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 May 31, 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 July 9, 2007
----- ------------------
Class A Common Stock 20,719,499 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 May 31, 2007 and
February 28, 2007.................................... 3
Consolidated Statements of Operations for the
Three Months Ended May 31, 2007 and 2006............. 5
Consolidated Statements of Cash Flows for the
Three Months Ended May 31, 2007 and 2006............. 6
Notes to Consolidated Financial Statements............. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK......................................... 27
ITEM 4. CONTROLS AND PROCEDURES................................ 27
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................... 28
ITEM 1A. RISK FACTORS.......................................... 28
ITEM 6. EXHIBITS............................................... 29
SIGNATURES..................................................... 30
2
Audiovox Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
May 31, February 28,
2007 2007
--------------- ---------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents ............................................ $ 15,461 $ 15,473
Short-term investments ............................................... 108,658 140,872
Accounts receivable, net ............................................. 109,833 86,003
Inventory ............................................................ 116,724 104,972
Receivables from vendors ............................................. 15,754 13,935
Prepaid expenses and other current assets ............................ 15,556 11,427
Income tax receivable ................................................ 2,769 3,518
Deferred income taxes ................................................ 2,489 2,492
-------- --------
Total current assets ................................................ 387,244 378,692
Investment securities ................................................. 14,062 13,179
Equity investments .................................................... 12,037 11,353
Property, plant and equipment, net .................................... 19,668 18,019
Goodwill .............................................................. 24,202 17,514
Intangible assets ..................................................... 57,914 57,874
Deferred income taxes ................................................. 2,438 1,858
Other assets .......................................................... 616 631
-------- --------
Total assets ........................................................ $518,181 $499,120
======== ========
See accompanying notes to consolidated financial statements.
3
Audiovox Corporation and Subsidiaries
Consolidated Balance Sheets (continued)
(In thousands, except share data)
May 31, February 28,
2007 2007
---------------- --------------
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .............................................................. $ 38,593 $ 34,344
Accrued expenses and other current liabilities ................................ 30,001 26,564
Accrued sales incentives ...................................................... 10,438 7,410
Bank obligations .............................................................. 3,533 2,890
Current portion of long-term debt ............................................. 1,626 1,524
------------ ------------
Total current liabilities .................................................... 84,191 72,732
Long-term debt ................................................................. 4,929 5,430
Other tax liabilities .......................................................... 4,171 3,347
Capital lease obligation ....................................................... 5,660 5,676
Deferred compensation .......................................................... 8,482 7,573
------------ ------------
Total liabilities ............................................................ 107,433 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, 22,336,546 and
22,005,346 shares issued, 20,643,499 and 20,312,299 shares outstanding
at May 31, 2007 and February 28, 2007, respectively ......................... 223 220
Class B convertible, $.01 par value; 10,000,000 shares authorized,
2,260,954 shares issued and outstanding ..................................... 22 22
Paid-in capital ............................................................... 274,464 271,056
Retained earnings ............................................................. 153,462 151,363
Accumulated other comprehensive loss .......................................... (444) (1,320)
Treasury stock, at cost, 1,693,047 shares of Class A common stock ............. (16,979) (16,979)
------------ ------------
Total stockholders' equity ..................................................... 410,748 404,362
------------ ------------
Total liabilities and stockholders' equity ..................................... $ 518,181 $ 499,120
============ ============
See accompanying notes to consolidated financial statements.
4
Audiovox Corporation and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended May 31, 2007 and 2006
(In thousands, except share and per share data)
(unaudited)
2007 2006
--------------- ---------------
Net sales .................................................................... $ 128,254 $ 111,299
Cost of sales ................................................................ 105,065 91,200
------------ ------------
Gross profit ................................................................. 23,189 20,099
------------ ------------
Operating expenses:
Selling ..................................................................... 8,797 7,061
General and administrative .................................................. 13,699 11,325
Engineering and technical support ........................................... 2,262 1,765
------------ ------------
Total operating expenses ................................................... 24,758 20,151
------------ ------------
Operating loss ............................................................... (1,569) (52)
------------ ------------
Other income (expense):
Interest and bank charges ................................................... (667) (560)
Equity in income of equity investees ........................................ 942 948
Other, net .................................................................. 1,467 1,921
------------ ------------
Total other income ........................................................ 1,742 2,309
------------ ------------
Income from continuing operations before income taxes ........................ 173 2,257
Income tax expense ........................................................... 52 475
------------ ------------
Net income from continuing operations ....................................... 121 1,782
Net income (loss) from discontinued operations, net of tax ................... 2,111 (260)
------------ ------------
Net income .................................................................. $ 2,232 $ 1,522
============ ============
Net income (loss) per common share (basic):
From continuing operations .................................................. $ 0.01 $ 0.08
From discontinued operations ................................................ 0.09 (0.01)
------------ ------------
Net income per common share (basic) ......................................... $ 0.10 $ 0.07
============ ============
Net income (loss) per common share (diluted):
From continuing operations .................................................. $ 0.01 $ 0.08
From discontinued operations ................................................ 0.09 (0.01)
------------ ------------
Net income per common share (diluted) ....................................... $ 0.10 $ 0.07
============ ============
Weighted-average common shares outstanding (basic) ........................... 22,775,052 22,369,348
============ ============
Weighted-average common shares outstanding (diluted) ......................... 22,847,113 22,548,039
============ ============
See accompanying notes to consolidated financial statements.
5
Audiovox Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended May 31, 2007 and 2006
(In thousands)
(unaudited)
2007 2006
----------- -----------
Cash flows from operating activities:
Net income ....................................................................... $ 2,232 $ 1,522
Net (income) loss from discontinued operations .................................... (2,111) 260
-------- --------
Net income from continuing operations ............................................. 121 1,782
Adjustments to reconcile net income to net cash (used in) provided by
continuing operating activities:
Depreciation and amortization .................................................... 1,167 981
Bad debt expense (recovery) ...................................................... 110 (104)
Equity in income of equity investees ............................................. (942) (948)
Non-cash compensation adjustment ................................................. (998) 131
Tax benefit on stock options exercised ........................................... (865) --
Changes in operating assets and liabilities (net of assets and liabilities acquired
Accounts receivable .............................................................. (21,166) 4,420
Inventory ........................................................................ (9,133) 5,024
Receivables from vendors ......................................................... (1,778) 3,625
Prepaid expenses and other ....................................................... (901) (1,266)
Investment securities-trading .................................................... (910) (69)
Accounts payable, accrued expenses, accrued sales incentives and
other current liabilities ........................................................ 7,359 3,993
Income taxes payable ............................................................. 839 1,762
-------- --------
Net cash (used in) provided by operating activities ............................. (27,097) 19,331
Cash flows from investing activities:
Purchases of property, plant and equipment ........................................ (2,401) (421)
Proceeds from sale of property, plant and equipment ............................... 66 --
Proceeds from distribution from an equity investee ................................ 257 737
Purchase of short-term investments ................................................ (5,600) (38,605)
Proceeds from sale of short-term investments ...................................... 37,750 13,000
Purchase of patents ............................................................... -- (475)
Purchase of acquired businesses ................................................... (6,699) --
-------- --------
Net cash provided by (used in) investing activities .............................. 23,373 (25,764)
6
Audiovox Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
For the Three Months Ended May 31, 2007 and 2006
(In thousands)
(unaudited)
2007 2006
------------ -----------
Cash flows from financing activities:
Borrowings from bank obligations .................................................. 662 --
Repayments on bank obligations .................................................... -- (1,314)
Principal payments on capital lease obligation .................................... (16) (21)
Proceeds from exercise of stock options ........................................... 2,546 --
Principal payments on debt ........................................................ (478) (464)
Repurchase of Class A Common Stock ................................................ -- (308)
Tax benefit on stock options exercised ............................................ 865 --
-------- --------
Net cash provided by (used in) financing activities .............................. 3,579 (2,107)
-------- --------
Effect of exchange rate changes on cash ............................................ 133 85
-------- --------
Net decrease in cash and cash equivalents .......................................... (12) (8,455)
Cash and cash equivalents at beginning of period ................................... 15,473 16,280
-------- --------
Cash and cash equivalents at end of period ......................................... $ 15,461 $ 7,825
======== ========
See accompanying notes to consolidated financial statements.
7
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements
May 31, 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 (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 (Note 10).
The Company has one reportable segment, the Electronics Group, which is
organized by product category. The Electronics Group consists of six
wholly-owned subsidiaries: American Radio Corp., Audiovox Electronics
Corporation, Audiovox Accessories Corp., 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.
No stock option awards vested or were granted during the periods presented,
accordingly no stock-based compensation expense has been recorded for the
three months ended May 31, 2007 and 2006. At May 31, 2007, the Company had
no unrecognized compensation cost as all stock options were fully vested.
8
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
May 31, 2007
Information regarding the Company's stock options is summarized below:
Weighted-Average
Number of Shares Exercise Price
---------------- ----------------
Outstanding and exercisable at February 28, 2007 ........................ 1,784,652 $ 12.97
Granted ............................................................... -- --
Exercised ............................................................. (331,200) 7.69
Forfeited/expired ..................................................... (5,000) 13.54
---------- ------
Outstanding and exercisable at May 31, 2007 ............................. 1,448,452 $ 14.19
========== ======
(3) Discontinued Operations
-----------------------
The net income (loss) from discontinued operations for the three months
ended May 31, 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 May 31,
--------------------------
2007 2006
---------- -----------
Net sales from discontinued operations ......................................... $ -- $ --
====== ======
Income (loss) from discontinued operations before income taxes ................. $3,247 $ (329)
Income tax expense (benefit) ................................................... 1,136 (69)
------ ------
Net income (loss) from discontinued operations ................................. $2,111 $ (260)
====== ======
(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 May 31,
------------------------------
2007 2006
------------- ------------
Weighted-average common shares outstanding (basic) .............................. 22,775,052 22,369,348
Effect of dilutive securities:
Stock options .................................................................. 72,061 178,691
---------- ----------
Weighted-average common shares and potential common shares outstanding .......... 22,847,113 22,548,039
(diluted)
========== ==========
Stock options totaling 1,000,000 and 1,315,422 for the three months ended
May 31, 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.
9
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
May 31, 2007
(5) Accumulated Other Comprehensive Loss
------------------------------------
Accumulated other comprehensive loss of $444 and $1,320 at May 31, 2007 and
February 28, 2007, respectively, includes the net accumulated unrealized
loss on the Company's available-for-sale investment securities of $1,570
and $1,561 at May 31, 2007 and February 28, 2007, respectively, and foreign
currency translation gains of $1,126 and $241 at May 31, 2007 and February
28, 2007, respectively.
The Company's total comprehensive income was as follows:
Three Months Ended May 31,
--------------------------
2007 2006
--------- ----------
Net income (loss) .............................................................. $ 2,232 $ 1,522
Other comprehensive income (loss):
Foreign currency translation adjustments ...................................... 885 968
Unrealized holding loss on available-for-sale investment
securities arising during the period, net of tax ............................. (9) (391)
------- -------
Other comprehensive income, net of tax ....................................... 876 577
------- -------
Total comprehensive income ..................................................... $ 3,108 $ 2,099
======= =======
The changes in the net unrealized holding loss on available-for-sale
investment securities arising during the periods presented above are net of
tax benefits of $6 and $240 for the three months ended May 31, 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:
Three Months Ended May 31,
--------------------------
2007 2006
-------- ---------
Cash paid during the period:
Interest (excluding bank charges) ................... $615 $498
Income taxes (net of refunds) ....................... 357 152
Non-Cash Transactions
---------------------
During the three months ended May 31, 2007 and 2006, the Company recorded a
non-cash compensation (benefit) charge of $(998) and $131 respectively,
related to the rights under call/put options previously granted to certain
employees. The benefit recorded during the three months ended May 31, 2007
was due to a reduction in the call/put liability calculation as a result of
the Oehlbach acquisition (Note 7).
Changes in Stockholders' Equity
-------------------------------
During the three months ended May 31, 2007, 331,200 stock options were
exercised yielding proceeds of $2,546 to the Company. In addition, the
Company recorded an $865 increase to paid in capital as a result of the tax
benefit realized upon exercise of stock options during the three months
ended May 31, 2007.
As a result of the implementation of FASB Interpretation 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
(Note 10).
10
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
May 31, 2007
(7) Business Acquisitions
---------------------
Thomson Accessories
-------------------
On January 29, 2007, the Company acquired 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.
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 $142 for the three months ended
May 31, 2007 and has been preliminarily allocated to intangible assets
(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 is 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:
Assets acquired:
Inventory ................................ $31,664
Prepaid expenses and other current assets. 2,312
Tradename ................................ 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 and liabilities assumed is preliminary
(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
earning 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 May 31, 2007 no amount has been accrued for the
contingency payment as the earnings target was not reached.
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 enhance the Company's international market share
in the accessory business.
11
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
May 31, 2007
The following summarizes the 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
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 and liabilities assumed is preliminary
(Note 8).
The following unaudited pro-forma financial information for the three
months ended May 31, 2006 represents the combined results of the Company's
operations as if the Oehlbach and Thomson acquisitions had 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 May 31, 2006
-------------------------------
(unaudited)
Net sales ............................. $159,624
Net income ............................ 1,640
Net income per share-diluted ......... 0.07
(8) Goodwill and Intangible Assets
------------------------------
The change in goodwill is as follows:
Balance at February 28, 2007.... $17,514
Purchase of Oehlbach (Note 7).... 6,688
-------
Balance at May 31, 2007 ......... $24,202
=======
At February 28, 2007, intangible assets consisted of the following:
Gross
Carrying Accumulated Total Net
Value Amortization Book Value
------------- --------------- ------------
Patents subject to amortization ..................................... $ 625 $ 193 $ 432
Trademarks/Tradenames not subject to
amortization ....................................................... 56,835 -- 56,835
Contract subject to amortization (5 years) .......................... 1,104 497 607
------- ------- -------
Total ............................................................. $58,564 $ 690 $57,874
======= ======= =======
12
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
May 31, 2007
At May 31, 2007, intangible assets consisted of the following:
Gross
Carrying Accumulated Total Net
Value Amortization Book Value
------------- --------------- ------------
Patents subject to amortization ........................................... $ 625 $ 240 $ 385
Trademarks/Tradenames not subject to amortization ........................ 56,977 -- 56,977
Contract subject to amortization (5 years) ............................... 1,104 552 552
------- ------- -------
Total ................................................................... $58,706 $ 792 $57,914
======= ======= =======
During the three months ended May 31, 2007, the Company made a contingent
payment of $142 in connection with the RCA brand, which has been
preliminarily allocated to trademarks not subject to amortization (Note 7).
The Company recorded amortization expense of $102 and $88 for the three
months ended May 31, 2007 and 2006, respectively. The estimated aggregate
amortization expense for the cumulative five years ending May 31, 2012
amounts to $898.
(9) Equity Investments
------------------
As of May 31, 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.
May 31, February 28,
2007 2007
------------- -------------
Current assets ........................... $25,275 $23,409
Non-current assets ....................... 4,781 4,716
Current liabilities ...................... 5,981 5,420
Members' equity .......................... 24,075 22,705
Three Months Ended May 31,
--------------------------
2007 2006
-------- --------
Net sales ................................ $19,506 $15,884
Gross profit ............................. 5,304 4,902
Operating income ......................... 1,646 1,642
Net income ............................... 1,884 1,896
The Company's share of income from ASA for the three months ended May 31,
2007 and 2006, was $942 and $948 respectively. In addition, the Company
received distributions from ASA totaling $257 during the three months ended
May 31, 2007, which was recorded as a reduction to equity investments in
the accompanying consolidated balance sheet.
13
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
May 31, 2007
(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
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 months
ended May 31, 2007 was 30.1%, compared to 21.0% in the prior year. The
increase in the effective tax rate is due to lower tax exempt interest
income earned on short-term investments, which results in the Company's
effective tax rate being less than the statutory rate.
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 requires increased disclosures.
The Company adopted the provisions of FIN 48 on March 1, 2007 which
resulted in a $133 adjustment to decrease retained earnings in connection
with a cumulative effect of a change in accounting principle. The amount of
unrecognized tax benefits at May 31, 2007 was $4,171, all of which would
impact the Company's effective tax rate, if recognized. The Company
recognizes accrued interest and penalties associated with unrecognized tax
benefits as part of the income tax provision. As of May 31, 2007, the
Company had $629 of accrued interest and penalties in connection with
unrecognized tax benefits.
There was no material change in the amount of uncertain tax benefits
recognized during the three months ended May 31, 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 state and foreign jurisdictions
with varying statutes of limitations.
14
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
May 31, 2007
(11) Accrued Sales Incentives
------------------------
A summary of the activity with respect to sales incentives is provided
below:
Three Months Ended May 31,
----------------------------------
2007 2006
------------- -----------
Opening balance ................................................... $ 7,410 $ 8,512
Accruals .......................................................... 7,714 * 3,001
Payments and credits .............................................. (3,323) (3,560)
Reversals for unearned sales incentive ............................ (347) (629)
Reversals for unclaimed sales incentives .......................... (1,016) (379)
-------- --------
Ending balance .................................................... $ 10,438 $ 6,945
======== ========
* Includes $325 of sales incentives acquired from the Oehlbach acquisition
(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:
Three Months Ended May 31,
-----------------------------
2007 2006
------------ -----------
Opening balance .............................................................. $ 9,586 $ 9,947
Liabilities accrued for warranties issued during the period .................. 2,691 1,382
Warranty claims paid during the period ....................................... (2,953) (2,306)
------- -------
Ending balance ............................................................... $ 9,324 $ 9,023
======= =======
(13) Financing Arrangements
----------------------
The Company has the following financing arrangements:
May 31, February 28,
2007 2007
----------- ------------
Bank Obligations
----------------
Domestic bank obligations (a) ............................................. $ -- $ --
Venezuela bank obligations (b) ............................................ 219 --
Euro Asset-Based lending obligation (c) ................................... 3,314 2,890
------ ------
Total bank obligations .................................................... $3,533 $2,890
====== ======
Debt
----
Euro term loan agreement (d) .............................................. $5,179 $5,461
Oehlbach (e) .............................................................. 850 --
Other (f) ................................................................. 526 1,493
------ ------
Total debt ................................................................ $6,555 $6,954
====== ======
(a) Domestic Bank Obligations
-------------------------
At May 31, 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 August 31, 2007 and allows aggregate borrowings
of up to $25,000 at an interest rate of Prime (or similar
designations) plus 1%. As of May 31, 2007 and February 28, 2007, no
direct amounts are outstanding under this agreement. At May 31, 2007,
the Company had $3,586 in commercial and standby letters of credit
outstanding, which reduces the amount available under the unsecured
credit line.
15
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
May 31, 2007
(b) Venezuela Bank Obligations
--------------------------
In October 2005, Audiovox Venezuela entered into a credit facility
borrowing arrangement which allows for principal borrowings up to
$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
February 28, 2007, no direct 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 Germany, which expires on
October 25, 2007 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 May 31,
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
has been fully repaid. Payments under Tranche A are due in monthly
installments and interest accrues at 2.75% over the Euribor rate. Any
amount repaid may not be reborrowed. The term loan becomes immediately
due and payable if a change of control occurs without permission of
the financial institution. In April 2005, the maturity of the term
loan was prolonged to August 30, 2010 with a pre-payment option.
Audiovox Corporation guarantees 3 million Euros of this term loan. The
term loan is secured by the pledge of the stock of Audiovox Germany on
all brands and trademarks of Audiovox Germany. The term loan requires
the maintenance of certain yearly financial covenants that are
calculated according to German Accounting Standards. Should any of the
financial covenants not be met, the financial institution may charge a
higher interest rate on any outstanding borrowings and/or call the
loan. The short and long term amounts outstanding under this agreement
were $1,554 and $3,625 respectively, at May 31, 2007 and $1,524 and
$3,937, respectively, at February 28, 2007.
(e) Oehlbach
--------
In connection with the Oehlbach acquisition (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.
16
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
May 31, 2007
(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:
Three Months Ended May 31,
-------------------------
2007 2006
--------- ---------
Interest income ......................... $ 1,411 $ 1,588
Rental income ........................... 138 138
Miscellaneous ........................... (82) 195
------- -------
Total Other, net ........................ $ 1,467 $ 1,921
======= =======
(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 ACC 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 Asset Sale to UTStarcom, Inc. These actions were
subsequently consolidated into a single derivative complaint (the
"Complaint"), In re Audiovox Corporation Derivative Litigation. The
Complaint challenges the payment of $16,000 to Mr. Christopher pursuant to
a Personally Held Intangibles Agreement, an additional $4,000 to Mr.
Christopher pursuant to an Agreement and General Release, $1,916 to Mr.
Shalam pursuant to an amendment to his Long-Term Incentive Award, $5,000
distributed to ACC employees other than Mr. Christopher and the extension
of certain options to Mr. Christopher. The Complaint alleges that: (i) the
payments should be rescinded on grounds including, inter alia, material
misrepresentation, breach of fiduciary duty and mistake, (ii) the
recipients of the various payments were unjustly enriched, and (iii) the
directors of Audiovox breached their fiduciary duties to Audiovox and its
shareholders.
17
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
May 31, 2007
This matter was settled in May 2007 and received final Chancery court
approval in June 2007. As a result of the settlement, the Company is to
receive $6,750 in gross proceeds, of which $1,500 was received as of May
31, 2007. The remaining gross proceeds of $5,250 is recorded in other
current assets on the accompanying consolidated balance sheet as of May 31,
2007 and was subsequently collected in June 2007. The gross proceeds were
partially offset by $2,378 in plaintiff legal fees which was recorded in
accrued expenses on the accompanying consolidated balance sheet as of May
31, 2007 and subsequently paid in June 2007. In addition, the Company
accrued $1,023 in legal and administrative costs as of May 31, 2007 for
defending all outstanding ACC legal claims. The items discussed above
resulted in a pre-tax benefit of $3,349 being recorded in discontinued
operations for the three months ended May 31, 2007.
(16) New Accounting Pronouncements
-----------------------------
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value
measurement. SFAS 157 does not require any new fair value measurements, but
rather eliminates inconsistencies in guidance found in various prior
accounting pronouncements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the impact of
SFAS 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 159") to provide
companies with an option to report selected financial assets and
liabilities at fair value. The objective of SFAS 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 159 is effective for fiscal years beginning after November 15, 2007
with early adoption permitted. The Company is currently evaluating the
impact of SFAS 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.
18
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 months ended May 31, 2007 compared to
the three months ended May 31, 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 six wholly-owned subsidiaries: American Radio Corp., Audiovox
Electronics Corporation ("AEC"), Audiovox Accessories Corp., 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), Heco(R), Jensen(R), Mac Audio(R),
Magnate(R), Movies 2 Go(R), Phase Linear(R), Prestige(R), Pursuit(R), RCA(R),
Recoton(R), Road Gear(R) and Spikemaster(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 ("Electronics Group"), which is organized
by product category.
We have recently integrated and continue to integrate the following
acquisitions, discussed below, into our existing business structure:
In March 2007, Audiovox German Holdings GmbH completed the acquisition of
Oehlbach, a European market leader in the accessories field, 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 expand our
electronics accessory product line to international markets.
In January 2007, we completed the acquisition of Thomson's Americas
consumer electronics accessory business for a total purchase price of
approximately $60,427 plus a five year fee related to the RCA brand in
connection with future sales. The purpose of this acquisition was to enhance our
market share in the accessory business, which includes the rights to the RCA
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.
19
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 existing business
distribution.
Effective March 1, 2007, the Company reported "accessories" as a separate
product category due to the growth in the accessories product line as a result
of the Thomson and Oehlbach acquisitions. In addition, the Company's former
mobile and consumer product categories are now combined and recorded in the
"Electronics" product category. 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 LCD and Plasma flat panel televisions,
o home and portable stereos,
o HDTV Antennas, WiFi Antennas and HDMI accessories,
o two-way radios, digital multi-media products such as personal video
recorders and MP3 products,
o home speaker systems and home theater in a box,
o portable DVD players, and
o flat panel TV mounting systems.
Accessories products include:
o antennas,
o home electronic accessories such as cabling, power cards and
performance enhancing electronics, and
o remotes, iPod specialized products, wireless headphones and other
connectivity products.
We believe the Electronics Group has an expanding market with a certain
level of volatility related to both domestic and international new car sales,
increased competition by manufacturers, 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.
Segment
We have determined that we operate in one segment, the Electronics Group
based on review of SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information". Characteristics of our operations which are relied on in
making and reviewing business decisions include the similarities in our
products, the commonality of our customers across 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.
20
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.
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 months ended May 31, 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 May 31, 2007 compared to the three months ended May 31, 2006
-------------------------------------------------------------------------------
The following tables set forth, for the periods indicated, certain
statement of operations data for the three months ended May 31, 2007 and 2006.
Net Sales
Three Months Ended May 31,
------------------------------ $ %
2007 2006 Change Change
------------ -------------- ----------- -----------
Electronics ............................ $ 94,984 $107,356 $(12,372) (11.5)%
Accessories ............................ 33,270 3,943 $ 29,327 743.8 %
-------- -------- -------- ------
Total net sales ...................... $128,254 $111,299 $ 16,955 15.2 %
======== ======== ======
Electronics sales, which represented 74.1% of net sales for the three months
ended May 31, 2007, decreased primarily due to the following:
o reduced consumer goods sales of approximately $11,590 as a result of
declining prices and product volume sales of flat panel TV's throughout the
electronics industry coupled with a delay in receipt of LCD panel shipments
from suppliers.
o an approximate $4,689 decline in video sales as a result of a decline in
mobile video and shuttle system sales.
o The above decreases were partially offset by a $7,212 increase in audio
sales as a result of improved sales in the Jensen Mobile, Phase Linear and
Satellite radio product lines.
Accessories sales, which represented 25.9% of net sales for the three months
ended May 31, 2007 increased due to incremental sales generated from the
recently acquired Thomson and Oehlbach operations. The Company expects accessory
sales to represent a higher percentage of total net sales as compared to the
prior year due to the acquisitions of Oehlbach and Thomson in March 2007 and
January 2007, respectively.
21
Sales incentive expense increased $4,033 to $6,026 for the three months
ended May 31, 2007 as a result of an increase in accessories net sales which
historically offer more sales incentive programs. The increase in sales
incentive expense was partially offset by a $355 increase in reversals. 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
Three Months Ended May 31,
------------------------------
2007 2006
---------- -----------
Gross profit ......................... $ 23,189 $ 20,099
Gross margins ........................ 18.1% 18.1%
Gross margins remained consistent with the prior period at 18.1%. Gross
margins were favorably impacted by margins generated from the recently acquired
accessories companies as well as improved margins in electronic products due to
focusing sales effects on more profitable product lines. Gross margins were
adversely impacted by increased warehouse and assembly costs as a result of
transition costs necessary to facilitate the newly acquired accessories
companies as well as increased inventory provisions as a result of fincreased
accessories sales due to acquisitions and increased warranty and repair costs.
Operating Expenses and Operating Loss
Three Months Ended May 31,
------------------------------- $ %
2007 2006 Change Change
------------- -------------- ------------ -----------
Operating expenses:
Selling ............................................ $ 8,797 $ 7,061 $ 1,736 24.6%
General and administrative ......................... 13,699 11,325 2,374 21.0%
Engineering and technical support .................. 2,262 1,765 497 28.2%
-------- -------- -------- -------
Total operating expenses .......................... 24,758 20,151 4,607 22.9%
Operating loss ...................................... $ (1,569) $ (52) $ (1,517) 2,917.3%
Operating expenses increased $4,607 or 22.9% for the three months ended May
31, 2007, as compared to the prior year. As a percentage of net sales, operating
expenses increased to 19.3% for the three months ended May 31, 2007, from 18.1%
in the prior year. The increase in total operating expenses is due to the
recently acquired Thomson and Oehlbach operations which had total operating
expense of $5,511 for the three months ended May 31, 2007.
Selling expenses increased $1,736 or 24.6% due to $2,215 of selling
expenses during the three months ended May 31, 2007 for the recently acquired
operations of Thomson and Oehlbach. This increase was partially offset by a
decrease in advertising due to a decline in the budgeted amounts for print media
advertising.
General and administrative expenses increased $2,374 or 21.0% due to:
o $2,912 of expenses during the three months ended May 31, 2007 for the
recently acquired operations of Thomson and Oehlbach, and
o $214 increase in bad debt expense due to an increase in sales and
accounts receivable balances.
o The above increases were partially offset by a $998 benefit related to
a call/put option previously granted to certain employees. The benefit
recorded for the three months ended May 31, 2007 was due to a
reduction in the call/put liability calculation as a result of the
Oehlbach acquisition.
22
Engineering and technical support expenses increased $497 or 28.2% due to
$382 of expenses during the three months ended May 31, 2007 for the recently
acquired operations of Thomson and Oehlbach, and an increase in domestic direct
labor as a result of wage increases.
Other (Expense) Income
Three Months Ended May 31,
------------------------------ $ %
2007 2006 Change Change
------------- ------------ ----------- ----------
Interest and bank charges ............................... $ (667) $ (560) $ (107) 19.1 %
Equity in income of equity investees .................... 942 948 (6) (0.6)
Other, net .............................................. 1,467 1,921 (454) (23.6)
------- ------- ------- -----
Total other income ...................................... $ 1,742 $ 2,309 $ (567) (24.6)%
======= ======= ======= =====
Interest and bank charges increased as a result of acquiring additional
debt in connection with the acquisition of Oehlbach as well as increased working
capital needs of foreign subsidiaries. Interest and bank charges represent
expenses for debt and bank obligations of Audiovox Germany and Venezuela and
interest for a capital lease.
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 additional working capital needs for.
Income Tax Provision
The effective tax rate for the three months ended May 31, 2007 was 30.1%
compared to 21.0% 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,
which results in our effective tax rate being less than the statutory rate.
Income (Loss) from Discontinued Operations
The following is a summary of financial results included within
discontinued operations:
Three Months Ended May 31,
-----------------------------
2007 2006
------- --------
Net sales from discontinued operations ......................................... $ -- $ --
====== ======
Income (loss) from discontinued operations before income taxes ................. $3,247 $ (329)
Income tax expense (benefit) ................................................... 1,136 (69)
------ ------
Net income (loss) from discontinued operations ................................. $2,111 $ (260)
====== ======
Net income (loss) from discontinued operations for the three months ended
May 31, 2007 and 2006 is primarily due to legal settlements and related costs
pertaining to our discontinued Cellular business. The increase in income from
discontinued operations for the three months ended May 31, 2007 is due to a
derivative legal settlement which resulted in pre-tax income of $3,349 (see Note
15 of Notes to the Consolidated Financial Statements).
23
Net Income
Net income for the three months ended May 31, 2007 was $2,232 compared to
$1,522 in the prior year. Income per share for the three months ended May 31,
2007 was $0.10 (diluted) as compared to income per share of $0.07 (diluted) for
the prior year. Net income was favorably impacted by sales incentive reversals
of $1,363 ($831 after taxes) and $1,008 ($796 after taxes) for the three months
ended May 31, 2007 and 2006, respectively. Net income for the three months ended
May 31, 2007 was also favorably impacted by $2,111 in income from discontinued
operations as a result of a derivative legal settlement.
Liquidity and Capital Resources
-------------------------------
Cash Flows, Commitments and Obligations
---------------------------------------
As of May 31, 2007, we had working capital of $303,053, which includes cash
and short-term investments of $124,119 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
acquisition of Oehlbach as well as additional working capital needs. We plan to
utilize our current cash position 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 current capital resources
to pursue other business opportunities, including acquisitions.
Operating activities used cash of $27,097 for the three months ended May
31, 2007 compared to cash provided of $19,331 in 2006. Net income from
continuing operations for the three months ended May 31, 2007 was $121 compared
to $1,782 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 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 three months ended May
31, 2007 were impacted by an increase in accounts receivable primarily
due to increased sales and the timing of collections. Accounts
receivable turnover approximated 5.3 during the three months ended May
31, 2007 compared to 5.1 in the prior year.
o Cash flows from operations were impacted by an increase in inventory
due to increased purchases for future sales projections. Inventory
turnover approximated 3.8 during the three months ended May 31, 2007
compared to 3.9 in the prior year.
o In addition, cash flows from operating activities for the three months
ended May 31, 2007 were favorably impacted by an increase in accounts
payable 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 $23,373 during the three months ended
May 31, 2007, primarily due to the sales (net of purchases) of short-term
investments partially offset by the Oehlbach acquisition and purchases of
property, plant and equipment. Investing activities used cash of $25,764 during
the three months ended May 31, 2006, primarily due to purchase (net of sales) of
short-term investments.
Financing activities provided $3,579 during the three months ended May 31,
2007, primarily from the exercise of stock options partially offset by payment
of bank obligations and debt. Financing activities for the three months ended
May 31, 2006 used cash of $2,107, primarily from the purchase of treasury stock
and payment of bank obligations and debt.
As of May 31, 2007, we have a domestic credit line to fund the temporary
short-term working capital needs of the Company. This line expires on August 31,
2007 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%.
24
Certain contractual cash obligations and other commercial commitments will
impact our short and long-term liquidity. At May 31, 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) ..................... $11,841 $ 522 $ 1,043 $ 1,069 $ 9,207
Operating leases (2) ............................. 20,375 3,322 4,740 3,337 8,976
------- ------- ------- ------- -------
Total contractual cash obligations ............... $32,216 $ 3,844 $ 5,783 $ 4,406 $18,183
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) ............................. $ 3,533 $ 3,533 -- -- --
Stand-by letters of credit (4) ................... 2,265 2,265 -- -- --
Commercial letters of credit (4) ................. 1,321 1,321 -- -- --
Debt (5) ......................................... 6,555 1,626 3,997 932 --
Unconditional purchase obligations (6) ........... 107,163 107,163 -- -- --
-------- -------- -------- -------- --
Total commercial commitments ..................... $120,837 $115,908 $ 3,997 $ 932 --
1. Represents total payments (interest and principal) due under a capital
lease obligation which has a current (included in other current
liabilities) and long term principal balance of $66 and $5,660,
respectively at May 31, 2007.
2. We enter into operating leases in the normal course of business.
3. Represents amounts outstanding under the Audiovox Germany factoring
agreement and Venezuela bank obligation at May 31, 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.
6. Open purchase obligations represent inventory commitments. These
obligations are not recorded in the consolidated financial statements until
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
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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.
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 May 31, 2012 are $6,170.
New Accounting Pronouncements
-----------------------------
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes guidelines for measuring
fair value and expands disclosures regarding fair value measurement. SFAS 157
does not require any new fair value measurements, but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are
currently evaluating the impact of SFAS 157, but we do not expect the adoption
of this pronouncement will have a material impact on our 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. We are currently evaluating the impact of SFAS 159, but do not expect
the adoption of this pronouncement to have a material impact on our financial
position or results of operations.
26
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 May 31, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
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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.
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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).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUDIOVOX CORPORATION
By: /s/Patrick M. Lavelle
---------------------
Patrick M. Lavelle
President and Chief
Executive Officer
Dated: July 10, 2007
By: /s/Charles M. Stoehr
--------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
30