options (in years) ........... 2.00 2.00
Fair value of options granted ................. $ 4.15 $ 3.75
The expected dividend yield is based on historical and projected dividend
yields. The Company estimates expected volatility based primarily on
historical daily price changes of the Company's stock equal to the expected
life of the option. The risk free interest rate is based on the U.S.
Treasury yield in effect at the time of the grant. The expected option term
is the number of years the Company estimates the options will be
outstanding prior to exercise based on employment termination behavior.
Information regarding the Company's stock options and warrants is
summarized below:
Weighted Weighted Average
Average Remaining
Number of Shares Exercise Price Contractual Term
---------------- -------------- -----------------
Outstanding at February 28, 2007 ............................. 1,784,652 $ 12.97
Granted .................................................... 275,000 10.90
Exercised .................................................. (408,866) 7.70
Forfeited/expired .......................................... (83,750) 13.68
---------- --------
Outstanding at November 30, 2007 ............................. 1,567,036 13.96 1.86
========== ======== ====
Exercisable at November 30, 2007 ............................. 1,481,203 $ 14.13 1.78
========== ======== ====
At November 30, 2007, the Company had unrecognized compensation costs of
approximately $276 related to non-vested options granted during the nine
months ended November 30, 2007. The unrecognized compensation costs related
to these options will be completely recognized by the fiscal year ending
February 29, 2008. At February 28, 2007 and November 30, 2006, the Company
had no unrecognized compensation cost as all stock options were fully
vested.
10
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
(3) Discontinued Operations
-----------------------
The net income (loss) from discontinued operations for the three and nine
months ended November 30, 2007 and 2006 is primarily due to legal
settlements and related legal and administrative costs associated with
contingencies pertaining to the Company's discontinued Cellular business
(see Note 15).
The following is a summary of the results of discontinued operations:
Three Months Ended Nine Months Ended
November 30, November 30,
----------------------- -----------------------
2007 2006 2007 2006
-------- --------- ---------- ---------
Net sales from discontinued operations .............................. $-- $ -- $ -- $ --
=== ======= ======= ======
Income (loss) from discontinued operations before
income taxes ....................................................... $-- $ (148) $ 3,248 $ (886)
Income tax (expense) benefit ........................................ -- 154 (1,137) 310
--- ------- ------- ------
Net income (loss) from discontinued operations ...................... $-- $ 6 $ 2,111 $ (576)
=== ======= ======= ======
(4) Net Income Per Common Share
---------------------------
Basic net income per common share is based upon the weighted-average common
shares outstanding during the period. Diluted net income per common share
reflects the potential dilution that would occur if common stock equivalent
securities or other contracts to issue common stock were exercised or
converted into common stock.
There are no reconciling items which impact the numerator of basic and
diluted net income per common share. A reconciliation between the
denominator of basic and diluted net income per common share is as follows:
Three Months Ended Nine Months Ended
November 30, November 30,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Weighted-average common shares outstanding ................................. 22,852,781 22,234,399 22,853,108 22,345,183
Effect of dilutive securities:
Stock options and warrants ................................................ 4,574 210,765 27,155 195,293
---------- ---------- ---------- ----------
Weighted-average common shares and potential common shares outstanding ..... 22,857,355 22,445,164 22,880,263 22,540,476
========== ========== ========== ==========
Stock options totaling 1,617,026 and 1,013,000 for the three months ended
November 30, 2007 and 2006, respectively, and 1,354,482 and 1,209,635 for
the nine months ended November 30, 2007 and 2006, respectively, were not
included in the net income per diluted share calculation because the
exercise price of these options was greater than the average market price
of the Company's common stock during these periods.
11
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
(5) Accumulated Other Comprehensive Income (Loss)
---------------------------------------------
Accumulated other comprehensive income (loss) of $2,537 and $(1,320) at
November 30, 2007 and February 28, 2007, respectively, includes the net
accumulated unrealized gain (loss) on the Company's available-for-sale
investment securities of $(1,082) and $(1,561) at November 30, 2007 and
February 28, 2007, respectively, and foreign currency translation gains of
$3,619 and $241 at November 30, 2007 and February 28, 2007, respectively.
The Company's total comprehensive income (loss) was as follows:
Three Months Ended Nine Months Ended
November 30, November 30,
----------------------- -----------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Net income ............................................................... $ 4,680 $ 3,854 $10,643 $ 3,421
Other comprehensive income (loss) :
Foreign currency translation adjustments ................................ 2,021 200 3,378 1,080
Unrealized holding gain (loss) on available-for-sale
investment securities arising during the period, net of tax ........... 471 (264) 479 (2,659)
------- ------- ------- -------
Other comprehensive income (loss), net of tax ........................... 2,492 (64) 3,857 (1,579)
------- ------- ------- -------
Total comprehensive income ............................................... $ 7,172 $ 3,790 $14,500 $ 1,842
======= ======= ======= =======
The changes in the net unrealized holding gain (loss) on available-for-sale
investment securities arising during the periods presented above are net of
tax expense (benefits) of $301 and $(162) for the three months ended
November 30, 2007 and 2006, respectively and $306 and $(1,630) for the nine
months ended November 30, 2007 and 2006, respectively.
(6) Supplemental Cash Flow Information/Changes in Stockholders' Equity
------------------------------------------------------------------
The following is supplemental information relating to the consolidated
statements of cash flows:
Nine Months Ended
November 30,
-------------------------
2007 2006
--------- ---------
Cash paid during the period:
Interest (excluding bank charges) ............... $ 1,904 $ 929
Income taxes (net of refunds) ................... $ 1,308 $ 53
12
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
Non-Cash Transactions
---------------------
During the nine months ended November 30, 2007 and 2006, the Company
recorded a non-cash compensation (benefit) charge of $(212) and $231,
respectively, related to the rights under a call/put option previously
granted to certain employees. The net benefit recorded during the nine
months ended November 30, 2007, was primarily due to a $998 reduction in
the call/put liability calculation as a result of the Oehlbach acquisition
(see Note 7). In addition, the Company recorded a non-cash stock based
compensation and warrant expense of $609 and $432 during the nine months
ended November 30, 2007 and 2006, respectively, related to the grant of
options and warrants to employees, directors and certain outside service
providers (see Note 2).
During the nine months ended November 2007, the Company recorded an
incremental non-cash amortization expense of $244 related to the
amortization of an intangible asset in connection with the Thomson
accessories acquisition (see Note 7).
Changes in Stockholders' Equity
-------------------------------
During the nine months ended November 30, 2007, 408,866 stock options were
exercised yielding proceeds of $3,148 to the Company. In addition, the
Company recorded a $1,020 increase to paid in capital as a result of the
tax benefit realized upon exercise of stock options during the nine months
ended November 30, 2007.
During the nine months ended November 30, 2007, the Company purchased
128,100 shares of its Class A Common Stock for $1,425 in connection with
its share repurchase program.
As a result of the implementation of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes ("FIN 48"), an adjustment of $133 was
recorded to decrease the beginning balance of retained earnings at March 1,
2007 in connection with a cumulative effect of a change in accounting
principle (see Note 10).
(7) Business Acquisitions
---------------------
Thomson Accessories
-------------------
On January 29, 2007, the Company acquired certain assets and liabilities of
Thomson's Americas consumer electronics accessory business as well as
rights to the RCA, Recoton, Spikemaster, Ambico and Discwasher brands for
consumer electronics accessories for $60,427, including a working capital
payment of $7,617.
As part of the acquisition price, the Company agreed to pay Thomson a 0.75%
fee related to future net sales of the RCA brand for five years from the
date of acquisition. This fee amounted to $562 for the nine months ended
November 30, 2007, and has been preliminarily allocated to intangible
assets (see Note 8).
The results of operations of this acquisition have been included in the
consolidated financial statements from the date of acquisition. The purpose
of this acquisition was to enhance the Company's market share in the
accessory business, which includes rights to the RCA brand and other brand
names. The following summarizes the preliminary allocation of the purchase
price to the fair value of the assets acquired and liabilities assumed at
the date of acquisition:
13
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
Assets acquired:
Inventory .................................................... $31,664
Prepaid expenses and other current assets .................... 2,312
Tradename and other intangible assets ........................ 46,735
-------
Total assets acquired ....................................... $80,711
-------
Liabilities assumed:
Accounts payable ............................................. $17,489
Accrued expenses and other liabilities ....................... 2,795
-------
Total liabilities assumed ................................... $20,284
-------
-------
Cash paid ...................................................... $60,427
=======
The allocation of the purchase price to assets acquired and liabilities
assumed is preliminary (see Note 8).
Oehlbach
--------
On March 1, 2007, Audiovox German Holdings GmbH completed the stock
acquisition of Oehlbach Kabel GmbH ("Oehlbach"), a European market leader
in the accessories field. As consideration for Oehlbach, the Company paid
the following:
Purchase price (net of cash acquired) ....................... $ 6,411
Acquisition related costs ................................... 146
--------
Total purchase price ........................................ $ 6,557
========
In addition, a contingent payment may be due by the Company if certain
earnings targets are generated by Oehlbach for a period of three years
after the acquisition date (March 1, 2010). The earnings target calculation
requires that if the accumulated Oehlbach operating income, including or
excluding certain items exceeds 3,290 Euros over the cumulative three year
period, the Company is liable to pay the excess of the operating income
amount (as defined in the purchase agreement) over 3,290 Euros but not to
exceed 1,000 Euros. As of November 30, 2007, no amount has been accrued for
the contingency payment as the earnings target was not met.
The results of operations of this acquisition have been included in the
consolidated financial statements from the date of acquisition. The purpose
of this acquisition was to expand the Company's accessory product lines to
European Markets.
The following summarizes the preliminary allocation of the purchase price
to the fair value of the assets acquired and liabilities assumed at the
date of acquisition:
Assets acquired:
Accounts receivable, net ..................................... $ 2,215
Inventory .................................................... 1,939
Prepaid expenses and other current assets .................... 60
Property, plant and equipment ................................ 337
Goodwill ..................................................... 6,688
-------
Total assets acquired ....................................... $11,239
-------
14
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
Liabilities assumed:
Accounts payable ............................................. $ 601
Accrued expenses and other liabilities ....................... 2,383
Income taxes payable ......................................... 891
Long-term debt ............................................... 807
-------
Total liabilities assumed ................................... $ 4,682
-------
Cash paid ...................................................... $ 6,557
=======
The allocation of the purchase price to assets acquired and liabilities
assumed is preliminary (see Note 8).
Incaar
------
On August 14, 2007, Audiovox German Holdings GmbH completed the acquisition
of certain assets and the business of Incaar Limited ("Incaar"), an OEM
business in Europe. As consideration for Incaar, the Company paid the
following:
Purchase price ............................................ $ 350
Acquisition related costs ................................. 52
------
Total purchase price ...................................... $ 402
======
In addition, a contingent payment may be due by the Company if certain
earnings targets are generated by Incaar for a period of two years after
the acquisition date (August 14, 2009). The earnings target calculation
requires that if the accumulated Incaar pre-tax income, including or
excluding certain items, exceeds 1,055 Euros over the cumulative two year
period, the Company is liable to pay an additional earn-out payment of
$400, as defined in the purchase agreement. As of November 30, 2007, no
amount has been accrued for the contingency payment as the earnings target
was not met.
The results of operations of this acquisition have been included in the
consolidated financial statements from the date of acquisition. The purpose
of this acquisition is to add the experience, concepts and product
development of an OEM business in Europe.
The following summarizes the preliminary allocation of the purchase price
to the fair value of the assets acquired at the date of acquisition:
Assets acquired:
Patent ....................................... $ 402
------
Cash paid ......................................... $ 402
======
The allocation of the purchase price to the assets acquired is preliminary
(see Note 8).
15
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
Technuity
---------
On November 1, 2007, Audiovox Accessories Corporation completed the
acquisition of all of the outstanding stock of Technuity, Inc.
("Technuity"), an emerging leader in the battery and power products
industry and the exclusive licensee of the Energizer(R) brand in North
America for rechargeable batteries and battery packs for camcorders,
cordless phones, digital cameras, DVD players and other power supply
devices. As consideration for Technuity, the Company paid the following:
Purchase price (net of cash acquired) .................... $ 20,373
Acquisition related costs ................................ 1,085
---------
Total purchase price ..................................... $ 21,458
=========
In addition, a minimum working capital payment, as defined in the
agreement, and a maximum contingent payment of $1,000 may be due by the
Company if certain sales and gross margin targets are met for a period of
twelve months after the acquisition date. The sales and gross margin
targets require that net sales exceeds $26.5 million and gross margin
exceeds $7.65 million, as defined in the purchase agreement. As of November
30, 2007, no amount has been accrued for the contingency payment as the
sales and gross margin targets have not been met.
The results of operations of this acquisition have been included in the
consolidated financial statements from the date of acquisition. The purpose
of this acquisition was to further strengthen our accessory product lines
and core offerings, to be the exclusive licensee of the Energizer(R) brand
in North America for rechargeable batteries and power supply systems and to
increase the Company's market share in the consumer electronics accessory
business.
The following summarizes the preliminary allocation of the purchase price
to the fair value of the assets acquired and liabilities assumed at the
date of acquisition:
Assets acquired:
Accounts receivable, net .................................. $ 4,071
Inventory ................................................. 5,008
Prepaid expenses and other current assets ................. 652
Property, plant and equipment, net ........................ 108
Goodwill .................................................. 15,807
-------
Total assets acquired .................................... $25,646
-------
Liabilities assumed:
Accounts payable .......................................... $ 3,689
Accrued expenses and other liabilities .................... 467
Other liabilities ......................................... 32
-------
Total liabilities assumed ................................ $ 4,188
-------
Cash paid ................................................... $21,458
=======
The allocation of the purchase price to the assets acquired and liabilities
assumed is preliminary (see Note 8).
16
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
The following unaudited pro-forma financial information for the three and
nine months ended November 30, 2007 and 2006 represents the combined
results of the Company's operations as if the Technuity, Incaar, Oehlbach
and Thomson acquisitions occurred on March 1, 2006. 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 Nine Months Ended
November 30, November 30,
-------------------------- ---------------------------
2007 2006 2007 2006
---------- ---------- ----------- ----------
Net sales .......................................... $188,252 $208,705 $477,501 $528,492
Net income ......................................... 5,032 4,984 11,733 5,825
Net income per share-diluted ....................... $ 0.22 $ 0.22 $ 0.51 $ 0.26
(8) Goodwill and Intangible Assets
------------------------------
The change in goodwill is as follows:
Balance at February 28, 2007 ........................... $17,514
Purchase of Oehlbach .................................. 6,688
Purchase of Technuity .................................. 15,807
-------
Balance at November 30, 2007 ........................... $40,009
=======
At November 30, 2007, intangible assets consisted of the following:
Gross
Carrying Accumulated Total Net
Value Amortization Book Value
-------- ------------ ----------
Trademarks/Tradenames not subject to amortization ..................... $50,650 $ -- $50,650
Intangible assets subject to amortization ............................. 6,500 244 6,256
Contract subject to amortization (5 years) ............................ 1,104 662 442
Patents subject to amortization ....................................... 1,097 344 753
------- ------- -------
Total ............................................................... $59,351 $ 1,250 $58,101
======= ======= =======
17
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
At February 28, 2007, intangible assets consisted of the following:
Gross
Carrying Accumulated Total Net
Value Amortization Book Value
--------- ------------ ----------
Trademarks/Tradenames not subject to amortization ..................... $56,835 $ -- $56,835
Contract subject to amortization (5 years) ............................. 1,104 497 607
Patents subject to amortization ........................................ 625 193 432
------- ------- -------
Total ................................................................ $58,564 $ 690 $57,874
======= ======= =======
During the nine months ended November 30, 2007, the Company made total
payments of $562 primarily relating to a contingent payment in connection
with the acquired RCA accessory brand, which has been preliminarily
allocated to trademarks not subject to amortization (see Note 7).
The Company recorded amortization expense of $351 and $103 for the three
months ended November 30, 2007 and 2006, respectively and $565 and $225 for
the nine months ended November 30, 2007 and 2006, respectively. The
estimated aggregate amortization expense for the cumulative five years
ending November 30, 2012 amounts to $2,507.
(9) Equity Investments
------------------
As of November 30, 2007 and February 28, 2007, the Company had a 50%
non-controlling ownership interest in Audiovox Specialized Applications,
Inc. ("ASA") which acts as a distributor of televisions and other
automotive sound, security and accessory products for specialized vehicles,
such as RV's and van conversions.
The following presents summary financial information for ASA. Such summary
financial information has been provided herein based upon the individual
significance of ASA to the consolidated financial information of the
Company.
November 30, February 28,
2007 2007
------------ ------------
Current assets ............................. $26,894 $23,409
Non-current assets ......................... 4,773 4,716
Current liabilities ........................ 5,538 5,420
Members' equity ............................ 26,129 22,705
18
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
Nine Months Ended November 30,
------------------------------
2007 2006
---------- -----------
Net sales ................................ $55,194 $45,072
Gross profit ............................. 16,099 13,480
Operating income ......................... 5,010 4,058
Net income ............................... 5,853 4,846
The Company's share of income from ASA for the nine months ended November
30, 2007 and 2006, was $2,927 and $2,423 respectively. In addition, the
Company received distributions from ASA totaling $1,215 and $2,589 during
the nine months ended November 30, 2007 and 2006, respectively, which was
recorded as a reduction to equity investments in the accompanying
consolidated balance sheets.
(10) Income Taxes
------------
Quarterly Tax Provision
-----------------------
Interim period tax provisions are generally based upon an estimated annual
effective tax rate per taxable entity, including evaluations of possible
current and 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 valuation allowance is
provided when it is more likely than not that some portion, or all, of the
deferred tax assets will not be realized.
The effective tax rate from continuing operations for the three and nine
months ended November 30, 2007 was a provision of 30.3% compared to a
benefit of 25.4% and 22.7% for the three and nine months ended November 30,
2006, respectively. The increase in the effective tax rate is due to
increased income from operations and lower tax exempt interest income
earned on our short-term investments. Accordingly, the Company's effective
tax rate is less than the statutory rate due to the impact of tax exempt
interest income.
FIN 48
------
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109, Accounting for Income Taxes"
("FIN 48"). FIN 48 addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company may recognize the tax
benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the taxing
authorities based on the technical merits of the position. The tax benefits
recognized in the financial statements from such position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. FIN 48 also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure requirements.
The Company adopted the provisions of FIN 48 on March 1, 2007, which
resulted in a $133 adjustment to decrease retained earnings in connection
19
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
with a cumulative effect of a change in accounting principle. The amount of
gross unrecognized tax benefits at November 30, 2007 was $4,450 (related to
gross unrecognized tax benefits for tax positions taken during a prior
period), all of which would impact the Company's effective tax rate, if
recognized. The Company increased its gross unrecognized tax benefits
related to unrecognized tax benefits for tax positions taken during a prior
period by $139 and $417 during the three and nine months ended November 30,
2007. The Company recognizes accrued interest and penalties associated with
unrecognized tax benefits as part of the income tax provision. As of
November 30, 2007, the Company had $812 of accrued interest and penalties
in connection with unrecognized tax benefits of which $91 and $275 of
interest and penalties were recognized during the three and nine months
ended November 30, 2007.
It is possible that the amount of unrecognized tax benefits could change in
the next 12 months, however, the Company does not expect the change to have
a significant impact on its results of operations or financial position.
The Internal Revenue Service ("IRS") is conducting an examination of the
Company's U.S. federal income tax returns for the fiscal years 2004, 2005
and 2006 as part of the IRS's Compliance Assurance Process program. In
addition, the Company files in numerous states and foreign jurisdictions
with varying statutes of limitations.
(11) Accrued Sales Incentives
------------------------
A summary of the activity with respect to sales incentives is provided
below:
Three Months Ended Nine Months Ended
November 30, November 30,
------------------------- -------------------------
2007 2006 2007 2006
---------- ----------- ----------- -----------
Opening balance .................................. $ 11,403 $ 7,405 $ 7,410 $ 8,512
Accruals ......................................... 7,385 * 5,614 22,467 ** 11,797
Payments and credits ............................. (2,980) (2,559) (12,531) (8,585)
Reversals for unearned sales incentive ........... (277) (451) (682) (1,152)
Reversals for unclaimed sales incentives ......... (594) (77) (1,727) (640)
-------- -------- -------- --------
Ending balance ................................... $ 14,937 $ 9,932 $ 14,937 $ 9,932
======== ======== ======== ========
* Includes $646 of sales incentives acquired from the Technuity
acquisition (see Note 7).
** Includes $325 and $646 of accrued sales incentives acquired from the
Oehlbach and Technuity acquisitions (see Note 7).
(12) Product Warranties and Product Repair Costs
-------------------------------------------
The following table provides a summary of the activity with respect to
product warranties and product repair costs:
20
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
----------------------------- -----------------------------
2007 2006 2007 2006
---------- ----------- ---------- -----------
Opening balance ............................................ $ 10,073 $ 8,576 $ 9,586 $ 9,947
Liabilities accrued for warranties issued
during the period ........................................ 3,009 2,864 8,178 6,019
Warranty claims paid during the period ..................... (2,886) (2,283) (7,568) (6,809)
-------- -------- -------- --------
Ending balance ............................................. $ 10,196 $ 9,157 $ 10,196 $ 9,157
======== ======== ======== ========
(13) Financing Arrangements
----------------------
The Company has the following financing arrangements:
November 30, February 28,
2007 2007
------------ ------------
Bank Obligations
----------------
Domestic bank obligation (a) ......................... $ -- $ --
Venezuela bank obligations (b) ....................... -- --
Euro Asset-Based lending obligation (c) .............. 3,929 2,890
------ ------
Total bank obligations ............................... $3,929 $2,890
====== ======
Debt
----
Euro term loan agreement (d) ......................... $ -- $5,461
Oehlbach (e) ......................................... 874 --
Other (f) ............................................ 1,441 1,493
------ ------
Total debt ........................................... $2,315 $6,954
====== ======
(a) Domestic Bank Obligations
-------------------------
At November 30, 2007, the Company has an unsecured credit line to fund
the temporary short-term working capital needs of the domestic
operations. This line expires on March 31, 2008, is renewable on a
periodic basis and allows aggregate borrowings of up to $25,000 at an
interest rate of Prime (or similar designations) plus 1%. As of
November 30, 2007 and February 28, 2007, no direct amounts are
outstanding under this agreement. At November 30, 2007, the Company
had $2,277 in commercial and standby letters of credit outstanding,
which reduces the amount available under the unsecured credit line.
(b) Venezuela Bank Obligations
--------------------------
In October 2005, Audiovox Venezuela entered into a credit facility
borrowing arrangement which allows for principal borrowings up to
21
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
$1,000 plus accrued interest. The facility requires minimum monthly
interest payments at an annual interest rate of 13% until the
expiration of the facility on February 14, 2008. Audiovox Corporation
has secured this facility with a $1,200 standby letter of credit. At
November 30, 2007 and February 28, 2007, no amounts were outstanding
under this agreement.
(c) Euro Asset-Based Lending Obligation
-----------------------------------
The Company has a 16,000 Euro accounts receivable factoring
arrangement and a 6,000 Euro Asset-Based Lending ("ABL") (finished
goods inventory and non factored accounts receivable) credit facility
for the Company's subsidiary, Audiovox German Holdings GmbH, which
expires on October 25, 2008 and is renewable on an annual basis.
Selected accounts receivable are purchased from the Company on a
non-recourse basis at 85% of face value and payment of the remaining
15% upon receipt from the customer of the balance of the receivable
purchased. In respect of the ABL credit facility, selected finished
goods are advanced at a 60% rate and non factored accounts receivables
are advanced at a 50% rate. The rate of interest is the three month
Euribor plus 2.5%, and the Company pays 0.4% of its gross sales as a
fee for the accounts receivable factoring arrangement. As of November
30, 2007, the amount of accounts receivable and finished goods
available for factoring exceeded the amounts outstanding under this
obligation.
(d) Euro Term Loan Agreement
------------------------
On September 2, 2003, 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. Tranche B
had been fully repaid in prior years. During September 2007, the
Company repaid in full the amount outstanding under the Tranche A term
loan using the Company's available cash on hand at the time.
Accordingly, the Company has been released from its 3 million Euro
guarantee under this loan as well as the pledge of stock, brands and
trademarks of Audiovox Germany.
(e) Oehlbach
--------
In connection with the Oehlbach acquisition (see Note 7), the Company
acquired short and long term debt payable to various third parties.
The interest rate on the debt ranges from 4.2% to 6.1% and is payable
from May 2008 to March 2011.
(f) Other Debt
----------
This amount represents a call/put option owed to certain employees of
Audiovox Germany.
(14) Other Income
------------
Other income is comprised of the following:
22
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
--------------------------- -----------------------------
2007 2006 2007 2006
----------- ----------- ------------ ------------
Interest income ............................ $ 822 $ 1,397 $ 3,379 $ 4,681
Rental income .............................. 138 138 414 414
Miscellaneous .............................. (144) (417) (349) (268)
------- ------- ------- -------
Total-Other, net ........................... $ 816 $ 1,118 $ 3,444 $ 4,827
======= ======= ======= =======
(15) Contingencies and Derivative Settlement
---------------------------------------
Contingencies
-------------
The Company is currently, and has in the past been, a party to various
routine legal proceedings incident to the ordinary course of business. If
management determines, based on the underlying facts and circumstances,
that it is probable a loss will result from a litigation contingency and
the amount of the loss can be reasonably estimated, the estimated loss is
accrued for. The Company believes there has been no material change to the
matters disclosed in Note 17 of the Company's Form 10-K for the fiscal year
ended February 28, 2007, however, due to the uncertainty of these matters,
the Company disclosed the following:
Certain consolidated class actions transferred to a Multi-District
Litigation Panel of the United States District Court of the District of
Maryland against the Company and other suppliers, manufacturers and
distributors of hand-held wireless telephones alleging damages relating to
exposure to radio frequency radiation from hand-held wireless telephones
are still pending. No assurances regarding the outcome of this matter can
be given, as the Company is unable to assess the degree of probability of
an unfavorable outcome or estimated loss or liability, if any. Accordingly,
no estimated loss has been recorded for the aforementioned case.
The products the Company sells are continually changing as a result of
improved technology. As a result, although the Company and its suppliers
attempt to avoid infringing known proprietary rights, the Company may be
subject to legal proceedings and claims for alleged infringement by its
suppliers or distributors, of third party patents, trade secrets,
trademarks or copyrights. Any claims relating to the infringement of
third-party proprietary rights, even if not meritorious, could result in
costly litigation, divert management's attention and resources, or require
the Company to either enter into royalty or license agreements which are
not advantageous to the Company or pay material amounts of damages.
Under the asset purchase agreement for the sale of the Company's Cellular
business to UTSI, the Company agreed to indemnify UTSI for any breach or
violation by Audiovox Communications Corporation and its representations,
warranties and covenants contained in the asset purchase agreement and for
other matters, subject to certain limitations. Significant indemnification
claims by UTSI could have a material adverse effect on the Company's
financial condition and results of operation. The Company is not aware of
any such claim(s) for indemnification.
Derivative Settlement
---------------------
In November 2004, several purported double derivative, derivative and class
actions were filed in the Court of Chancery of the State of Delaware, New
Castle County challenging approximately $27,000 made in payments from the
proceeds of the sale of the Company's cellular business. These actions were
subsequently consolidated into a single derivative complaint (the
"Complaint"), In re Audiovox Corporation Derivative Litigation.
23
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
This matter was settled in May 2007 and received final Chancery court
approval in June 2007. As a result of the settlement, the Company received
$6,750 in gross proceeds. The gross proceeds were offset by $2,378 in
plaintiff legal fees and $1,023 in accrued legal and administrative costs
for defending all remaining ACC legal claims. The items discussed above
resulted in a pre-tax benefit of $3,349 recorded in discontinued operations
for the nine months ended November 30, 2007.
(16) Recent Accounting Pronouncements
--------------------------------
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes guidelines
for measuring fair value and expands disclosures regarding fair value
measurement. SFAS No. 157 does not require any new fair value measurements,
but rather eliminates inconsistencies in guidance found in other accounting
pronouncements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2008, as it was amended by FASB Staff Position No. 157-b,
Effective Date of FASB Statement No. 157. The transition adjustment of the
difference between the carrying amounts and the fair values of those
financial instruments should be recognized as a cumulative effect
adjustment to retained earnings as of the beginning of the year of
adoption. The Company is currently evaluating the impact of SFAS No. 157,
but does not expect the adoption of this pronouncement to have a material
impact on the Company's financial position or results of operations.
In February 2007, the FASB released SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" ("SFAS No. 159") to provide
companies with an option to report selected financial assets and
liabilities at fair value. The objective of SFAS No. 159 is to reduce both
the complexity in accounting for financial instruments and the volatility
in earnings caused by measuring related assets and liabilities differently.
SFAS No. 159 is effective for fiscal years beginning after November 15,
2007 with early adoption permitted. The Company is currently evaluating the
impact of SFAS No. 159, but does not expect the adoption of this
pronouncement to have a material impact on the Company's financial position
or results of operations.
On December 4, 2007, the Financial Accounting Standards Board ("FASB")
issued Statement No. 141(R), Business Combinations ("Statement No. 141(R)")
and Statement No. 160, Accounting and Reporting of Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51
("Statement No. 160"). These new standards will significantly change the
financial accounting and reporting of business combination transactions and
noncontrolling (or minority) interests in consolidated financial
statements. Issuance of these standards is also noteworthy in that they
represent the culmination of the first major collaborative convergence
project between the International Accounting Standards Board and the FASB.
Statement No. 141(R) is required to be adopted concurrently with Statement
No. 160 and is effective for business combination transactions for which
the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Early adoption is
prohibited. Application of Statement No. 141(R) and Statement No. 160 is
required to be adopted prospectively, except for certain provisions of
Statement No. 160, which are required to be adopted retrospectively.
Business combination transactions accounted for before adoption of
Statement No. 141(R) should be accounted for in accordance with Statement
No. 141 and that accounting previously completed under Statement No. 141
should not be modified as of or after the date of adoption of Statement No.
141(R). The Company is currently evaluating the impact of Statement No.
141(R) and Statement No. 160, but does not expect the adoption of these
pronouncements to have a material impact on the Company's financial
position or results of operations.
24
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
November 30, 2007
(Dollars in thousands, except share and per share data)
(unaudited)
(17) Subsequent Events
-----------------
On December 31, 2007, the Company completed the acquisition of certain
assets and liabilities of Thomson's U.S., Canada, Mexico, China and Hong
Kong consumer electronics audio/video business for a total purchase price
of approximately $19,700, plus a net asset payment and a fee related to the
RCA(R) brand in connection with future sales for a stated period of time.
The purpose of this acquisition was to control the RCA trademark for the
audio video field of use and to expand our core product offerings in
certain developing markets. Contemporaneous with this transaction, the
Company entered into a license agreement with Multimedia Device Ltd., a
Chinese manufacturer to market certain product categories acquired in the
acquisition for an upfront fee of $10,000, the purchase of certain
inventory and future royalty payments.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Forward-Looking Statements
Certain information in this Quarterly Report on Form 10-Q would constitute
forward-looking statements, including but not limited to, information relating
to the future performance and financial condition of the Company, the plans and
objectives of the Company's management and the Company's assumptions regarding
such performance and plans that are forward-looking in nature and involve
certain risks and uncertainties. Actual results could differ materially from
such forward-looking information.
We begin Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") with an overview of the business. This is
followed by a discussion of the Critical Accounting Policies and Estimates that
we believe are important to understanding the assumptions and judgments
incorporated in our reported financial results. In the next section, we discuss
our results of operations for the three and nine months ended November 30, 2007
compared to the three and nine months ended November 30, 2006. We then provide
an analysis of changes in our balance sheets and cash flows, and discuss our
financial commitments in the sections entitled "Liquidity and Capital
Resources." We conclude this MD&A with a discussion of "Related Party
Transactions" and "Recent Accounting Pronouncements".
Unless specifically indicated otherwise, all amounts and percentages
presented in our MD&A below are exclusive of discontinued operations and are in
thousands, except for per share amounts.
Business Overview
Audiovox Corporation ("Audiovox", "We", "Our", "Us" or "Company") is a
leading international distributor and value added service provider in the
accessory, mobile and consumer electronics industries. We conduct our business
through seven wholly-owned subsidiaries: American Radio Corp., Audiovox
Electronics Corporation ("AEC"), Audiovox Consumer Electronics, Inc., Audiovox
Accessories Corp. ("AAC"), Audiovox German Holdings GmbH ("Audiovox Germany"),
Audiovox Venezuela, C.A and Code Systems, Inc. ("Code"). We market our products
under the Audiovox(R) brand name and other brand names, such as Acoustic
Research(R), Advent(R), Ambico(R), Car Link(R), Chapman(R), Code-Alarm(R),
Discwasher(R), Energizer(R), Heco(R), Jensen(R), Mac Audio(R), Magnate(R),
Movies 2 Go(R), Oehlbach(R), Phase Linear(R), Prestige(R), Pursuit(R), RCA(R)
(effective January 1, 2008), RCA Accessories(R), Recoton(R), Road Gear(R),
Spikemaster(R) and Terk(R), as well as private labels through a large domestic
and international distribution network. We also function as an OEM ("Original
Equipment Manufacturer") supplier to several customers and presently have one
reportable segment (the "Electronics Group"), which is organized by product
category. We previously announced our intention to acquire synergistic
businesses with gross profit margins higher than our core business.
We have recently acquired and continue to integrate the following
acquisitions, discussed below, into our existing business structure:
In December 2007, the Company completed the acquisition of certain assets
and liabilities of Thomson's U.S., Canada, Mexico, China and Hong Kong consumer
electronics audio/video business for a total purchase price of approximately
$19,700, plus a net asset payment and a fee related to the RCA(R) brand in
connection with future sales for a stated period of time. The purpose of this
acquisition was to control the RCA trademark for the audio video field of use
and to expand our core product offerings in certain developing markets.
Contemporaneous with this transaction, the Company entered into a license
agreement with Multimedia Device Ltd., a Chinese manufacturer to market certain
product categories acquired in the acquisition for an upfront fee of $10,000,
the purchase of certain inventory and future royalty payments.
26
In November 2007, Audiovox Accessories Corporation completed the
acquisition of all of the outstanding stock of Technuity, Inc., an emerging
leader in the battery and power products industry and the exclusive licensee of
the Energizer(R) brand in North America for rechargeable batteries and battery
packs for camcorders, cordless phones, digital cameras, DVD players and other
power supply devices, for a total purchase price of $21,458, plus a minimum
working capital payment, as defined in the agreement, and a maximum contingent
earn out payment of $1,000, if certain sales and gross margin targets are met.
The purpose of this acquisition was to further strengthen our accessory product
lines and core offerings, to be the exclusive licensee of the Energizer(R) brand
in North America for rechargeable batteries and power supply systems and to
increase the Company's market share in the consumer electronics accessory
business.
In August 2007, Audiovox German Holdings GmbH completed the acquisition of
certain assets of Incaar Limited, a U.K. business that specializes in rear seat
electronics systems, for a total purchase price of $402, in addition to a
maximum contingent earn out payment of $400, if certain earnings targets are
met. The purpose of this acquisition was to add the experience, concepts and
product development of an Original Equipment Manufacturer ("OEM") business to
our European operations.
In March 2007, Audiovox German Holdings GmbH completed the stock
acquisition of Oehlbach, a European market leader in the accessories business,
for a total purchase price of $6,557, in addition to a contingent earn out
payment, not to exceed 1 million euros. The purpose of this acquisition was to
add electronics accessory product lines to our European business.
In January 2007, we completed the acquisition of certain assets and
liabilities of Thomson's Americas consumer electronics accessory business for a
total purchase price of approximately $60,427, including a working capital
payment of $7,617, plus a five year fee related to the RCA brand in connection
with future sales. The purpose of this acquisition was to expand our market
presence in the accessory business. The acquisition included the rights to the
RCA Accessories brand for consumer electronics accessories as well as the
Recoton, Spikemaster, Ambico and Discwasher brands for use on any product
category and the Jensen, Advent, Acoustic Research and Road Gear brands for
consumer electronics accessories.
We continue to monitor economic and industry conditions in order to
evaluate potential synergistic business acquisitions that would allow us to
leverage overhead, penetrate new markets or expand our core business and
distribution channels.
Effective March 1, 2007, the Company reported "Accessories" as a separate
product group due to the Thomson and Oehlbach acquisitions and now during the
fiscal 2008 third quarter, the Technuity acquisition. In addition, the Company's
former mobile and consumer product categories are now combined and recorded in
the "Electronics" product group. As such, certain reclassifications have been
made to prior year amounts as the Company currently reports sales data for the
following two product categories:
Electronics products include:
o mobile multi-media video products, including in-dash, overhead,
headrest and portable mobile video systems,
o autosound products including radios, speakers, amplifiers and CD
changers,
o satellite radios including plug and play models and direct connect
models,
o automotive security and remote start systems,
o automotive power accessories,
o car to car portable navigation systems,
o rear observation and collision avoidance systems,
o Liquid Crystal Display ("LCD") and Plasma flat panel televisions,
o home and portable stereos,
o two-way radios,
o digital multi-media products such as personal video recorders and MP3
products,
o home speaker systems and home theater in a box, and
o portable DVD players.
27
Accessories products include:
o High-Definition Television ("HDTV") Antennas,
o Wireless Fidelity ("WiFi") Antennas,
o High-Definition Multimedia Interface ("HDMI") accessories,
o home electronic accessories such as cabling,
o other connectivity products,
o power cords,
o performance enhancing electronics,
o TV universal remotes,
o flat panel TV mounting systems,
o iPod specialized products,
o wireless headphones,
o battery backups (UPS),
o camcorder, digital camera, notebook, cordless phone and portable video
(DVD) batteries and accessories,
o portable audio batteries, and
o power supply systems.
We believe our product groups have expanding market opportunities with
certain levels of volatility related to both domestic and international markets,
new car sales, increased competition by manufacturers, private labels,
technological advancements, discretionary consumer spending and general economic
conditions. Also, all of our products are subject to price fluctuations which
could affect the carrying value of inventories and gross margins in the future.
Reportable Segments
We have determined that we operate in one reportable segment, the
Electronics Group, based on review of Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information". The characteristics of our operations that are relied on
in making and reviewing business decisions include the similarities in our
products, the commonality of our customers across multiple brands, our unified
marketing strategy, and the nature of the financial information used by our
Executive Officers. Management reviews the financial results of the Company
based on the performance of the Electronics Group.
Critical Accounting Policies and Estimates
As disclosed in our Form 10-K for the fiscal year ended February 28, 2007,
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
of America. The preparation of these financial statements require us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgments can be subjective and complex, and consequently, actual results could
differ from those estimates. Our most critical accounting policies and estimates
relate to revenue recognition; sales incentives; accounts receivable; inventory,
goodwill and other intangible assets; warranties, stock-based compensation and
income taxes. Since February 28, 2007, there have been no changes in our
critical accounting policies or changes to the assumptions and estimates related
to them, except for the accounting for uncertain tax positions, which is further
discussed in footnote 10. Income Taxes, included in this Form 10-Q, for the
three and nine months ended November 30, 2007.
28
Results of Operations
As you read this discussion and analysis, refer to the accompanying
consolidated statements of operations, which present the results of our
operations for the three and nine months ended November 30, 2007 and 2006. We
analyze and explain the differences between periods based on the specific line
items of the consolidated statements of operations.
Three months ended November 30, 2007 compared to the three months ended
-----------------------------------------------------------------------
November 30, 2006
-----------------
Continuing Operations
---------------------
The following tables set forth, for the periods indicated, certain
statement of operations data for the three months ended November 30, 2007 and
2006.
Net Sales
Three Months Ended November 30,
------------------------------- $ %
2007 2006 Change Change
------------- ----------- --------- -----------
Electronics ........................... $138,959 $148,273 $ (9,314) (6.3)%
Accessories ........................... 44,604 3,560 41,044 1,153
-------- -------- -------- -----
Total net sales ..................... $183,563 $151,833 $ 31,730 20.9 %
======== ======== ======== =====
Electronics sales, which include mobile and consumer electronics,
represented 75.7% of our net sales for the three months ended November 30, 2007,
decreased by 6.3% or $9,314 primarily due to a decrease in consumer electronics
sales as a result of lower than anticipated holiday sales and shortages of LCD
panels. This industry-wide shortage adversely impacted fiscal 2008 third quarter
sales of LCD TV's, portable DVD's and digital picture frames. Electronic sales
also declined in certain mobile video categories due to a decline in OEM sales
as a result of a decline in new car sales.
The above decreases were partially offset by an increase in mobile audio
sales as a result of improved sales in the Jensen(R) mobile, Phase Linear(R) and
satellite radio product lines and increases in the electronic sales of the
Company's international operations in Germany and Venezuela.
Accessories sales, which represented 24.3% of our net sales for the three
months ended November 30, 2007, increased 1,153% or $41,044 due to incremental
sales generated from the recently acquired Thomson, Oehlbach and Technuity
operations. The Company expects accessory sales to continue to represent a
higher percentage of total net sales and margin as compared to the prior year
due to these acquisitions.
Sales incentive expense increased $1,815 to $6,901 for the three months
ended November 30, 2007, as a result of an increase in accessories net sales
which offer more sales incentive programs, which is partially offset by a $343
increase in sales incentive reversals during the period. The increase in the
reversals is primarily due to an increase of unclaimed sales incentives upon the
expiration of the claim period. We believe the reversal of earned but unclaimed
sales incentives upon the expiration of the claim period is a disciplined,
rational, consistent and systematic method of reversing unclaimed sales
incentives. These sales incentive programs are expected to continue and will
either increase or decrease based upon competition and customer demands.
29
Gross Profit
2007 2006
------------ ------------
Gross profit ............................. $ 34,991 $ 25,371
Gross margin percentage .................. 19.1% 16.7%
Gross margins increased by 240 basis points from 16.7% to 19.1%. Gross
margins were favorably impacted by higher margins generated from the recently
acquired accessory companies as well as improved overall margins in our core
business. Gross margins were adversely impacted by increased warehouse and
assembly costs as a result of incremental costs necessary to facilitate the
newly acquired companies as well as increased warranty and repair costs, freight
and shipping costs and inventory provisions as a result of increased accessories
sales.
Operating Expenses and Operating Income
Three Months Ended November 30,
------------------------------- $ %
2007 2006 Change Change
------------ ------------ ---------- ----------
Operating Expenses:
Selling .............................................. $ 9,828 $ 8,114 $ 1,714 21.1%
General and administrative ........................... 16,948 13,649 3,299 24.2
Engineering and technical support .................... 2,600 1,888 712 37.7
------- ------- ------- ----
Operating expenses .................................. $29,376 $23,651 $ 5,725 24.2%
------- ------- ------- ----
Operating income ..................................... $ 5,615 $ 1,720 $ 3,895 226.5%
Operating expenses increased $5,725 for the three months ended November 30,
2007, as compared to the prior year. As a percentage of net sales, operating
expenses increased to 16% for the three months ended November 30, 2007, from
15.6% in the prior year due to incremental costs to operate the acquired
companies. The increase in total operating expenses is due to the incremental
costs related to the recently acquired Thomson, Oehlbach, Incaar and Technuity
operations, which contributed total operating expenses of $6,263 for the three
months ended November 30, 2007. Operating expenses for our core business was
$23,113 for the three months ended November 30, 2007, a decrease of
approximately $538 over prior year.
The following table sets forth, for the periods indicated, total operating
expenses from our core business and the incremental operating expenses related
to the recently acquired Thomson, Oehlbach, Incaar and Technuity businesses.
Three Months Ended November 30,
------------------------------- $ %
2007 2006 Change Change
----------- ------------- ---------- --------------
Core operating expenses ............................. $23,113 $23,651 $ (538) (2.3)%
Operating expenses from acquired
businesses ....................................... 6,263 -- 6,263 100.0
------- ------- ------- -----
Total operating expenses ............................ $29,376 $23,651 $ 5,725 24.2 %
======= ======= ======= =====
Selling expenses increased $1,714 due to $2,781 of selling expenses during
the three months ended November 30, 2007 for the recently acquired operations of
Thomson, Oehlbach, Incaar and Technuity, as well as increases in salesmen
salaries due to a change in compensation programs and increases in the cost of
travel and share-based compensation expense. These increases were partially
offset by a decrease in advertising expenses due to a decline in the budgeted
amounts for general and print media advertising in fiscal 2008. Selling expenses
for our core business was $7,047 for the three months ended November 30, 2007, a
decrease of $1,067 over the prior year.
30
General and administrative expenses increased $3,299 due to:
o $2,883 of expenses during the three months ended November 30, 2007 for
the recently acquired operations of Thomson, Oehlbach, Incaar and
Technuity,
o $1,085 increase in executive bonuses and profit sharing as a result of
the Company meeting certain earnings targets and fiscal wage
increases,
o $156 increase in depreciation and amortization due to an increase in
capital expenditures as a result of acquisitions and investments in
new systems,
o $276 increase in a non-cash stock-based compensation expense due to
the vesting of options to employees during the period,
o $426 increase in the cost of travel and communication expenses and an
increase in the cost of the Company's medical plan as a result of an
increase in the usage of the plan.
The above increases were partially offset by a $1,578 decline in
professional fees due to reduced audit fees, legal and consulting costs.
General and Administrative expenses for our core business was $14,065 for
the three months ended November 30, 2007, decreased by $416 over the prior year.
Engineering and technical support expenses increased $712 due to $599 of
expenses during the three months ended November 30, 2007 for the recently
acquired operations of Thomson, Oehlbach, Incaar and Technuity, and an increase
in domestic direct labor and related payroll benefits as a result of fiscal wage
increases. Engineering and technical support expense for our core business was
$2,001 for the three months ended November 30, 2007, an increase of $113 over
the prior year.
Other Income (Expense)
Three Months Ended November 30,
------------------------------- $ %
2007 2006 Change Change
----------- ------------- ----------- ----------
Interest and bank charges ............................... $ (723) $ (429) $ (294) 68.5 %
Equity in income of equity investees .................... 1,011 659 352 53.4
Other, net .............................................. 816 1,118 (302) (27.0)
------- ------- ------- -----
Total other income, net ................................. $ 1,104 $ 1,348 $ (244) (18.1)%
======= ======= ======= =====
Interest and bank charges increased as a result of the assumption of
additional debt in connection with the acquisition of Oehlbach as well as
increased working capital needs of our domestic and foreign subsidiaries.
Interest and bank charges represent expenses for bank obligations of Audiovox
Corporation, Audiovox Germany and Venezuela and interest for a capital lease.
Income from equity investments increased due to increased income earned by
Audiovox Specialized Applications ("ASA") as a result of increased sales and
gross margins in Jensen(R) audio and other product lines.
Other income decreased due to a decline in interest income as a result of a
decline in short-term investment holdings due to cash utilized for acquisitions
as well as current working capital needs.
Income Tax Provision (Benefit)
The effective tax rate for the three months ended November 30, 2007 was a
provision of 30.3% compared to a benefit of 25.4% in the prior period. The
increase in the effective tax rate is due to lower tax exempt interest income
earned on our short-term investments and an increase in our operating income.
Accordingly, our effective tax rate is less than the statutory rate due to the
impact of our tax exempt interest income.
31
Income (Loss) from Discontinued Operations
The following is a summary of financial results included within
discontinued operations:
Three Months Ended
November 30,
--------------------------------
2007 2006
-------------- -------------
Net sales from discontinued operations ......................................... $-- $--
===== =====
Loss from discontinued operations before income taxes .......................... -- (148)
Recovery of income taxes ....................................................... -- 154
----- -----
Net income from discontinued operations ........................................ $-- $ 6
===== =====
Net income from discontinued operations for the three months ended November
30, 2006 is primarily due to legal and related costs offset by associated income
tax benefits pertaining to our discontinued Cellular business.
Net Income
The following table sets forth, for the periods indicated, selected
statement of operations data beginning with operating income from continuing
operations to reported net income and basic and diluted net income per common
share.
Three Months Ended November 30,
------------------------------------
2007 2006
--------------- --------------
Operating income ............................................................. $ 5,615 $ 1,720
Other income, net ............................................................ 1,104 1,348
------- -------
Income from continuing operations before income taxes ........................ 6,719 3,068
Income tax (expense) benefit ................................................. (2,039) 780
------- -------
Net income from continuing operations ....................................... 4,680 3,848
Net income from discontinuing operations, net of tax ......................... -- 6
------- -------
Net income ................................................................... $ 4,680 $ 3,854
======= =======
Net income per common share:
Basic ..................................................................... $ 0.20 $ 0.17
======= =======
Diluted ................................................................... $ 0.20 $ 0.17
======= =======
Net income was favorably impacted by sales incentive reversals of $871
($531 after taxes) and $528 ($343 after taxes) for the three months ended
November 30, 2007 and 2006, respectively.
Nine months ended November 30, 2007 as compared to the nine months ended
------------------------------------------------------------------------
November 30, 2006
-----------------
Continuing Operations
---------------------
The following tables set forth, for the periods indicated, certain
statement of operations data for the nine months ended November 30, 2007 and
2006.
32
Net Sales
Nine Months Ended November 30,
------------------------------ $ %
2007 2006 Change Change
----------- ------------- ------------ ---------
Electronics ............................ $ 341,205 $ 349,793 $ (8,588) (2.5)%
Accessories ............................ 118,880 10,763 108,117 1,004.5 %
--------- --------- --------- --------
Total net sales ...................... $ 460,085 $ 360,556 $ 99,529 27.6 %
========= ========= ========= =========
Electronics sales, which include mobile and consumer electronics,
represented 74.2% of our net sales for the nine months ended November 30, 2007,
decreased by 2.5% or $8,588 primarily due to a decrease in consumer electronics
sales as a result of lower than anticipated holiday sales and an industry-wide
shortage of LCD panels that adversely affected sales of LCD TV's, portable DVD's
and digital picture frames. Electronic sales also declined in certain mobile
video categories due to increased OEM programs that include the video system as
"standard" on more vehicles and a decline in new car sales.
The above decreases were partially offset by an increase in mobile audio
sales as a result of improved sales in the Jensen(R) mobile, Phase Linear and
satellite radio product lines and increases in the electronic sales of the
Company's international operations in Germany and Venezuela.
Accessories sales, which represented 25.8% of our net sales for the nine
months ended November 30, 2007, increased 1,004.5% or $108,117 due to
incremental sales generated from the recently acquired Thomson, Oehlbach and
Technuity operations. The Company expects accessories sales to continue to
represent a higher percentage of total net sales and margin as compared to the
prior year due to these acquisitions.
Sales incentive expense increased $10,440 to $20,445 for the nine months
ended November 30, 2007 as a result of a general increase in sales, specifically
an increase in accessories net sales which offer more sales incentive programs,
which is partially offset by a $617 increase in reversals during the period. The
increase in reversals is primarily due to a $1,087 increase in reversals of
unclaimed sales incentives upon the expiration of the claim period. We believe
the reversal of earned but unclaimed sales incentives upon the expiration of the
claim period is a disciplined, rational, consistent and systematic method of
reversing unclaimed sales incentives. These sales incentive programs are
expected to continue and will either increase or decrease based upon competition
and customer demands.
Gross Profit
2007 2006
----------- ------------
Gross profit ............................. $ 86,654 $ 61,224
Gross margin percentage .................. 18.8% 17.0%
Gross margins increased by 180 basis points from 17.0% to 18.8% for the
nine months ended November 30, 2007 as compared to the prior period. Gross
margins were favorably impacted by higher margins generated from the recently
acquired companies as well as improved overall margins in our core business as
well as improved buying programs and inventory management. Gross margins were
adversely impacted by increased warehouse and assembly costs as a result of
incremental transition costs necessary to facilitate the newly acquired
companies as well as increased warranty and repair costs, freight and shipping
costs and inventory provisions as a result of increased accessories sales. In
addition, reversals of sales incentive expense favorably impacted gross margins
by 0.5% during the nine months ended November 30, 2007 and 2006, respectively.
33
Operating Expenses and Operating Income (Loss)
Nine Months Ended November 30,
-------------------------------- $ %
2007 2006 Change Change
-------------- ------------- ---------- ----------
Operating Expenses:
Selling ............................................... $ 26,534 $ 21,626 $ 4,908 22.7%
General and administrative ............................ 45,153 36,682 8,471 23.1
Engineering and technical support ..................... 7,010 5,418 1,592 29.4
-------- -------- -------- ----
Operating expenses ................................... $ 78,697 $ 63,726 $ 14,971 23.5%
-------- -------- -------- ----
Operating income (loss) ............................... $ 7,957 $ (2,502) $ 10,459 418.0%
Operating expenses increased $14,971 for the nine months ended November 30,
2007, as compared to 2006. As a percentage of net sales, operating expenses
decreased to 17.1% for the nine months ended November 30, 2007, from 17.7% in
2006 due to higher sales and better controls over our fixed costs. The increase
in total operating expenses is due to the incremental costs related to the
recently acquired Thomson, Oehlbach, Incaar and Technuity operations, which
contributed total operating expenses of $16,789 for the nine months ended
November 30, 2007. Operating expenses for our core business was $61,908 for the
nine months ended November 30, 2007, a decrease of $1,818 over prior year.
The following table sets forth, for the periods indicated, total operating
expenses from our core business and the incremental operating expenses related
to the recently acquired Thomson, Oehlbach, Incaar and Technuity businesses.
Nine Months Ended November 30,
------------------------------ $ %
2007 2006 Change Change
------------ -------------- ---------- ----------
Core operating expenses .................................... $ 61,908 $ 63,726 $ (1,818) (2.9)%
Operating expenses from acquired businesses ................ 16,789 -- 16,789 100.0
-------- -------- -------- -----
Total operating expenses ................................... $ 78,697 $ 63,726 $ 14,971 23.5 %
======== ======== ======== =====
Selling expenses increased $4,908 primarily due to $7,166 of selling
expenses during the nine months ended November 30, 2007 for the recently
acquired operations of Thomson, Oehlbach, Incaar and Technuity, an increase in
the cost of travel and an increase in commission expense as a result of
increases in commissionable sales and salesmen salaries. These increases were
partially offset by a decline in advertising expenses due to a decline in the
budgeted amounts for general and print media advertising in fiscal 2008. Selling
expenses for our core business was $19,368 for the nine months ended November
30, 2007, a decrease of $2,258 over prior year.
General and administrative expenses increased $8,471 due to the following:
o $8,189 of expenses during the nine months ended November 30, 2007 for
the recently acquired operations of Thomson, Oehlbach, Incaar and
Technuity,
o $1,548 increase to executive bonuses and profit sharing as a result of
the Company meeting certain earnings targets and fiscal wage
increases,
o $394 increase in depreciation and amortization due to an increase in
capital expenditures as a result of acquisitions and investments in
new systems,
o $178 increase in a non-cash stock-based compensation and warrant
expense due to the vesting of options to employees,
o $447 increase in the cost of the Company's medical plan, as a result
of an increase in the usage of the plan, and an increase in the cost
of travel due to acquisition activity, and
o $442 increase in communication expenses.
The above increases were partially offset by a $1,701 decrease in
professional fees due to a reduction in audit fees, legal costs and consulting
costs.
34
General and administrative expenses from our core business was $36,964 for
the nine months ended November 30, 2007, an increase of $282 over the prior
year.
Engineering and technical support expenses increased $1,592 due to $1,435
of expenses during the nine months ended November 30, 2007 for the recently
acquired operations of Thomson, Oehlbach, Incaar and Technuity and an increase
in domestic direct labor and related payroll benefits as a result of wage
increases. Engineering and technical support expenses for our core business was
$5,575 for the nine months ended November 30, 2007, an increase of $157 over the
prior years.
Other Income (Expense)
Nine Months Ended November 30,
------------------------------- $ %
2007 2006 Change Change
------------ -------------- ----------- ---------
Interest and bank charges ............................... $(2,087) $(1,491) $ (596) 40.0 %
Equity in income of equity investees .................... 2,927 2,423 504 20.8
Other, net .............................................. 3,444 4,827 (1,383) (28.7)
------- ------- ------- ----
Total other income, net ................................. $ 4,284 $ 5,759 $(1,475) (25.6)%
======= ======= ======= ====
Interest and bank charges increased as a result of the assumption of
additional debt in connection with the acquisition of Oehlbach as well as
increased working capital needs of our domestic and foreign subsidiaries.
Interest and bank charges represent expenses for bank obligations of Audiovox
Corporation, Audiovox Germany and Venezuela and interest for a capital lease.
Equity in income of equity investees increased due to increased equity
income of Audiovox Specialized Applications, Inc. ("ASA") as a result of
increased sales and gross margins in the Jensen Audio and Voyager product lines.
Other income decreased due to a decline in interest income as a result of a
decline in short-term investment holdings due to cash utilized for acquisitions
as well as current working capital needs.
Income Tax Provision
The effective tax rate for the nine months ended November 30, 2007, was a
provision of 30.3% compared to a benefit of 22.7% in the prior period. The
increase in the effective tax rate is due to lower tax exempt interest income
earned on our short-term investments and increased income from operations.
Accordingly, our effective tax rate is less than the statutory rate due to the
impact of our tax exempt interest income.
Income (loss) from Discontinued Operations
The following is a summary of financial results included within
discontinued operations:
35
Nine Months Ended
November 30,
---------------------------------
2007 2006
------------- ---------------
Net sales from discontinued operations .......................................... $ -- $ --
======= =======
Income (loss) from discontinued operations before income taxes .................. 3,248 (886)
Income tax (expense) benefit .................................................... (1,137) 310
------- -------
Net income (loss) from discontinued operations .................................. $ 2,111 $ (576)
======= =======
The income (loss) from discontinued operations for the nine months ended
November 30, 2006 is primarily due to legal and related costs associated with
contingencies pertaining to our discontinued Cellular business. The increase in
income from discontinued operations for the nine months ended November 30, 2007
is due to a derivative legal settlement which resulted in pre-tax income of
$3,348, net of legal fees and other administrative costs of $3,401 (see Note 15
of Notes to the Consolidated Financial Statements).
Net Income
The following table sets forth, for the periods indicated, selected
statement of operations data beginning with operating income (loss) from
continuing operations to reported net income and basic and diluted net income
per common share:
Nine months ended November 30,
----------------------------------
2007 2006
------------- -------------
Operating income (loss) ......................................................... $ 7,957 $ (2,502)
Other income, net ............................................................... 4,284 5,759
-------- --------
Income from continuing operations before income taxes ........................... 12,241 3,257
Income tax (expense) benefit .................................................... (3,709) 740
-------- --------
Net income from continuing operations .......................................... 8,532 3,997
Net income (loss) from discontinuing operations, net of tax ..................... 2,111 (576)
-------- --------
Net income ...................................................................... $ 10,643 $ 3,421
======== ========
Net income per common share:
Basic ........................................................................ $ 0.47 $ 0.15
======== ========
Diluted ...................................................................... $ 0.47 $ 0.15
======== ========
Net income was favorably impacted by sales incentive reversals of $2,409
($1,469 after taxes) and $1,792 ($1,165 after taxes) for the nine months ended
November 30, 2007 and 2006, respectively, and pre-tax income of $3,248 ($2,111
after taxes) recorded in discontinued operations for the nine months ended
November 30, 2007.
Liquidity and Capital Resources
-------------------------------
Cash Flows, Commitments and Obligations
---------------------------------------
As of November 30, 2007, we had working capital of $293,151, which includes
cash and short-term investments of $28,946 compared with working capital of
$305,960 at February 28, 2007, which included cash and short-term investments of
$156,345. The decrease in short-term investments is primarily due to the
acquisitions of Oehlbach, Incaar and Technuity, the purchase of capital
expenditures as well as additional working capital needs to support current
operations. We plan to utilize our current cash and short-term investments as
well as collections from accounts receivable to fund the current operations of
the business. However, we may utilize all or a portion of our current capital
resources to pursue other business opportunities, including acquisitions.
36
Operating activities used cash of $92,870 for the nine months ended
November 30, 2007 compared to cash used of $21,429 in 2006. Net income from
continuing operations for the nine months ended November 30, 2007 was $8,532
compared to $3,997 in the prior year. The increase in cash used by operating
activities as compared to the prior year was primarily due to an increase in
accounts receivable (including vendor receivables) and inventory balances.
The following significant fluctuations in the balance sheet accounts
impacted cash flows from operations:
o Cash flows from operating activities for the nine months ended
November 30, 2007 were impacted by an increase in accounts receivable
and receivables from vendors primarily due to increased sales and the
timing of collections. Accounts receivable turnover approximated 5.0
times during the nine months ended November 30, 2007 compared to 4.2
times in the prior year.
o Cash flows from operations were impacted by an increase in inventory
due to increased purchases for future sales projections during the
holiday selling season. Inventory turnover approximated 3.9 times
during the nine months ended November 30, 2007 compared to 4.1 times
in the prior year.
o In addition, cash flows from operating activities for the nine months
ended November 30, 2007 were favorably impacted by an increase in
accounts payable and accrued expenses due to the timing of payments.
The timing of payments made can fluctuate and are often impacted by
the timing of inventory purchases, operating expenses and the amount
of inventory on hand.
Investing activities provided cash of $100,224 during the nine months ended
November 30, 2007, primarily due to the sales (net of purchases) of short-term
investments partially offset by the Technuity, Oehlbach and Incaar acquisitions
and purchases of property, plant and equipment. Investing activities provided
cash of $24,216 during the nine months ended November 30, 2006, primarily due to
purchase (net of sales) of short-term investments.
Financing activities used cash of $2,407 during the nine months ended
November 30, 2007, primarily from the purchase of treasury stock and principal
payments on debt partially offset by the proceeds received from the exercise of
stock options. Financing activities for the nine months ended November 30, 2006
used cash of $5,272, primarily from the purchase of treasury stock and payment
of bank obligations and debt partially offset by proceeds received from the
exercise of stock options and warrants.
As of November 30, 2007, we have a domestic credit line to fund the
temporary short-term working capital needs of the Company. This line expires on
March 31, 2008 and allows aggregate borrowings of up to $25,000 at an interest
rate of Prime (or similar designations) plus 1%. In addition, Audiovox Germany
has a 16,000 Euro accounts receivable factoring arrangement and a 6,000 Euro
Asset-Based Lending ("ABL") credit facility and Audiovox Venezuela has a $1,000
credit facility borrowing arrangement with an interest rate of 13%.
Certain contractual cash obligations and other commercial commitments will
impact our short and long-term liquidity. At November 30, 2007, such obligations
and commitments are as follows:
Payments Due by Period
-----------------------------------------------------------------------
Less than 1-3 4-5 After
Contractual Cash Obligations Total 1 Year Years Years 5 Years
-------------------------------------------------------- ------- --------- -------- -------- ----------
Capital lease obligation (1) ....................... $11,580 $ 521 $ 1,043 $ 1,095 $ 8,920
Operating leases (2) ............................... 18,816 2,976 4,298 3,361 8,182
------- ------- ------- ------- -------
Total contractual cash obligations ................. $30,396 $ 3,497 $ 5,341 $ 4,456 $17,102
37
Amount of Commitment Expiration per period
----------------------------------------------------------------------
Total
Amounts Less than 1-3 4-5 After
Other Commercial Commitments Committed 1 Year Years Years 5 years
-------------------------------------------------------- --------- --------- -------- --------- ----------
Bank obligations (3) .................................... $ 3,929 $ 3,929 $ -- $ -- $ --
Stand-by letters of credit (4) .......................... 2,244 2,244 -- -- --
Commercial letters of credit (4) ........................ 33 33 -- -- --
Debt (5) ................................................ 2,315 79 1,695 541 --
Unconditional purchase obligations (6) .................. 78,877 78,877 -- -- --
------- ------- ------- ------- -------
Total commercial commitments ............................ $87,398 $85,162 $ 1,695 $ 541 $ 0
======= ======= ======= ======= =======
1. Represents total payments (interest and principal) due under capital lease
obligations, which has a current (included in other current liabilities)
and long term principal balance of $74 and $5,625, respectively at November
30, 2007.
2. We enter into operating leases in the normal course of business.
3. Represents amounts outstanding under the Audiovox Germany factoring
agreement at November 30, 2007.
4. Commercial letters of credit are issued during the ordinary course of
business through major domestic banks as requested by certain suppliers. We
also issue standby letters of credit to secure certain bank obligations and
insurance requirements.
5. Represents amounts outstanding under a loan agreement for Audiovox Germany.
This amount also includes amounts due under a call-put option with certain
employees of Audiovox Germany. During September 2007, the Company paid the
outstanding balance of the Germany term loan (approximately $4,868) in full
with current cash balances.
6. Open purchase obligations represent inventory commitments. These
obligations are not recorded in the consolidated financial statements until
these commitments are fulfilled and such obligations are subject to change
based on negotiations with manufacturers.
We regularly review our cash funding requirements and attempt 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, we evaluate possible
acquisitions of, or investments in, businesses that are complementary to ours,
which transactions may require the use of cash. We believe that our cash, other
liquid assets, operating cash flows, credit arrangements, access to equity
capital markets, taken together, provides adequate resources to fund ongoing
operating expenditures. In the event that they do not, we may require additional
funds in the future to support our working capital requirements or for other
purposes and may seek to raise such additional funds through the sale of public
or private equity and/or debt financings as well as from other sources. No
assurance can be given that additional financing will be available in the future
or that if available, such financing will be obtainable on terms favorable when
required.
Off-Balance Sheet Arrangements
------------------------------
We do 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.
38
Related Party Transactions
--------------------------
During 1998, we entered into a 30-year capital lease for a building with
our principal stockholder and chairman, which was the headquarters of the
discontinued Cellular operation. Payments on the capital lease were based upon
the construction costs of the building and the then-current interest rates. The
current effective interest rate on the capital lease obligation is 8%. On
November 1, 2004, we entered into an agreement to sublease the building to
UTStarcom for monthly payments of $46 until November 1, 2009. We also lease
another facility from our principal stockholder which expires on November 30,
2016. Total lease payments required under all related party leases for the
five-year period ending November 30, 2012 are $6,139.
Recent Accounting Pronouncements
--------------------------------
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS 157 defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value measurement.
SFAS No. 157 does not require any new fair value measurements, but rather
eliminates inconsistencies in guidance found in other accounting pronouncements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2008, as
it was amended by FASB Staff Position No. 157-b, Effective Date of FASB
Statement No. 157. The transition adjustment of the difference between the
carrying amounts and the fair values of those financial instruments should be
recognized as a cumulative effect adjustment to retained earnings as of the
beginning of the year of adoption. The Company is currently evaluating the
impact of SFAS No. 157, but does not expect the adoption of this pronouncement
to have a material impact on the Company's financial position or results of
operations.
In February 2007, the FASB released SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" ("SFAS No. 159") to provide
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS No. 159is to reduce both the complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. SFAS No. 159is effective
for fiscal years beginning after November 15, 2007 with early adoption
permitted. The Company is currently evaluating the impact of SFAS No. 159, but
does not expect the adoption of this pronouncement to have a material impact on
the Company's financial position or results of operations.
On December 4, 2007, the Financial Accounting Standards Board ("FASB")
issued Statement No. 141(R), Business Combinations ("Statement No. 141(R)") and
Statement No. 160, Accounting and Reporting of Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 ("Statement No.
160"). These new standards will significantly change the financial accounting
and reporting of business combination transactions and noncontrolling (or
minority) interests in consolidated financial statements. Issuance of these
standards is also noteworthy in that they represent the culmination of the first
major collaborative convergence project between the International Accounting
Standards Board and the FASB. Statement No. 141(R) is required to be adopted
concurrently with Statement No. 160 and is effective for business combination
transactions for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Early
adoption is prohibited. Application of Statement No. 141(R) and Statement No.
160 is required to be adopted prospectively, except for certain provisions of
Statement No. 160, which are required to be adopted retrospectively. Business
combination transactions accounted for before adoption of Statement No. 141(R)
should be accounted for in accordance with Statement No. 141 and that accounting
previously completed under Statement No. 141 should not be modified as of or
after the date of adoption of Statement No. 141(R). The Company is currently
evaluating the impact of Statement No. 141(R) and Statement No. 160, but does
not expect the adoption of these pronouncements to have a material impact on the
Company's financial position or results of operations.
39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------- ----------------------------------------------------------
There has been no significant change in our market risk sensitive
instruments since February 28, 2007.
ITEM 4. CONTROLS AND PROCEDURES
------- -----------------------
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e)
as of the end of the period covered by this report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of the period covered by this report, these disclosure controls and
procedures are effective at a "reasonable assurance" level.
There were no material changes in our internal control over financial
reporting (as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) during the three month period ended November 30, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
40
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
------- -----------------
See Note 15 of the Notes to the Consolidated Financial Statements in Part
I, Item 1 of this Form 10-Q and Note 17 of the Form 10-K for the fiscal year
ended February 28, 2007 for information regarding legal proceedings.
ITEM 1A. RISK FACTORS
-------- ------------
There have been no material changes from the risk factors previously
disclosed in the Company's Form 10-K for the fiscal year ended February 28,
2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
------- -----------------------------------------------------------
Treasury Stock/Share Repurchase Program
---------------------------------------
In September 2000, we were authorized by the Board of Directors to
repurchase up to 1,563,000 shares of Class A Common Stock in the open market
under a share repurchase program (the "Program"). In July 2006, the Board of
Directors authorized an additional repurchase up to 2,000,000 Class A common
stock in the open market in connection with the program. As of November 30,
2007, the cumulative total of acquired shares pursuant to the program was
1,821,147 reducing the remaining authorized share repurchase balance to
1,741,853. During the nine months ended November 30, 2007, we purchased 128,100
shares for $1,431,000 as outlined in the following table:
Total Number Maximum
of Shares Number of
Purchased as Shares that
Total Part of May Yet Be
Number of Average Publicly Purchased
Shares Price Paid Announced Under the
Period Purchased Per Share Program Program (1)
-------------------------------------------- ----------- ---------- ----------- -------------
As of February 28, 2007 .................... -- $ 10.03 1,693,047 1,869,953
July 2007 purchases ........................ 98,200 $ 11.44 1,791,247 1,771,753
August 2007 purchases ...................... 29,900 $ 10.29 1,821,147 1,741,853
September 2007 purchases ................... -- -- -- --
October 2007 purchases ..................... -- -- -- --
November 2007 purchases .................... -- -- -- --
---------
Total purchases ............................ 128,100
(1) Prior to the purchases made during the nine months ended November 30, 2007,
we had 1,693,047 shares of treasury stock purchased as part of a publicly
announced program. As of November 30, 2007, we had 1,821,147 shares of
treasury stock with an average paid price per share of $10.11.
41
ITEM 6. EXHIBITS
------- --------
Exhibit Number Description
-------------- -----------
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and rule
31.1 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith)
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and rule
31.2 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith).
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
32.1 herewith).
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
32.2 herewith).
42
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/Patrick M. Lavelle
-----------------------
Patrick M. Lavelle
President and Chief
Executive Officer
Dated: January 9, 2008
By: /s/Charles M. Stoehr
----------------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
43