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 August 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 20,591,399 Shares
Class B Common Stock 2,260,954 Shares
Audiovox Corporation
1
INDEX
Page
____
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets at August 31, 2007 and
February 28, 2007....................................... 3
Consolidated Statements of Operations for the
Three and Six Months Ended August 31, 2007 and 2006..... 5
Consolidated Statements of Cash Flows for the
Six Months Ended August 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.................... 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................ 33
ITEM 4. CONTROLS AND PROCEDURES................................... 33
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................... 34
ITEM 1A. RISK FACTORS............................................. 34
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS........................................... 34
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 34
ITEM 6. EXHIBITS.................................................. 36
SIGNATURES........................................................ 37
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Audiovox Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
August 31, February 28,
2007 2007
----------------- --------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents ......................................... $ 11,252 $ 15,473
Short-term investments ............................................ 72,606 140,872
Accounts receivable, net .......................................... 122,406 86,003
Inventory ......................................................... 138,253 104,972
Receivables from vendors .......................................... 20,346 13,935
Prepaid expenses and other current assets ......................... 11,622 11,427
Income tax receivable ............................................. 1,846 3,518
Deferred income taxes ............................................. 2,597 2,492
-------- --------
Total current assets ............................................. 380,928 378,692
Investment securities .............................................. 13,437 13,179
Equity investments ................................................. 12,541 11,353
Property, plant and equipment, net ................................. 20,760 18,019
Goodwill ........................................................... 24,202 17,514
Intangible assets .................................................. 58,281 57,874
Deferred income taxes .............................................. 2,478 1,858
Other assets ....................................................... 608 631
-------- --------
Total assets ..................................................... $513,235 $499,120
======== ========
See accompanying notes to consolidated financial statements.
3
Audiovox Corporation and Subsidiaries
Consolidated Balance Sheets (continued)
(In thousands, except share data)
August 31, February 28,
2007 2007
------------------- ----------------
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .............................................................. $ 36,204 $ 34,344
Accrued expenses and other current liabilities ................................ 23,000 26,564
Accrued sales incentives ...................................................... 11,403 7,410
Bank obligations .............................................................. 3,296 2,890
Current portion of long-term debt ............................................. 1,653 1,524
------------ ------------
Total current liabilities .................................................... 75,556 72,732
Long-term debt ................................................................. 4,827 5,430
Other tax liabilities .......................................................... 4,310 3,347
Capital lease obligation ....................................................... 5,643 5,676
Deferred compensation .......................................................... 8,291 7,573
------------ ------------
Total liabilities ............................................................ 98,627 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, 22,412,546 and
22,005,346 shares issued, 20,591,399 and 20,312,299 shares
outstanding at August 31, 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 ............................................................... 275,534 271,056
Retained earnings ............................................................. 157,193 151,363
Accumulated other comprehensive income (loss) ................................. 45 (1,320)
Treasury stock, at cost, 1,821,147 and 1,693,047 shares of Class A
common stock at August 31, 2007 and February 28, 2007, respectively ....... (18,410) (16,979)
------------ ------------
Total stockholders' equity ..................................................... 414,608 404,362
------------ ------------
Total liabilities and stockholders' equity ..................................... $ 513,235 $ 499,120
============ ============
See accompanying notes to consolidated financial statements.
4
Audiovox Corporation and Subsidiaries
Consolidated Statements of Operations
For the Three and Six Months Ended August 31, 2007 and 2006
(In thousands, except share and per share data)
(unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
------------------------------ ------------------------------
2007 2006 2007 2006
------------- ------------- ------------- -------------
Net sales ...................................................... $ 148,269 $ 97,424 $ 276,522 $ 208,723
Cost of sales .................................................. 119,795 81,670 224,859 172,870
------------ ------------ ------------ ------------
Gross profit ................................................... 28,474 15,754 51,663 35,853
------------ ------------ ------------ ------------
Operating expenses:
Selling ....................................................... 7,910 6,451 16,706 13,512
General and administrative .................................... 14,506 11,708 28,205 23,033
Engineering and technical support ............................. 2,148 1,765 4,410 3,530
------------ ------------ ------------ ------------
Total operating expenses ..................................... 24,564 19,924 49,321 40,075
------------ ------------ ------------ ------------
Operating income (loss) ........................................ 3,910 (4,170) 2,342 (4,222)
------------ ------------ ------------ ------------
Other income (expense):
Interest and bank charges ..................................... (697) (502) (1,364) (1,062)
Equity in income of equity investees .......................... 975 816 1,916 1,764
Other, net .................................................... 1,161 1,788 2,628 3,709
------------ ------------ ------------ ------------
Total other income, net ...................................... 1,439 2,102 3,180 4,411
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income
taxes ...................................................... 5,349 (2,068) 5,522 189
Income tax expense (benefit) ................................... 1,619 (435) 1,670 40
------------ ------------ ------------ ------------
Net income (loss) from continuing operations .................. 3,730 (1,633) 3,852 149
Net income (loss) from discontinued operations,
net of tax .................................................. -- (322) 2,111 (582)
------------ ------------ ------------ ------------
Net income (loss) ............................................. $ 3,730 $ (1,955) $ 5,963 $ (433)
============ ============ ============ ============
Net income (loss) per common share (basic):
From continuing operations .................................... $ 0.16 $ (0.07) $ 0.17 $ 0.01
From discontinued operations .................................. -- (0.02) 0.09 (0.03)
------------ ------------ ------------ ------------
Net income (loss) per common share (basic) .................... $ 0.16 $ (0.09) $ 0.26 $ (0.02)
============ ============ ============ ============
Net income (loss) per common share (diluted):
From continuing operations .................................... $ 0.16 $ (0.07) $ 0.17 $ 0.01
From discontinued operations .................................. -- (0.02) 0.09 (0.03)
------------ ------------ ------------ ------------
Net income (loss) per common share (diluted) ................... $ 0.16 $ (0.09) $ 0.26 $ (0.02)
============ ============ ============ ============
Weighted-average common shares outstanding (basic) ............. 22,931,487 22,430,598 22,853,269 22,399,973
============ ============ ============ ============
Weighted-average common shares outstanding (diluted) ........... 22,936,317 22,430,598 22,891,715 22,587,530
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
Audiovox Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended August 31, 2007 and 2006
(In thousands)
(unaudited)
2007 2006
--------- ---------
Cash flows from operating activities:
Net income (loss) ......................................................................... $ 5,963 $ (433)
Net (income) loss from discontinued operations ............................................ (2,111) 582
-------- --------
Net income from continuing operations ..................................................... 3,852 149
Adjustments to reconcile net income (loss) to net cash (used in) provided by
continuing operating activities:
Depreciation and amortization ............................................................. 2,287 1,897
Bad debt expense (recovery) ............................................................... 38 (48)
Equity in income of equity investees ...................................................... (1,916) (1,764)
Non-cash compensation adjustment .......................................................... (747) 150
Non-cash stock based compensation and warrant expense ..................................... 333 38
Tax benefit on stock options exercised .................................................... (1,019) --
Changes in operating assets and liabilities (net of assets and liabilities acquired):
Accounts receivable ....................................................................... (33,137) 9,464
Inventory ................................................................................. (30,464) (6,280)
Receivables from vendors .................................................................. (6,405) 4,848
Prepaid expenses and other ................................................................ 2,867 (2,331)
Investment securities-trading ............................................................. (718) (165)
Accounts payable, accrued expenses, accrued sales incentives and other
current liabilities .................................................................... (1,194) 313
Income taxes payable ...................................................................... 1,884 1,558
-------- --------
Net cash (used in) provided by operating activities ..................................... (64,339) 7,829
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment ................................................ (4,460) (955)
Proceeds from sale of property, plant and equipment ....................................... 38 24
Proceeds from distribution from an equity investee ........................................ 727 1,681
Proceeds from a liquidating distribution from an available-for-sale security .............. 459 --
Purchase of short-term investments ........................................................ (5,600) (57,405)
Proceeds from sale of short-term investments .............................................. 73,750 45,375
Purchase of patents ....................................................................... -- (475)
Purchase of acquired business ............................................................. (7,013) --
-------- ---------
Net cash provided by (used in) investing activities ...................................... 57,901 (11,755)
-------- --------
6
Audiovox Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
For the Six Months Ended August 31, 2007 and 2006
(In thousands)
(unaudited)
2007 2006
----------- ----------
Cash flows from financing activities:
Repayments on bank obligations .................................................... -- (1,310)
Proceeds from bank borrowings ..................................................... 371 --
Principal payments on capital lease obligation .................................... (32) (42)
Principal payments on debt ........................................................ (910) (836)
Repurchase of Class A common stock ................................................ (1,431) (2,551)
Repurchase of preferred stock ..................................................... -- (5)
Proceeds from exercise of stock options ........................................... 3,130 1,321
Tax benefit on stock options exercised ............................................ 1,019 --
-------- --------
Net cash provided by (used in) financing activities .............................. 2,147 (3,423)
-------- --------
Effect of exchange rate changes on cash ............................................ 70 83
-------- --------
Net decrease in cash and cash equivalents .......................................... (4,221) (7,266)
Cash and cash equivalents at beginning of period ................................... 15,473 16,280
-------- --------
Cash and cash equivalents at end of period ......................................... $ 11,252 $ 9,014
======== ========
See accompanying notes to consolidated financial statements.
7
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements
August 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 (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 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.
8
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
August 31, 2007
Stock-Based Compensation Expense
--------------------------------
The Company recognized stock-based compensation (exclusive of deferred tax
benefits) for awards granted under the Company's Stock Option Plans in the
following line items in the Consolidated Statement of Operations:
Three and six months ended August 31,
2007 2006
----------- ----------
Cost of sales ................................................... $ 5 $--
Selling expenses ................................................ 64 0
General and administrative expenses ............................. 202 38
Engineering and technical support ............................... 5 0
---- ----
Stock-based compensation expense before income tax benefit....... $276 $ 38
==== ====
The Company granted 257,500 options during the three months ended August
31, 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, have a
contractual term between 2 years and 3.7 years and a grant date fair value
of $3.26 per share. In connection with this option grant, there were 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 above for assumptions used to determine fair
value). Accordingly, the Company recorded additional legal expense in the
amount of approximately $57 during the three and six months ended August
31, 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 August 31, 2007.
Options granted during the three months ended August 31, 2006 vested
immediately, had exercise prices 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 months ended
August 31, 2006 was $3.75.
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
respective periods were as follows:
Three and six months ended August 31,
2007 2006
---------------------- -----------------
Dividend yield ....................................................... 0% 0%
Weighted-average expected volatility ................................. 47.0% 48.8%
Risk-free interest rate .............................................. 4.57% 4.97%
Expected life of options/warrants (in years) ......................... 2.00 - 3.00 2.00
Fair value of options/warrants granted ............................... $3.26 (3 year option) $3.75
$2.57 (2 year option)
9
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
August 31, 2007
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 ....................................................... (407,200) 7.69
Forfeited/expired ............................................... (5,000) 13.54
------
Outstanding at August 31, 2007 ................................... 1,647,452 13.97 2.0
========== ====== ===
Exercisable at August 31, 2007 .................................... 1,475,785 $ 14.29 3.5
========== ====== ===
At August 31, 2007, the Company had unrecognized compensation costs of
approximately $553 related to non-vested options granted during the three
and six months ended August 31, 2007. The unrecognized compensation costs
related to these options will be completely recognized by the fiscal year
ending February 28, 2008. At August 31, 2006, the Company had no
unrecognized compensation cost as all stock options were fully vested.
(3) Discontinued Operations
-----------------------
The net income (loss) from discontinued operations for the three and six
months ended August 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 Six Months Ended
August 31, August 31,
------------------------- ---------------------------
2007 2006 2007 2006
------- ------- -------- ---------
Net sales from discontinued operations ................... $ -- $ -- $ -- $ --
======= ====== ====== ======
Income (loss) from discontinued
operations before income taxes ....................... $ -- $ (409) $3,248 $ (738)
Income tax expense (benefit) ............................. -- (87) 1,137 (156)
-------- ------ ------ ------
Net income (loss) from discontinued operations............ $ -- $ (322) $2,111 $ (582)
======== ====== ====== ======
(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.
10
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
August 31, 2007
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 Six Months Ended
August 31, August 31,
---------------------------- -----------------------------
2007 2006 2007 2006
---------- ---------- ----------- -----------
Weighted-average common shares outstanding ................. 22,931,487 22,430,598 22,853,269 22,399,973
Effect of dilutive securities:
Stock options and warrants .............................. 4,830 -- 38,446 187,557
---------- ---------- ---------- ----------
Weighted-average common shares and
potential common shares outstanding ..................... 22,936,317 22,430,598 22,891,715 22,587,530
========== ========== ========== ==========
Stock options totaling 1,446,419 and 2,098,913 for the three months ended
August 31, 2007 and 2006, respectively, and 1,223,210 and 1,307,952 for the
six months ended August 31, 2007 and 2006, respectively, were not included
in the net income (loss) per diluted share calculation because the exercise
price of these options and warrants was greater than the average market
price of the Company's common stock during these periods or because these
options and warrants were anti-dilutive.
(5) Accumulated Other Comprehensive Income (Loss)
---------------------------------------------
Accumulated other comprehensive income (loss) of $45 and $(1,320) at August
31, 2007 and February 28, 2007, respectively, includes the net accumulated
unrealized loss on the Company's available-for-sale investment securities
of $1,553 and $1,561 at August 31, 2007 and February 28, 2007,
respectively, and foreign currency translation gains of $1,598 and $241 at
August 31, 2007 and February 28, 2007, respectively.
The Company's total comprehensive income (loss) was as follows:
Three Months Ended Six Months Ended
August 31, August 31,
-------------------------- --------------------------
2007 2006 2007 2006
---------- --------- ---------- ---------
Net income (loss) ................................................ $ 3,730 $(1,955) $ 5,963 $ (433)
Other comprehensive income (loss) :
Foreign currency translation adjustments ........................ 472 (88) 1,357 880
Unrealized holding gain (loss) on available-
for-sale investment securities arising during
the period, net of tax ....................................... 17 (2,004) 8 (2,395)
------- ------- ------- -------
Other comprehensive income (loss), net of tax ................... 489 (2,092) 1,365 (1,515)
------- ------- ------- -------
Total comprehensive income (loss) ................................ $ 4,219 $(4,047) $ 7,328 $(1,948)
======= ======= ======= =======
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 $(10) and $1,228 for the three months ended
August 31, 2007 and 2006, respectively and $(5) and $1,468 for the six
months ended August 31, 2007 and 2006, respectively.
11
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
August 31, 2007
(6) Supplemental Cash Flow Information/Changes in Stockholders' Equity
------------------------------------------------------------------
The following is supplemental information relating to the consolidated
statements of cash flows:
Six Months Ended
August 31,
---------------------
2007 2006
-------- --------
Cash paid during the period:
Interest (excluding bank charges) ............... $1,251 $ 929
Income taxes (net of refunds) ................... $ 600 $ 53
Non-Cash Transactions
---------------------
During the six months ended August 31, 2007 and 2006, the Company recorded
a non-cash compensation (benefit) charge of $(747) and $150, respectively,
related to the rights under a call/put option previously granted to certain
employees. The benefit recorded during the six months ended August 31,
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 $333 and $38 during the six months ended August 31, 2007
and 2006, respectively, related to the grant of options and warrants to
other employees, directors and certain outside service providers (see Note
2).
Changes in Stockholders' Equity
-------------------------------
During the six months ended August 31, 2007, 407,200 stock options were
exercised yielding proceeds of $3,130 to the Company. In addition, the
Company recorded a $1,019 increase to paid in capital as a result of the
tax benefit realized upon exercise of stock options during the six months
ended August 31, 2007.
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 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 $219 for the six months ended
August 31, 2007, respectively 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.
12
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
August 31, 2007
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 to assets 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 August 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 was to expand the Company's accessory product lines to
European Markets.
13
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
August 31, 2007
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
-------
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 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 the additional earn-out payment of
$400, as defined in the purchase agreement. As of August 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 add the experience, concepts and product
development of an OEM business in Europe.
The following summarizes the allocation of the purchase price to the fair
value of the assets acquired at the date of acquisition:
Assets acquired:
Patent ................................................... $402
Liabilities assumed ...................................... --
----
Cash paid .................................................. $402
====
The allocation of the purchase price to the assets acquired is preliminary
(see Note 8).
14
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
August 31, 2007
The following unaudited pro-forma financial information for the three and
six months ended August 31, 2006 represents the combined results of the
Company's operations as if the Incaar, Oehlbach and Thomson acquisitions
occurred on March 1, 2006. The acquisition of Incaar did not have a
material affect on the combined results of the Company for the three and
six months ended August 31, 2007. 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 Six Months Ended
August 31, August 31,
------------------ ----------------
2006 2006
------------------ ----------------
Net sales .................................. $ 145,795 $ 305,482
Net loss ................................... (1,831) (188)
Net loss per share-diluted ................ $ (0.08) $ (0.01)
(8) Goodwill and Intangible Assets
------------------------------
The change in goodwill is as follows:
Balance at February 28, 2007 ....................... $17,514
Purchase of Oehlbach .............................. 6,688
-------
Balance at August 31, 2007 ......................... $24,202
=======
At August 31, 2007, intangible assets consisted of the following:
Gross
Carrying Accumulated Total Net
Value Amortization Book Value
-------- ------------ ----------
Patents subject to amortization ........................................... $ 1,027 $ 297 $ 730
Trademarks/Tradenames not subject to amortization ........................ 57,054 -- 57,054
Contract subject to amortization (5 years) ............................... 1,104 607 497
------- ------- -------
Total ................................................................... $59,185 $ 904 $58,281
======= ======= =======
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
======= ======= =======
During the six months ended August 31, 2007, the Company made total
payments of $219 primarily relating to a contingent payment of $142 and $77
for other acquisition related costs in connection with the acquired RCA
brand, which has been preliminarily allocated to trademarks not subject to
amortization (see Note 7).
15
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
August 31, 2007
The Company recorded amortization expense of $111 and $102 for the three
months ended August 31, 2007 and 2006, respectively and $214 and $190 for
the six months ended August 31, 2007 and 2006, respectively. The estimated
aggregate amortization expense for the cumulative five years ending August
31, 2012 amounts to $1,201.
(9) Equity Investments
------------------
As of August 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.
August 31, February 28,
2007 2007
----------- ------------
Current assets ............................. $26,244 $23,409
Non-current assets ......................... 4,993 4,716
Current liabilities ........................ 6,155 5,420
Members' equity ............................ 25,082 22,705
Six Months Ended August 31,
---------------------------
2007 2006
---------- -----------
Net sales .................................. $37,721 $31,109
Gross profit ............................... 10,596 9,339
Operating income ........................... 3,273 2,908
Net income ................................. $ 3,832 $ 3,528
The Company's share of income from ASA for the six months ended August 31,
2007 and 2006, was $1,916 and $1,764 respectively. In addition, the Company
received distributions from ASA totaling $727 and $1,681 during the six
months ended August 31, 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 six
months ended August 31, 2007 was a provision of 30.3%, compared to a
benefit of 21.0% for the three months ended August 31, 2006 and a provision
of 21.0% for the six months ended August 31, 2006, respectively. The
16
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
August 31, 2007
increase in the effective tax rate is due to lower tax exempt interest
income earned on short-term investments. Accordingly, the Company's
effective tax rate is 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 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
with a cumulative effect of a change in accounting principle. The amount of
gross unrecognized tax benefits at August 31, 2007 was $4,310 (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 $278 during the three and six months ended August 31,
2007. The Company recognizes accrued interest and penalties associated with
unrecognized tax benefits as part of the income tax provision. As of August
31, 2007, the Company had $721 of accrued interest and penalties in
connection with unrecognized tax benefits of which $92 and $184 of interest
and penalties were recognized during the three and six months ended August
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 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 Six Months Ended
August 31, August 31,
-------------------------- --------------------------
2007 2006 2007 2006
---------- --------- ---------- ---------
Opening balance ..................................... $ 10,438 $ 6,945 $ 7,410 $ 8,512
Accruals ............................................ 7,368 3,182 15,082 * 6,183
Payments and credits ................................ (6,228) (2,466) (9,551) (6,026)
Reversals for unearned sales incentive .............. (58) (72) (405) (701)
Reversals for unclaimed sales
incentives ...................................... (117) (184) (1,133) (563)
-------- -------- -------- --------
Ending balance ...................................... $ 11,403 $ 7,405 $ 11,403 $ 7,405
======== ======== ======== ========
* Includes $325 of sales incentives acquired from the Oehlbach acquisition
(see Note 7).
17
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
August 31, 2007
(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 Six Months Ended
August 31, August 31,
------------------------ ------------------------
2007 2006 2007 2006
--------- ---------- ---------- ----------
Opening balance ............................................ $ 9,324 $ 9,023 $ 9,586 $ 9,947
Liabilities accrued for warranties issued
during the period ....................................... 2,477 1,773 5,168 3,155
Warranty claims paid during the period ..................... (1,728) (2,220) (4,681) (4,526)
-------- -------- -------- --------
Ending balance ............................................. $ 10,073 $ 8,576 $ 10,073 $ 8,576
======== ======== ======== ========
(13) Financing Arrangements
----------------------
The Company has the following financing arrangements:
August 31, February 28,
2007 2007
---------- ------------
Bank Obligations
Domestic bank obligations (a) ................ $ -- $ --
Venezuela bank obligations (b) ............... -- --
Euro Asset-Based lending obligation (c) ...... 3,296 2,890
------ ------
Total bank obligations ....................... $3,296 $2,890
====== ======
Debt
Euro term loan agreement (d) ................. $4,868 $5,461
Oehlbach (e) ................................. $ 821 --
Other (f) .................................... 791 1,493
------ ------
Total debt ................................... $6,480 $6,954
====== ======
(a) Domestic Bank Obligations
-------------------------
At August 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 November 30, 2007, 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 August
31, 2007 and February 28, 2007, no direct amounts are outstanding
under this agreement. At August 31, 2007, the Company had $5,311 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
$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
August 31, 2007 and February 28, 2007, no amounts were outstanding
under this agreement.
18
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
August 31, 2007
(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 August
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.
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:
Three Months Ended Six Months Ended
August 31, August 31,
----------------------------- -------------------------------
2007 2006 2007 2006
----------- ------------ -------------- ------------
Interest income ............................. $ 1,146 $ 1,696 $ 2,557 $ 3,284
Rental income ............................... 138 138 276 276
Miscellaneous ............................... (123) (46) (205) 149
------- ------- ------- -------
Total-Other, net ............................ $ 1,161 $ 1,788 $ 2,628 $ 3,709
======= ======= ======= =======
19
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
August 31, 2007
(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 Accessories 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.
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 six months ended August 31, 2007.
(16) Recent 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 other accounting
pronouncements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. The transition adjustment of the difference between the
20
Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
August 31, 2007
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 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.
21
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 six months ended August 31, 2007
compared to the three and six months ended August 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. ("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), Heco(R), Jensen(R), Mac
Audio(R), Magnate(R), Movies 2 Go(R), Phase Linear(R), Prestige(R), Pursuit(R),
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 have recently integrated and continue to integrate the following
acquisitions, discussed below, into our existing business structure:
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
throughout Europe.
In March 2007, Audiovox German Holdings GmbH completed the stock
acquisition of Oehlbach, a European market leader in the accessories field, for
22
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 lines to European markets.
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 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 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 existing business
distribution.
Effective March 1, 2007, the Company reported "accessories" as a separate
product group due to 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 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.
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, and
o wireless headphones.
23
We believe our product groups have expanding market opportunities with
certain levels 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.
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 six months ended August 31, 2007.
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 six months ended August 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 August 31, 2007 compared to the three months ended
---------------------------------------------------------------------
August 31, 2006
---------------
Continuing Operations
---------------------
The following tables set forth, for the periods indicated, certain
statement of operations data for the three months ended August 31, 2007 and
2006.
Net Sales
Three Months Ended August 31,
----------------------------- $ %
2007 2006 Change Change
---------- ---------- ----------- ----------
Electronics ............................ $107,263 $ 94,164 $ 13,099 13.9%
Accessories ............................ 41,006 3,260 37,746 1,157.9
-------- -------- -------- --------
Total net sales ...................... $148,269 $ 97,424 $ 50,845 52.2%
======== ======== ======== ========
24
Electronics sales, which represented 72.3% of net sales for the three
months ended August 31, 2007, increased by 13.9% or $13,099 primarily due to a
$14,738 increase in audio sales as a result of improved sales in the Jensen
Mobile, Phase Linear and Satellite radio product lines and increases in the Code
Alarm lines. In addition, we experienced increased sales related to our
international operations in Germany and Venezuela.
The above increases were partially offset by reduced consumer electronics
sales of approximately $4,467 as a result of shortages of LCD panels that
affected sales in LCD TV's, portable DVD's and digital picture frames, and a
$6,969 decline in other mobile electronics sales due to a decline in certain OEM
programs, and lower demand in mobile video and the security and remote start
business.
Accessories sales, which represented 27.7% of net sales for the three
months ended August 31, 2007, increased over 1000% or $37,746 due to incremental
sales generated from the recently acquired Thomson and Oehlbach operations. The
Company expects accessory sales to continue to represent a higher percentage of
total net sales as compared to the prior year due to acquisitions.
Sales incentive expense increased $4,267 to $7,193 for the three months
ended August 31, 2007, as a result of an increase in accessories net sales which
offer more sales incentive programs and a reduction in sales incentive reversals
during the 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
Three Months Ended August 31,
-----------------------------
2007 2006
---------- -----------
Gross profit ............................. $ 28,474 $ 15,754
Gross margin percentage .................. 19.2% 16.2%
Gross margins increased by 300 basis points from 16.2% to 19.2%. Gross
margins were favorably impacted by higher margins generated from the recently
acquired 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 transition costs necessary to facilitate the newly
acquired accessories companies as well as increased warranty and repair costs,
freight and inventory provisions as a result of increased accessories sales.
Operating Expenses and Operating Income (Loss)
Three Months Ended August 31,
------------------------------- $ %
2007 2006 Change Change
----------- ----------- --------- -------
Operating Expenses:
Selling ............................................... $ 7,910 $ 6,451 $ 1,459 22.6%
General and administrative ............................ 14,506 11,708 2,798 23.9
Engineering and technical support ..................... 2,148 1,765 383 21.7
-------- -------- ------
Operating expenses ................................... 24,564 19,924 4,640 23.3
-------- -------- ------
Operating income (loss) ............................... $ 3,910 $ (4,170) $ 8,080 193.8%
Operating expenses increased $4,640 or 23.3% for the three months ended
August 31, 2007, as compared to the prior year. As a percentage of net sales,
operating expenses decreased to 16.6% for the three months ended August 31,
2007, from 20.5% in the prior year due to higher sales and better controls over
25
our fixed costs. The increase in total operating expenses in actual dollars is
due to the incremental costs related to the recently acquired Thomson, Oehlbach
and Incaar operations, which had total operating expenses of $5,015 for the
three months ended August 31, 2007.
Selling expenses increased $1,459 or 22.6% due to $2,170 of selling
expenses during the three months ended August 31, 2007 for the recently acquired
operations of Thomson, Oehlbach and Incaar, as well as increases in the cost of
travel and share-based compensation expense. These increases were partially
offset by a decrease in advertising and trade show expenses due to a decline in
the budgeted amounts for general and print media advertising in fiscal 2008.
General and administrative expenses increased $2,798 or 23.9% due to:
o $2,369 of expenses during the three months ended August 31, 2007 for
the recently acquired operations of Thomson and Oehlbach,
o $470 increase in executive bonuses as a result of the Company meeting
certain earnings targets,
o $204 increase in depreciation and amortization due to an increase in
capital expenditures as a result of acquisitions and investments in
new systems,
o $259 increase in a non-cash stock-based compensation expense due to
the granting of options and warrants to employees and other service
providers during the period, and
o $311 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 $465 decline in professional
fees due to reduced audit fees, legal and consulting costs.
Engineering and technical support expenses increased $383 or 21.7% due to
$453 of expenses during the three months ended August 31, 2007 for the recently
acquired operations of Thomson, Oehlbach and Incaar, and an increase in domestic
direct labor and related payroll benefits as a result of fiscal wage increases.
Other Income (Expense)
Three Months Ended August 31,
------------------------------ $ %
2007 2006 Change Change
----------- ---------- ---------- --------
Interest and bank charges .......................... $ (697) $ (502) $ (195) 38.8%
Equity in income of equity investees ............... 975 816 159 19.5
Other, net ......................................... 1,161 1,788 (627) (35.1)
------- ------- ------- ------
Total other income, net ............................ $ 1,439 $ 2,102 $ (663) (31.5)%
======= ======= ======= ======
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 debt and bank obligations of
Audiovox Corporation, 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 current working capital needs.
Income Tax Provision (Benefit)
The effective tax rate for the three months ended August 31, 2007 was a
provision of 30.3% compared to a benefit of 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. Accordingly, our effective tax rate is
less than the statutory rate.
26
Loss from Discontinued Operations
The following is a summary of financial results included within
discontinued operations:
Three Months Ended August 31,
--------------------------------
2007 2006
-------------- --------------
Net sales from discontinued operations .................................... $ -- $ --
======= =====
Loss from discontinued operations before income taxes ..................... $ -- $(409)
Income tax benefit ........................................................ -- 87
------- -----
Net loss from discontinued operations ..................................... $ -- $(322)
======= =====
Net loss from discontinued operations for the three months ended August 31,
2006 is primarily due to legal and related costs pertaining to contingencies
associated with our discontinued Cellular business.
Net Income (Loss)
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 (loss) and basic and diluted net
income (loss) per common share.
Three Months Ended August 31,
---------------------------------
2007 2006
---------- ----------
Operating income (loss) ................................................. $ 3,910 $(4,170)
Other income, net ....................................................... 1,439 2,102
------- -------
Income (loss) from continuing operations before income taxes ............ 5,349 (2,068)
Income tax (expense) benefit ............................................ (1,619) 435
------- -------
Net income (loss) from continuing operations ............................ 3,730 (1,633)
Net loss from discontinuing operations, net of tax ...................... -- (322)
------- -------
Net income (loss) ....................................................... $ 3,730 $(1,955)
======= =======
Net income (loss) per common share:
Basic ................................................................ $ 0.16 $ (0.09)
======= =======
Diluted .............................................................. $ 0.16 $ (0.09)
======= =======
Net income for the three months ended August 31, 2007 was $3,730 compared
to a net loss of $1,955 in the prior year. Income per share for the three months
ended August 31, 2007 was $0.16 (diluted) as compared to a loss per share of
$0.09 (diluted) for the prior year. Net income was favorably impacted by sales
incentive reversals of $175 ($122 after taxes) and $256 ($202 after taxes) for
the three months ended August 31, 2007 and 2006, respectively.
Six months ended August 31, 2007 as compared to the six months ended
--------------------------------------------------------------------
August 31, 2006
---------------
Continuing Operations
---------------------
The following tables set forth, for the periods indicated, certain
statement of operations data for the six months ended August 31, 2007 and 2006.
27
Net Sales
Six Months Ended August 31,
------------------------------ $ %
2007 2006 Change Change
---------- ---------- --------- ---------
Electronics .............................. $202,247 $201,520 $ 727 0.4%
Accessories .............................. 74,275 7,203 67,072 931.2
-------- -------- -------- -----
Total net sales ........................ $276,522 $208,723 $ 67,799 32.5%
======== ======== ======== =====
Electronics sales, which represented 73.1% of net sales, increased by 0.4%
or $727 primarily due to a $21,890 increase in audio sales as a result of
improved sales in the Jensen Mobile, Phase Linear and Satellite radio product
lines as well as increases in the Code Alarm lines, and a $4,688 increase in
sales in our international operations in Germany and Venezuela.
The above increases were partially offset by reduced consumer electronics
sales of approximately $16,081 as a result of shortages of LCD panels that
affected sales in LCD TV's, portable DVD's and digital picture frames, and a
$13,992 decline in other mobile electronics sales due to a decline in certain
OEM programs, and lower demand in mobile video and the security and remote start
business.
Accessories sales, which represented 26.9% of net sales for the six months
ended August 31, 2007, increased over 900% or $67,072 due to incremental sales
generated from the recently acquired Thomson and Oehlbach operations. The
Company expects accessories sales to continue to represent a higher percentage
of total net sales as compared to the prior year due to acquisitions.
Sales incentive expense increased $8,300 to $13,219 for the six months
ended August 31, 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 $274 increase in reversals during the period. The
increase in reversals is primarily due to a $570 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 ............................. $ 51,663 $ 35,853
Gross margin percentage .................. 18.7% 17.2%
Gross margins increased by 150 basis points from 17.2% to 18.7% for the six
months ended August 31, 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 and 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 accessories companies as well
as increased warranty and repair costs, freight and inventory provisions as a
result of increased accessories sales. In addition, reversals of sales incentive
expense favorably impacted gross margins by 0.6% during the six months ended
August 31, 2007 and 2006, respectively.
28
Operating Expenses and Operating Income (Loss)
Six Months Ended August 31,
----------------------------- $ %
2007 2006 Change Change
---------- ------------ ---------- --------
Operating Expenses:
Selling ............................................... $ 16,706 $ 13,512 $ 3,194 23.6%
General and administrative ............................ 28,205 23,033 5,172 22.5
Engineering and technical support ..................... 4,410 3,530 880 24.9
-------- -------- -------- -----
Operating expenses ................................... 49,321 40,075 9,246 23.1
-------- -------- -------- -----
Operating income (loss) ............................... $ 2,342 $ (4,222) $ 6,564 155.5%
Operating expenses increased $9,246 or 23.1%, for the six months ended
August 31, 2007, as compared to 2006. As a percentage of net sales, operating
expenses decreased to 17.8% for the six months ended August 31, 2007, from 19.2%
in 2006 due to higher sales and better controls over fixed costs. The increase
in total operating expenses in actual dollars is due to the incremental costs
related to the recently acquired Thomson, Oehlbach and Incaar operations, which
had total operating expenses of $10,526 for the six months ended August 31,
2007.
Selling expenses increased $3,194 or 23.6% primarily due to $4,385 of
selling expenses during the six months ended August 31, 2007 for the recently
acquired operations of Thomson, Oehlbach and Incaar, 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 consumer print media advertisements.
General and administrative expenses increased $5,172 or 22.5% due to the
following:
o $5,080 of expenses during the six months ended August 31, 2007 for the
recently acquired operations of Thomson and Oehlbach,
o $470 increase to executive bonuses as a result of the Company meeting
certain earnings targets,
o $392 increase in depreciation and amortization due to an increase in
capital expenditures as a result of acquisitions and investments in
new systems,
o $259 increase in a non-cash stock-based compensation expense due to
the granting of options and warrants to employees and other service
providers during the period, and
o $468 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 $568 decrease in
professional fees due to a reduction in audit fees, legal costs and consulting
costs, and a $747 benefit relating to a reduction in the call/put option
liability calculation previously granted to certain employees as a result of the
Oehlbach acquisition.
Engineering and technical support expenses increased $880 or 24.9% due to
$836 of expenses during the six months ended August 31, 2007 for the recently
acquired operations of Thomson, Oehlbach and Incaar and an increase in domestic
direct labor and related payroll benefits as a result of wage increases.
29
Other Income (Expense)
Six Months Ended August 31,
----------------------------- $ %
2007 2006 Change Change
----------- ------------ --------- ----------
Interest and bank charges ............................... $(1,364) $(1,062) $ (302) 28.4 %
Equity in income of equity investees .................... 1,916 1,764 152 8.6
Other, net .............................................. 2,628 3,709 (1,081) (29.1)
------- ------- ------- ------
Total other income, net ................................. $ 3,180 $ 4,411 $(1,231) (27.9)%
======= ======= ======= ======
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 debt and 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 six months ended August 31, 2007, was a
provision of 30.3% compared to a provision of 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. Accordingly, our effective tax rate is
less than the statutory rate.
Income (loss) from Discontinued Operations
The following is a summary of financial results included within
discontinued operations:
Six Months Ended
August 31,
--------------------------
2007 2006
---------- -----------
Net sales from discontinued operations .......................................... $ -- $ --
====== ======
Income (loss) from discontinued operations before income taxes .................. $3,248 $ (738)
Income tax expense (benefit) .................................................... 1,137 (156)
------ ------
Net income (loss) from discontinued operations .................................. $2,111 $ (582)
====== ======
The loss from discontinued operations for the six months ended August 31,
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 six months ended August 31, 2007 is due to a
derivative legal settlement which resulted in pre-tax income of $3,349, net of
legal fees and other administrative costs of $3,401 (see Note 15 of Notes to the
Consolidated Financial Statements).
30
Net Income (Loss)
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 (loss) and basic and diluted net
income (loss) per common share:
Six Months Ended August 31,
-------------------------------
2007 2006
---------- ---------
Operating income (loss) .................................................. $ 2,342 $(4,222)
Other income, net ........................................................ 3,180 4,411
------- -------
Income from continuing operations before income taxes .................... 5,522 189
Income tax expense ....................................................... (1,670) (40)
------- -------
Net income from continuing operations ................................... 3,852 149
Net income (loss) from discontinuing operations, net of tax .............. 2,111 (582)
------- -------
Net income (loss) ........................................................ $ 5,963 $ (433)
======= =======
Net income (loss) per common share:
Basic ................................................................. $ 0.26 $ (0.02)
======= =======
Diluted ............................................................... $ 0.26 $ (0.02)
======= =======
Net income for the six months ended August 31, 2007 was $5,963 compared to
a net loss of $433 during the comparable period in 2006. Income per share for
the six months ended August 31, 2007 was $0.26 (diluted) as compared to net loss
per share of $0.02 (diluted) for the same period in 2006. Net income was
favorably impacted by sales incentive reversals of $1,538 ($1,073 after taxes)
and $1,264 ($999 after taxes) for the six months ended August 31, 2007 and 2006,
respectively, and pre-tax income of $3,248 ($2,111 after taxes) recorded in
discontinued operations for the six months ended August 31, 2007.
Liquidity and Capital Resources
-------------------------------
Cash Flows, Commitments and Obligations
---------------------------------------
As of August 31, 2007, we had working capital of $305,372, which includes
cash and short-term investments of $83,858 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 and Incaar, 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.
Operating activities used cash of $64,339 for the six months ended August
31, 2007 compared to cash provided of $7,829 in 2006. Net income from continuing
operations for the six months ended August 31, 2007 was $3,852 compared to $149
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 six months ended August
31, 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 5.3
during the six months ended August 31, 2007 compared to 4.9 in the
prior year.
31
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 3.7 during the
six months ended August 31, 2007 compared to 3.5 in the prior year.
o In addition, cash flows from operating activities for the six months
ended August 31, 2007 were unfavorably impacted by a decrease 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 $57,901 during the six months ended
August 31, 2007, primarily due to the sales (net of purchases) of short-term
investments partially offset by the Oehlbach and Incaar acquisitions and
purchases of property, plant and equipment. Investing activities used cash of
$11,755 during the six months ended August 31, 2006, primarily due to purchase
(net of sales) of short-term investments.
Financing activities provided cash of $2,147 during the six months ended
August 31, 2007, primarily from the exercise of stock options partially offset
by the purchase of treasury stock. Financing activities for the six months ended
August 31, 2006 used cash of $3,423, primarily from the purchase of treasury
stock and payment of bank obligations and debt.
As of August 31, 2007, we have a domestic credit line to fund the temporary
short-term working capital needs of the Company. This line expires on November
30, 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%.
Certain contractual cash obligations and other commercial commitments will
impact our short and long-term liquidity. At August 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) ............................ $ 11,710 $ 521 $ 1,043 $ 1,082 $ 9,064
Operating leases (2) .................................... 19,583 3,138 4,554 3,295 8,596
-------- -------- -------- -------- --------
Total contractual cash obligations ...................... $ 31,293 $ 3,659 $ 5,597 $ 4,377 $ 17,660
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) .................................... $ 3,296 $ 3,296 $ -- $ -- $ --
Stand-by letters of credit (4) .......................... 3,045 3,045 -- -- --
Commercial letters of credit (4) ........................ 2,266 2,266 -- -- --
Debt (5) ................................................ 6,480 1,653 3,954 873 --
Unconditional purchase obligations (6) .................. 125,549 125,549 -- -- --
-------- -------- -------- -------- --------
Total commercial commitments ............................ $140,636 $135,809 $ 3,954 $ 873 $ --
======== ======== ======== ======== ========
32
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 $67 and $5,643,
respectively at August 31, 2007.
2. We enter into operating leases in the normal course of business.
3. Represents amounts outstanding under the Audiovox Germany factoring
agreement at August 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. 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.
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 August 31, 2012 are $6,126.
Recent 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
33
inconsistencies in guidance found in other accounting pronouncements. SFAS 157
is effective for fiscal years beginning after November 15, 2007. 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 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.
34
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 August 31, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
35
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 August 31, 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 six months ended August 31, 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
---------
Total purchases ................................... 128,100
(1) Prior to the purchases made during the six months ended August 31, 2007, we
had 1,693,047 shares of treasury stock purchased as part of a publicly
announced program. As of August 31, 2007, we had 1,821,147 shares of
treasury stock with an average paid price per share of $10.11.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on August 2, 2007, at
the Sheraton in Smithtown, New York. Proxies for the meeting were solicited
pursuant to Regulation 14 of the Act on behalf of the Board of Directors and two
matters were voted on at the Annual Meeting, as follows:
o The election of Class A nominee's Paul C. Kreuch, Jr., Dennis F.
McManus, and Peter A. Lesser, and the election of Class A and Class B
nominee's John J. Shalam, Patrick M. Lavelle, Charles M. Stoehr, and
Philip Christopher as Directors of the Company until the next annual
meeting.
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The votes were cast for this matter as follows:
FOR AGAINST/ABSTAIN
---------- ---------------
Class A
-----------------------------
Paul C. Kreuch, Jr. 19,368,254 587,967
Dennis F. McManus 19,358,753 597,468
Peter A. Lesser 19,362,476 593,745
Class A and B
-----------------------------
John J. Shalam 38,197,833 4,367,928
Patrick M. Lavelle 38,394,208 4,171,553
Charles M. Stoehr 37,799,951 4,765,810
Philip Christopher 38,237,384 4,328,377
Each nominee was elected a Director of the Company.
o To ratify the appointment of Grant Thornton LLP as our independent
registered public accounting firm for the fiscal year ending February
28, 2008.
FOR AGAINST/ABSTAIN
---------- ---------------
42,458,448 107,313
The selection of Grant Thornton LLP as the Company's independent auditors was
ratified.
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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: October 10, 2007
By: /s/Charles M. Stoehr
----------------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
39