UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2006
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-28839
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 MARCUS BLVD., HAUPPAUGE, NEW YORK 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 231-7750
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer as defined in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Number of shares of each class of the issuer's common stock outstanding as of
the latest practicable date.
Class As of January 4, 2007
Class A Common Stock 20,142,300 Shares
Class B Common Stock 2,260,954 Shares
1
AUDIOVOX CORPORATION
INDEX
PAGE
----
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets at February 28,
2006 and November 30, 2006.............................................. 3
Consolidated Statements of Operations for the
Three and Nine Months Ended November 30, 2005 and 2006.................. 5
Consolidated Statements of Cash Flows for the
Nine Months Ended November 30, 2005 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............................................................ 32
ITEM 4. CONTROLS AND PROCEDURES................................................... 32
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................... 33
ITEM 1A. RISK FACTORS............................................................. 33
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS..................................................... 33
ITEM 6. EXHIBITS.................................................................. 34
SIGNATURES........................................................................ 35
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
FEBRUARY 28, NOVEMBER 30,
2006 2006
-------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 16,280 $ 13,878
Restricted cash .................................... 1,488 --
Short-term investments ............................. 160,799 135,787
Accounts receivable, net ........................... 88,671 135,276
Inventory .......................................... 96,150 88,483
Receivables from vendors ........................... 9,830 9,578
Prepaid expenses and other current assets .......... 6,023 10,188
Deferred income taxes .............................. 8,218 8,217
-------- --------
Total current assets .............................. 387,459 401,407
Investment securities ............................... 14,709 12,200
Equity investments .................................. 11,834 11,668
Property, plant and equipment, net .................. 18,799 18,251
Excess cost over fair value of assets acquired ...... 16,067 17,514
Intangible assets ................................... 11,002 11,184
Deferred income taxes ............................... 3,989 5,617
Other assets ........................................ 2,153 650
-------- --------
Total assets ...................................... $466,012 $478,491
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
FEBRUARY 28, NOVEMBER 30,
2006 2006
-------------------- ----------------
-------------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 13,776 $ 21,020
Accrued expenses and other current liabilities ...................... 17,907 22,228
Accrued sales incentives ............................................ 8,512 9,932
Income taxes payable ................................................ -- 339
Bank obligations .................................................... 5,329 4,346
Current portion of long-term debt ................................... 1,371 1,522
----------- -----------
Total current liabilities .......................................... 46,895 59,387
Long-term debt ....................................................... 5,924 5,679
Capital lease obligation ............................................. 5,892 5,810
Deferred compensation ................................................ 6,569 7,304
----------- -----------
Total liabilities .................................................. 65,280 78,180
Commitments and contingencies
Stockholders' equity:
Preferred stock, $50 par value; 50,000 shares authorized, issued
and outstanding at February 28, 2006 with liquidation preference
of $2,500. No shares issued or outstanding at November 30, 2006.... 2,500 --
Series preferred stock, $.01 par value; 1,500,000 shares authorized,
no shares issued or outstanding .............................. -- --
Common stock:
Class A, $.01 par value; 60,000,000 shares authorized,
21,520,346 and 21,662,346 shares issued, 20,131,794 and 19,968,694
shares outstanding at February 28, 2006 and November 30,
2006, respectively ............................................... 215 217
Class B convertible, $.01 par value; 10,000,000 shares
authorized, 2,260,954 shares issued and outstanding ........... 22 22
Paid-in capital ..................................................... 263,008 267,398
Retained earnings ................................................... 148,427 151,848
Accumulated other comprehensive loss ................................ (608) (2,187)
Treasury stock, at cost, 1,388,552 and 1,693,652 shares of Class A
common stock at February 28, 2006 and November 30, 2006,
respectively ................................................... (12,832) (16,987)
----------- -----------
Total stockholders' equity ........................................... 400,732 400,311
----------- -----------
Total liabilities and stockholders' equity ........................... $ 466,012 $ 478,491
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2005 AND 2006
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------------------- -----------------------------
2005 2006 2005 2006
-------------- -------------- ------------- ------------
Net sales ...................................................... $ 156,290 $ 151,833 $ 423,736 $ 360,556
Cost of sales .................................................. 146,586 126,462 378,968 299,332
------------ ------------ ------------ ------------
Gross profit ................................................... 9,704 25,371 44,768 61,224
------------ ------------ ------------ ------------
Operating expenses:
Selling ....................................................... 8,235 8,114 23,808 21,626
General and administrative .................................... 13,500 13,649 38,126 36,682
Engineering and technical support ............................. 1,438 1,888 4,723 5,418
------------ ------------ ------------ ------------
Total operating expenses ..................................... 23,173 23,651 66,657 63,726
------------ ------------ ------------ ------------
Operating (loss) income ........................................ (13,469) 1,720 (21,889) (2,502)
------------ ------------ ------------ ------------
Other income (expense):
Interest and bank charges ..................................... (555) (429) (1,845) (1,491)
Equity in income of equity investees .......................... 397 659 1,989 2,423
Other, net .................................................... (85) 1,118 5,125 4,827
------------ ------------ ------------ ------------
Total other (loss) income, net ............................... (243) 1,348 5,269 5,759
------------ ------------ ------------ ------------
(Loss) income from continuing operations before taxes .......... (13,712) 3,068 (16,620) 3,257
Income tax benefit ............................................. 5,406 780 10,485 740
------------ ------------ ------------ ------------
Net (loss) income from continuing operations ................... (8,306) 3,848 (6,135) 3,997
Net (loss) income from discontinued operations, net of tax ..... (1,990) 6 (2,251) (576)
------------ ------------ ------------ ------------
Net (loss) income .............................................. $ (10,296) $ 3,854 $ (8,386) $ 3,421
============ ============ ============ ============
Net (loss) income per common share (basic):
From continuing operations .................................... $ (0.37) $ 0.17 $ (0.28) $ 0.18
From discontinued operations .................................. (0.09) -- (0.10) (0.03)
------------ ------------ ------------ ------------
Net (loss) income per common share (basic) ..................... $ (0.46) $ 0.17 $ (0.38) $ 0.15
============ ============ ============ ============
Net (loss) income per common share (diluted):
From continuing operations .................................... $ (0.37) $ 0.17 $ (0.28) $ 0.18
From discontinued operations .................................. (0.09) -- (0.10) (0.03)
------------ ------------ ------------ ------------
Net (loss) income per common share (diluted) ................... $ (0.46) $ 0.17 $ (0.38) $ 0.15
============ ============ ============ ============
Weighted-average common shares outstanding (basic) ............. 22,649,819 22,234,399 22,352,866 22,345,183
============ ============ ============ ============
Weighted-average common shares outstanding (diluted) ........... 22,649,819 22,445,164 22,352,866 22,540,476
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2005 AND 2006
(IN THOUSANDS)
(UNAUDITED)
2005 2006
----------- ----------
(revised)
Cash flows from operating activities:
Net (loss) income ......................................................................... $ (8,386) $ 3,421
Net loss from discontinued operations ..................................................... 2,251 576
-------- --------
Net (loss) income from continuing operations .............................................. (6,135) 3,997
Adjustments to reconcile net (loss) income to net cash used in continuing operating
activities:
Depreciation and amortization ............................................................ 2,878 2,863
Bad debt expense (recovery) .............................................................. 1,389 (51)
Equity in income of equity investees ..................................................... (1,989) (2,423)
Other than temporary impairment charge in investment ..................................... 1,758 --
Deferred income tax expense .............................................................. (4,874) --
Non-cash compensation adjustment ......................................................... 123 231
Stock based compensation expense ......................................................... -- 432
Unrealized gain on trading security ...................................................... (2,455) --
Loss on disposal of property, plant and equipment ........................................ 3 33
Tax benefit on stock options exercised ................................................... 1,353 (22)
Changes in operating assets and liabilities (net of assets and liabilities
acquired):
Accounts receivable ...................................................................... (38,309) (44,996)
Inventory ................................................................................ 12,624 8,562
Receivables from vendors ................................................................. (2,818) 274
Prepaid expenses and other ............................................................... (1,804) (2,502)
Investment securities-trading ............................................................ (346) (757)
Accounts payable, accrued expenses, accrued sales incentives and other current
liabilities ................................................................................ 3,143 12,412
Income taxes payable ..................................................................... (10,827) 518
Changes in assets and liabilities of discontinued operations ............................ 526 --
-------- --------
Net cash used in operating activities ................................................... (45,760) (21,429)
Cash flows from investing activities:
Purchases of property, plant and equipment ................................................ (1,493) (1,917)
Proceeds from sale of property, plant and equipment ....................................... 6 24
Proceeds from distribution from an equity investee ........................................ 969 2,589
Purchase of short-term investments ........................................................ (62,000) (66,905)
Proceeds from sale of short-term investments .............................................. 92,747 91,900
Purchase of patents ....................................................................... -- (475)
Purchase of long term investment .......................................................... -- (1,000)
Proceeds from sale of Cellular business ................................................... 11,070 --
Escrow payment for purchase of minority interest .......................................... (1,702) --
Adjustment related to purchase of acquired business ....................................... (1,714) --
Cash provided by discontinued operations .................................................. 15 --
-------- --------
Net cash provided by investing activities ................................................ 37,898 24,216
6
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2005 AND 2006
(IN THOUSANDS)
(UNAUDITED)
2005 2006
----------- ----------
Cash flows from financing activities:
Borrowings from bank obligations .................................................. 1,100 --
Repayments on bank obligations .................................................... (1,765) (1,425)
Principal payments on capital lease obligation .................................... (52) (64)
Proceeds from exercise of stock options and warrants .............................. 7,584 1,444
Principal payments on debt ........................................................ (1,159) (1,089)
Repurchase of Class A common stock ................................................ (2,037) (4,155)
Repurchase of preferred stock ..................................................... -- (5)
Tax benefit on stock options exercised ............................................ -- 22
Cash used in discontinued operations .............................................. (61) --
-------- --------
Net cash provided by (used in) financing activities .............................. 3,610 (5,272)
-------- --------
Effect of exchange rate changes on cash ............................................ (208) 83
-------- --------
Net decrease in cash and cash equivalents .......................................... (4,460) (2,402)
Cash and cash equivalents at beginning of period ................................... 18,624 16,280
-------- --------
Cash and cash equivalents at end of period ......................................... $ 14,164 $ 13,878
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2006
(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 November 30, 2005.
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,
recoverability of deferred tax assets, valuation of long-lived assets,
accrued sales incentives and warranty reserves. A summary of the Company's
significant accounting policies is identified in Note 1 of the Consolidated
Financial Statements in the Company's Form 10-K for the year ended November
30, 2005. There have been no changes to the Company's significant
accounting policies subsequent to November 30, 2005, except as discussed in
Note 2 below.
The Company has one reportable segment, the Electronics Group, which is
organized by product category. The Electronics Group consists of five
wholly-owned subsidiaries: Audiovox Electronics Corporation, American Radio
Corp., Code Systems, Inc., Audiovox German Holdings GmbH and Audiovox
Venezuela, C.A. 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.
In February 2006, the Company changed its fiscal year end from November
30th to February 28th. The Company's current fiscal year began March 1,
2006 and ends on February 28, 2007. This quarterly report on Form 10-Q
supplements the transition report on Form 10-Q for the three month
transition period ended February 28, 2006 and compares the financial
position as of November 30, 2006 to February 28, 2006 and the results of
operations for the three and nine months ended November 30, 2006 of the
fiscal year ending February 28, 2007 with the results of operations for the
three and nine months ended November 30, 2005 from the fiscal year ended
November 30, 2005.
For the nine months ended November 30, 2005, the Company revised the
operating, investing and financing activities of cash flows attributed to
discontinued operations, to conform to the appropriate presentation,
whereas in the prior periods it was reported on a combined basis as a
single line within operating activities.
(2) Accounting for Stock-Based Compensation
---------------------------------------
The Company has various stock based compensation plans, which are more
fully described in Note 11 of the Company's Form 10-K for the fiscal year
ended November 30, 2005.
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
Prior to December 1, 2005, the Company accounted for stock-based employee
compensation under the intrinsic value method as outlined in the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25"), and related interpretations while disclosing
pro-forma net income (loss) and pro-forma net income (loss) per share as if
the fair value method had been applied in accordance with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation ("SFAS No. 123")." Under the intrinsic value method, no
compensation expense was recognized if the exercise price of the Company's
employee stock options equaled or exceeded the market price of the
underlying stock on the date of grant. The Company issued all stock option
grants with exercise prices equal to, or greater than, the market value of
the underlying common stock on the date of grant. No compensation expense
relating to the grant of such options was recognized in the consolidated
statements of operations through November 30, 2005.
Effective December 1, 2005, the Company adopted SFAS No. 123(R),
"Share-Based Payment" ("SFAS 123(R)"). SFAS No. 123(R) replaces SFAS No.
123 and supersedes APB No. 25. SFAS 123(R) requires that all stock-based
compensation be recognized as an expense in the financial statements and
that such costs be measured at the fair value of the award at the date of
grant and be recognized as an expense over the requisite service period.
This statement was adopted using the modified prospective method, which
requires the Company to recognize compensation expense on a prospective
basis for all unvested stock options outstanding. Therefore, prior period
financial statements have not been restated. Under this method, in addition
to reflecting compensation expense for new share-based payment awards,
expense is also recognized to reflect the remaining vesting period of
awards that had been included in pro-forma disclosures in prior periods.
Since all options outstanding as of December 1, 2005 were fully vested and
exercisable, there was no compensation expense recognized for options
granted prior to the adoption of SFAS 123(R) in the consolidated statement
of operations for the three and nine months ended November 30, 2006. Prior
to adopting SFAS 123(R), the Company presented all tax benefits related to
stock-based compensation as an operating cash inflow, which was $1,353 for
the nine months ended November 30, 2005. SFAS 123(R) requires tax benefits
related to stock based compensation be presented as an operating activity
outflow and finance activity inflow on a prospective basis, which was $22
for the nine months ended November 30, 2006.
The following table illustrates the effect on net loss and net loss per
common share as if the Company had measured the compensation cost for the
Company's stock option programs under the fair value method during the
three and nine months ended November 30, 2005.
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, 2005 NOVEMBER 30, 2005
------------------------ -----------------------
Net loss
As reported ................................................... $(10,296) $ (8,386)
Stock based compensation expense .............................. (490) (490)
-------- --------
Pro-forma ..................................................... $(10,786) $ (8,876)
======== ========
Net loss per common share (basic and diluted)
As reported ................................................... $ (0.46) $ (0.38)
Pro-forma ..................................................... $ (0.48) $ (0.40)
The per share fair value of stock options granted during the three months
ended November 30, 2005 was $2.51 on the date of grant. This fair value was
determined using the Black-Sholes option-pricing model with the following
assumptions:
9
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
Expected dividend yeild ........................................ 0%
Expected weighted average volatility yield ..................... 19.4%
Risk-free interest rate ........................................ 4.70%
Expected life (years) .......................................... 2.6
On November 10, 2005, the FASB issued Staff Position No. 123(R)-3,
"Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards", which provides an alternative (and simplified)
method to calculate the pool of excess income tax benefits upon the
adoption of SFAS No. 123(R). Among other things, Staff Position No.
123(R)-3 provides guidance on how to present excess tax benefits in the
statement of cash flows when the alternative pool calculation is used. This
new guidance became effective upon its issuance; however, companies can
generally make a one-time election to adopt the transition method in Staff
Position No. 123(R)-3 up to one year from the later of (i) initial adoption
of SFAS No. 123(R) or (ii) November 10, 2005. If a company elects to adopt
the alternative method after it has already issued financial statements
pursuant to the provisions of SFAS No. 123(R), such adoption would be
considered a change in accounting principle. The Company continues to
evaluate Staff Position No. 123(R)-3 and, accordingly, has not yet
determined whether the alternative method will be utilized.
(a) Stock-Based Compensation Expense
--------------------------------
The Company recognized stock-based compensation for awards issued
under the Company's Stock Option Plans in the following line items in
the Consolidated Statement of Operations:
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, 2006 NOVEMBER 30, 2006
------------------ -----------------
Cost of sales ............................................ $ 21 $ 21
Selling expenses ......................................... 156 156
General and administrative expenses ...................... 207 245
Engineering and technical support ........................ 10 10
---- ----
Stock-based compensation expense before income
tax benefit............................................... $394 $432
==== ====
The Company uses the Black-Scholes option pricing model to estimate
the fair value of stock based compensation awards with the following
assumptions for the three months ended November 30, 2006:
THREE MONTHS ENDED
NOVEMBER 30, 2006
------------------
Dividend yield ............................................. 0%
Weighted-average expected volatility ....................... 49.90%
Risk-free interest rate .................................... 4.67%
Expected life of options (in years) ........................ 2.00
Options granted during the three and nine months ended November 30,
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 November 30, 2006 was $4.15.
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
10
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
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
EXERCISE REMAINING
NUMBER OF SHARES PRICE CONTRACTUAL LIFE
-------------------- -------------- -----------------
Outstanding and exercisable at
February 28, 2006 .................................. 2,197,152 $ 12.04
Granted .......................................... 105,000 13.42
Exercised ........................................ (142,000) 10.16
Forfeited/expired ................................ (17,500) 14.34
---------
Outstanding and exercisable at
November 30, 2006 .................................. 2,142,652 $ 12.21 1.84
========== ========= ====
At November 30, 2006, the Company had no unrecognized compensation
cost as all stock options were fully vested.
(3) Discontinued Operations
-----------------------
On February 25, 2005, the Company entered into a plan to discontinue
ownership of Audiovox Malaysia ("AVM") due to increased competition from
non local OEM's and deteriorating credit quality of local customers. The
Company completed the sale of AVM on November 7, 2005. The net loss from
discontinued operations for the three and nine months ended November 30,
2006 is primarily due to legal and related costs associated with
contingencies pertaining to the Company's discontinued Cellular business
offset by associated income tax benefits (see Note 17).
The following is a summary of the results of the discontinued operations:
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
--------------------- -------------------------
2005 2006 2005 2006
--------- --------- --------- ----------
Net sales from discontinued operations ..................... $ 624 -- $ 2,690 --
======= ======= ======= =======
Loss from discontinued operations before income taxes ...... $ (63) $ (148) $ (493) $ (886)
Recovery of income taxes ................................... 152 154 321 310
------- ------- ------- -------
89 6 (172) (576)
Loss on sale of business, net of tax ....................... (2,079) -- (2,079) --
------- ------- ------- -------
Net (loss) income from discontinued operations ............. $(1,990) $ 6 $(2,251) $ (576)
======= ======= ======= =======
(4) Net Income (Loss) Per Common Share
----------------------------------
Basic net income (loss) per common share is based upon the weighted-average
common shares outstanding during the period. Diluted net income (loss) 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.
11
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
There are no reconciling items which impact the numerator of basic and
diluted net income (loss) per common share. A reconciliation between the
denominator of basic and diluted net income (loss) per common share is as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
--------------------------------- ------------------------------
2005 2006 2005 2006
-------------- --------------- ------------- -------------
Weighted-average common shares outstanding (basic) ........ 22,649,819 22,234,399 22,352,866 22,345,183
Effect of dilutive securities:
Stock options and warrants ............................... -- 210,765 -- 195,293
---------- ---------- ---------- ----------
Weighted-average common shares and potential common
shares outstanding (diluted) .............................. 22,649,819 22,445,164 22,352,866 22,540,476
========== ========== ========== ==========
Stock options and warrants totaling 1,004,890 and 1,013,000 for the three
months ended November 30, 2005 and 2006, respectively, and 815,897 and
1,209,635 for the nine months ended November 30, 2005 and 2006,
respectively, were not included in the net income (loss) per diluted share
calculation because these options and warrants were anti-dilutive or the
exercise price of these options and warrants was greater than the average
market price of the Company's common stock during these periods.
(5) Accumulated Other Comprehensive Loss
------------------------------------
Accumulated other comprehensive loss of $608 and $2,187 at February 28,
2006 and November 30, 2006, respectively, includes the net accumulated
unrealized gain (loss) on the Company's available-for-sale investment
securities of $331 and $(2,328) at February 28, 2006 and November 30, 2006,
respectively, and foreign currency translation (loss) gain of $(939) and
$141 at February 28, 2006 and November 30, 2006, respectively.
The Company's total comprehensive (loss) income was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
--------------------------- ------------------------
2005 2006 2005 2006
------------ ----------- ----------- ---------
Net income (loss) .................................................. $(10,296) $ 3,854 $ (8,386) $ 3,421
Other comprehensive (loss) income:
Foreign currency translation adjustments (see disclosure
below) ........................................................... 1,012 200 106 1,080
Unrealized holding gain (loss) on available-for-sale
investment securities arising during the period, net of tax ...... 173 (264) (176) (2,659)
-------- -------- -------- --------
Other comprehensive income (loss), net of tax ..................... 1,185 (64) (70) (1,579)
-------- -------- -------- --------
Total comprehensive (loss) income .................................. $ (9,111) $ 3,790 $ (8,456) $ 1,842
======== ======== ======== ========
12
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, 2005 NOVEMBER 30, 2005
------------------ -----------------
Disclosure of reclassification amount:
Unrealized foreign currency translation loss .............................. $ (353) $(1,259)
Less: reclassification adjustments for realized foreign
currency translation loss included in net income (loss)
from discontinued operations ............................................. (1,365) (1,365)
------- -------
Net unrealized foreign currency translation gain ............................ $ 1,012 $ 106
------- -------
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 provisions (benefits) of $106 and $(162) for the three months ended
November 30, 2005 and 2006, respectively and $(108) and $(1,630) for the
nine months ended November 30, 2005 and 2006, respectively.
(6) Inventory Writedown
-------------------
The Company recorded a $9,972 inventory write-down during the three months
ended November 30, 2005, which was primarily related to an $8,775 charge
due to the discontinuance of certain products within select product lines.
This write-down was the result of the Company completing its review of: a)
holiday season inventory and sales projections, b) products which were at
the end of their product life cycle and c) market information obtained from
industry competitors and customers regarding pricing and product demand at
a Consumer Electronics trade show.
(7) Non-Cash Transactions/Changes in Stockholders' Equity
-----------------------------------------------------
Non-Cash Transactions
---------------------
During the nine months ended November 30, 2005 and 2006, the Company
recorded a non-cash compensation adjustment of $123 and $231 respectively,
related to the rights under call/put options previously granted to certain
employees.
During the nine months ended November 30, 2006, the Company released its
restricted cash balance for the purchase of Audiovox Venezuela's minority
interest (see Note 17).
During the three months ended November 30, 2005, the Company recorded
an-other-than temporary impairment charge of $1,758 for its investment in
CellStar common stock and such charge has been included in other income
(expense) on the accompanying consolidated statement of operations.
Changes in Stockholders Equity
------------------------------
During the nine months ended November 30, 2006, the Company purchased
305,100 shares of treasury stock for $4,155.
During the nine months ended November 30, 2006, 142,000 shares of Class A
common stock were issued in connection with the exercise of stock options
and warrants resulting in proceeds of $1,444.
In August 2006, the Company repurchased all 50,000 outstanding shares of
preferred stock (the "shares") from the original shareholder for $5 and
retired the shares upon repurchase. The $2,495 difference between the
repurchase price and book value of the shares is included in paid in
capital in the accompanying consolidated balance sheet at November 30,
2006.
13
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
(8) Business Acquisition
--------------------
On January 4, 2005, the Company entered into an asset purchase agreement to
purchase certain assets of Terk Technologies Corp. ("Terk") for a total
purchase price of $15,274, as adjusted. The purchase price was subject to a
working capital adjustment based on the working capital of Terk at the time
of closing, plus contingent debentures with a maximum value of $9,280 based
on the achievement of future revenue targets. No amount has been recorded
with respect to the debentures and any amount paid under the debentures
would be recorded as additional goodwill. 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
increase the Company's market share for satellite radio products as well as
accessories for antennas and HDTV products.
(9) Goodwill and Other Intangible Assets
------------------------------------
The change in goodwill for the period is as follows:
Balance at February 28, 2006 ..................................... $16,067
Purchase of Venezuela minority interest (see Note 17) ............ 1,447
-------
Balance at November 30, 2006 ..................................... $17,514
=======
At February 28, 2006, intangible assets consisted of the following:
GROSS
CARRYING ACCUMULATED TOTAL NET
VALUE AMORTIZATION BOOK VALUE
--------------- ------------------ ------------------
--------------- ------------------ ------------------
Patents subject to amortization .......................... $ 150 $ 18 $ 132
Trademarks/Tradenames not subject to
amortization ............................................. 10,042 -- 10,042
Contract subject to amortization ......................... 1,104 276 828
------- ------- -------
------- ------- -------
Total .................................................. $11,296 $ 294 $11,002
======= ======= =======
At November 30, 2006, intangible assets consisted of the following:
GROSS
CARRYING ACCUMULATED TOTAL NET
VALUE AMORTIZATION BOOK VALUE
--------------- ------------------ ------------------
Patents subject to amortization .......................... $ 625 $ 145 $ 480
Trademarks/Tradenames not subject to
amortization ............................................. 10,042 -- 10,042
Contract subject to amortization ......................... 1,104 442 662
------- ------- -------
Total .................................................. $11,771 $ 587 $11,184
======= ======= =======
During the nine months ended November 30, 2006, the Company purchased $475
of patents subject to amortization with estimated useful lives ranging from
twenty-four to forty-five months.
The Company recorded amortization expense of $244 and $103 for the three
months ended November 30, 2005 and 2006, respectively and $232 and $225 for
the nine months ended November 30, 2005 and 2006, respectively. The
estimated aggregate amortization expense for the cumulative five years
ending November 30, 2011 amounts to $1,096.
14
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
(10) Equity Investments
------------------
As of February 28, 2006 and November 30, 2006, 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.
FEBRUARY 28, NOVEMBER 30,
2006 2006
------------ ------------
Current assets ............................. $24,007 $24,309
Non-current assets ......................... 4,339 4,501
Current liabilities ........................ 4,678 5,474
Members' equity ............................ 23,668 23,336
NINE MONTHS ENDED
NOVEMBER 30,
-----------------
2005 2006
------- -------
Net sales .................................. $38,927 $45,072
Gross profit ............................... 8,616 13,480
Operating income ........................... 4,019 4,058
Net income ................................. $ 4,034 $ 4,846
The Company's share of income from ASA for the nine months ended November
30, 2005 and 2006, was $2,017 and $2,423 respectively. In addition, the
Company received distributions from ASA totaling $2,589 during the nine
months ended November 30, 2006, which was recorded as a reduction to equity
investments in the accompanying consolidated balance sheet.
(11) Bliss-tel Investment
--------------------
On December 13, 2004, Bliss-tel Public Company Limited ("Bliss-tel") issued
230,000,000 shares on the SET (Security Exchange of Thailand) for an
offering price of 6.20 baht per share. Prior to the issuance of these
shares, the Company was a 20% shareholder in Bliss-tel and, subsequent to
the offering, the Company owns 30,000,000 shares (or approximately 13%) of
Bliss-tel's outstanding stock. In addition, on July 21, 2005, the Company
received 9,000,000 warrants ("the warrants") which may be exercised
beginning on September 29, 2006, and expire on July 17, 2012. Each warrant
is exercisable into one share of Bliss-tel common stock at an exercise
price of 8 baht per share. Beginning in the quarter ended February 28,
2005, the Company accounted for the Bliss-tel investment as a trading
security in accordance with FASB Statement No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" whereby the unrealized holding
gains and losses of Bliss-tel stock were included in earnings. As a result
of this transaction, the Company recorded a net gain of $2,455 for the nine
months ended November 30, 2005, which is included in other income on the
accompanying consolidated statements of operations.
The Company re-characterized the Bliss-tel investment to an
available-for-sale security on September 1, 2005, as a result of a change
in the Company's strategy regarding selling the Bliss-tel stock as the
Company was unable to find a buyer in the short term. Accordingly,
beginning on September 1, 2005, the unrealized holding gains and losses on
the Bliss-tel investment are included as a component of accumulated other
comprehensive loss in the accompanying consolidated balance sheets.
15
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
(12) Income Taxes
------------
Interim period tax provisions are generally based upon an estimated annual
effective tax rate per taxable entity, including evaluations of possible
future events and transactions, and are subject to subsequent refinement or
revision. When the Company is unable to estimate a part of its annual
income or loss, or the related tax expense or benefit, the tax expense or
benefit applicable to that item is reported in the interim period in which
the income or loss occurs. A valuation allowance is provided when it is
more likely than not that some portion, or all, of the deferred tax assets
will not be realized.
The effective tax rate from continuing operations for the three and nine
months ended November 30, 2006 was a tax benefit of 25.4% and 22.7%
respectively, compared to 39.4% and 63.1% in the comparable prior periods.
The Company's effective tax rate for the three and nine months ended
November 30, 2006 is less than the statutory rate as a result of tax exempt
interest income earned on short term investments. The effective tax rate
for the nine months ended November 30, 2005 was favorably impacted by
$3,307 in tax accrual reductions due to the completion of certain tax
examinations for the years 1994 through 2000.
(13) Accrued Sales Incentives
------------------------
A summary of the activity with respect to sales incentives is provided
below:
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
---------------------------------- ------------------------------
2005 2006 2005 2006
---------------- ----------- ------------ ----------
Opening balance ..................................... $ 7,919 $ 7,405 $ 5,450 $ 8,512
Accruals ............................................ 6,418 5,614 16,749 * 11,797
Payments and credits ................................ (3,843) (2,559) (10,858) (8,585)
Reversals for unearned sales incentive .............. (270) (451) (275) (1,152)
Reversals for unclaimed sales incentives ............ (398) (77) (1,240) (640)
-------- -------- -------- --------
Ending balance ...................................... $ 9,826 $ 9,932 $ 9,826 $ 9,932
======== ======== ======== ========
* Includes $1,255 of accrued sales incentives acquired from Terk.
(14) 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 NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------- -------------------------
2005 2006 2005 2006
---------- --------- --------- ---------
Opening balance .................................................... $ 11,314 $ 8,576 $ 11,394 $ 9,947
Liabilities accrued for warranties issued during the
period ............................................................. 2,099 2,864 4,698 6,019
Warranty claims paid during the period ............................. (3,084) (2,283) (5,763) (6,809)
-------- -------- -------- --------
Ending balance ..................................................... $ 10,329 $ 9,157 $ 10,329 $ 9,157
======== ======== ======== ========
(15) Financing Arrangements
----------------------
The Company has the following financing arrangements:
16
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
FEBRUARY 28, NOVEMBER 30,
2006 2006
------------ ------------
Bank Obligations
Domestic bank obligation (a) ...................... $ -- $ --
Venezuela bank obligations (b) .................... 956 372
Euro Asset-Based lending obligation (c) ........... 4,373 3,974
------ ------
Total bank obligations ............................ $5,329 $4,346
====== ======
Debt
Euro term loan agreement (d) ...................... $6,282 $5,835
Other (e) ......................................... 1,013 1,366
------ ------
Total debt ........................................ $7,295 $7,201
====== ======
(a) Domestic Bank Obligations
-------------------------
At November 30, 2006, the Company has an unsecured credit line to fund
the temporary short-term working capital needs of the domestic
operations. This line expires on August 31, 2007 and allows aggregate
borrowings of up to $25,000 at an interest rate of Prime (or similar
designations) plus 1%. As of February 28, 2006 and November 30, 2006,
no direct amounts are outstanding under this agreement. At November
30, 2006, the Company had $9,197 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 20, 2007. Audiovox Corporation
has secured this facility with a $1,000 standby letter of credit.
(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 November
30, 2006, 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
17
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
has been fully repaid. Payments under Tranche A are due in monthly
installments and interest accrues at 2.75% over the Euribor rate. Any
amount repaid may not be reborrowed. The term loan becomes immediately
due and payable if a change of control occurs without permission of
the financial institution. In April 2005, the maturity of the term
loan was prolonged to August 30, 2010 with a pre-payment option.
Audiovox Corporation guarantees 3 million Euros of this term loan. The
term loan is secured by the pledge of the stock of Audiovox Germany on
all brands and trademarks of Audiovox Germany. The term loan requires
the maintenance of certain yearly financial covenants that are
calculated according to German Accounting Standards. Should any of the
financial covenants not be met, the financial institution may charge a
higher interest rate on any outstanding borrowings and/or call the
loan. The short and long term amounts outstanding under this agreement
were $1,371 and $4,911, respectively, at February 28, 2006 and $1,522
and $4,313 respectively, at November 30, 2006.
(e) Other Debt
----------
This amount represents a call/put option owed to certain employees of
Audiovox Germany.
(16) Other Income (Loss)
-------------------
Other income (loss) is comprised of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
---------------------------------- ------------------------------
2005 2006 2005 2006
--------------- --------------- --------------- ------------
CellStar Impairment (see Note 7) ................ $(1,758) $ -- $(1,758) $ --
Bliss-tel (see Note 11) ......................... -- -- 2,455 --
Interest income ................................. 873 1,397 2,950 4,681
Rental income ................................... 163 138 457 414
Miscellaneous ................................... 637 (417) 1,021 (268)
------- ------- ------- -------
Total Other, net ................................ $ (85) $ 1,118 $ 5,125 $ 4,827
======= ======= ======= =======
(17) Commitments and 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 its outstanding litigation matters
disclosed below will not have a material adverse effect on the Company's
financial statements, individually or in the aggregate; however, due to the
uncertain outcome of these matters, the Company disclosed these specific
matters below:
In November 2004, several purported double derivative, derivative and class
actions were filed in the Court of Chancery of the State of Delaware, New
Castle County challenging approximately $27,000 made in payments from the
proceeds of the Asset Sale to UTStarcom, Inc. These actions were
subsequently consolidated into a single derivative complaint (the
"Complaint"), In re Audiovox Corporation Derivative Litigation. The
Complaint challenges the payment of $16,000 to Mr. Christopher pursuant to
a Personally Held Intangibles Agreement, an additional $4,000 to Mr.
Christopher pursuant to an Agreement and General Release, $1,916 to Mr.
Shalam pursuant to an amendment to his Long-Term Incentive Award, $5,000
distributed to ACC employees other than Mr. Christopher and the extension
of certain options to Mr. Christopher. The Complaint alleges that: (i) the
payments should be rescinded on grounds including, inter alia, material
misrepresentation, breach of fiduciary duty and mistake, (ii) the
recipients of the various payments were unjustly enriched, and (iii) the
directors of Audiovox breached their fiduciary duties to Audiovox and its
shareholders. This matter has been settled in principle for an estimated
payment of $6,750 to the Company (less plaintiffs' legal fees, costs of
notice and mailing, etc., all to be determined). The parties expect to
submit settlement papers to the Court of Chancery not later than February
of 2007. The settlement will not become final until notice to stockholders,
a hearing and Court of Chancery approval. As this represents a gain
contingency, these amounts will not be recorded until received and such
amount will be recorded with in discontinued operations when received.
18
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
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.
During fiscal 2004, an arbitration proceeding was commenced by the Company
and several of its subsidiaries against certain Venezuelan employees and
two Venezuelan companies ("Respondents") before the American Arbitration
Association. The matter was submitted to mediation and settled in fiscal
2005. The agreement provided for a payment (to be made upon satisfaction of
certain pre-closing conditions) from the Company to the Respondents of
$1,700 in consideration of which the Company will acquire all of
Respondents' ownership. In addition, the Company and Respondents will
release all claims. As of February 28, 2006, $250 was paid to the
Respondents and the remaining balance (which includes accrued interest),
was included in restricted cash on the accompanying consolidated balance
sheet. In April 2006, all closing conditions were satisfied and the
remaining balance in restricted cash was paid to the Respondents. This
purchase of minority interest was recorded as goodwill on the accompanying
consolidated balance sheet in accordance with FASB Statement 141 "Business
Combinations" (see Note 9). As such, this matter has been completed and the
Company has full ownership of Audiovox Venezuela.
The products the Company sells are continually changing as a result of
improved technology. As a result, although the Company and its suppliers
attempt to avoid infringing known proprietary rights, the Company may be
subject to legal proceedings and claims for alleged infringement by its
suppliers or distributors, of third party patents, trade secrets,
trademarks or copyrights. Any claims relating to the infringement of
third-party proprietary rights, even if not meritorious, could result in
costly litigation, divert management's attention and resources, or require
the Company to either enter into royalty or license agreements which are
not advantageous to the Company or pay material amounts of damages.
Under the asset purchase agreement for the sale of the Company's Cellular
business to UTSI, the Company agreed to indemnify UTSI for any breach or
violation by ACC and its representations, warranties and covenants
contained in the asset purchase agreement and for other matters, subject to
certain limitations. Significant indemnification claims by UTSI could have
a material adverse effect on the Company's financial condition and results
of operation. The Company is not aware of any such claim(s) for
indemnification.
In July 2006, the Company extended an existing operating lease agreement
with its principal stockholder until November 30, 2016. The lease extension
requires 125 monthly installments for an aggregate total of $7,701 in
payments.
(18) New Accounting Pronouncements
-----------------------------
In July 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48. "Accounting for Uncertainty in Income Taxes" ("FIN
48"). FIN 48 clarifies the accounting for uncertain income tax positions
that are recognized in the Company's financial statements in accordance
with the provisions of FASB Statement No. 109, "Accounting for Income
Taxes". FIN 48 also provides guidance on the derecognition of uncertain
positions, financial statement classification, accounting for interest and
penalties, accounting for interim periods and adds new disclosure
requirements. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company is currently evaluating the impact that FIN 48 will
have on its financial position and results of operations.
19
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
(19) Subsequent Event
----------------
On December 21, 2006, the Company entered into a definitive agreement (the
"Agreement") with Thomson ("Thomson"). Under the Agreement, the Company
will acquire Thomson's Americas consumer electronics accessory business as
well as rights to the RCA brand for consumer electronics accessories. The
Company anticipates that the transaction will close in early 2007.
As consideration for Thomson's Americas consumer electronics accessory
business , the Company agreed to pay Thomson $50,000 plus a five (5) year
fee related to the RCA brand in connection with future sales of consumer
electronics accessories.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
We begin Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") with an overview of the business. This is
followed by a discussion of the Critical Accounting Policies and Estimates that
we believe are important to understanding the assumptions and judgments
incorporated in our reported financial results. In the next section, we discuss
our results of operations for the three and nine months ended November 30, 2005
compared to the three and nine months ended November 30, 2006. We then provide
an analysis of changes in our balance sheets and cash flows, and discuss our
financial commitments in the sections entitled "Liquidity and Capital
Resources." We conclude this MD&A with a discussion of "Related Party
Transactions" and "Recent Accounting Pronouncements".
In February 2006, we changed our fiscal year end from November 30th to
February 28th. Our current fiscal year began March 1, 2006 and ends on February
28, 2007. This quarterly report on Form 10-Q for our new fiscal year supplements
our transition report on Form 10-Q for the three month transition period ended
February 28, 2006 and compares our financial position as of November 30, 2006 to
February 28, 2006 and the results of operations for the three and nine months
ended November 30, 2006 of our new fiscal year ending February 28, 2007 with the
results of operations for the three and nine months ended November 30, 2005 from
the fiscal year ended November 30, 2005.
Unless specifically indicated otherwise, all amounts and percentages
presented in our MD&A below are exclusive of discontinued operations.
BUSINESS OVERVIEW
We operate through one reportable segment, the Electronics Group, which
consists of five wholly-owned subsidiaries: Audiovox Electronics Corporation,
American Radio Corp., Code Systems, Inc., Audiovox German Holdings GmbH and
Audiovox Venezuela, C.A. and market our products under the Audiovox(R) brand
name and other brand names, such as Jensen(R), Acoustic Research(R), Phase
Linear(R), Advent(R), Prestige(R), Pursuit(R), Code-Alarm(R), Car Link(R),
Movies 2 Go(R), Terk(R), Magnate(R), Mac Audio(R), and Heco(R), as well as
private labels and original equipment manufacturers through a large domestic and
international distribution network. Our products are broken down into two major
categories: Mobile Electronics and Consumer Electronics.
Mobile Electronics products include:
o mobile multi-media 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 and direct connect models,
o automotive security and remote start systems,
o car to car portable navigation systems,
o rear observation and collision avoidance systems, and
o automotive power accessories.
Consumer Electronics products include:
o LCD and Plasma flat panel televisions,
o portable DVD players,
o Two-way radios, digital multi-media products such as personal video
recorders and MP3 products,
o home speaker systems and home theater in a box, o home and portable
stereos,
o HDTV Antennas, WiFi Antennas and HDMI accessories,
o flat panel TV mounting systems, and
o home electronic accessories such as cabling and performance enhancing
electronics.
21
We believe the Electronics Group has an expanding market with a certain
level of volatility related to both domestic and international new car sales,
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As disclosed in our Form 10-K for the fiscal year ended November 30, 2005,
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 and income taxes. Since
November 30, 2005, there have been no changes in our critical accounting
policies or changes to the assumptions and estimates related to them, except for
the adoption of SFAS 123(R), Share-Based Payment, as discussed in note 2 in the
accompanying consolidated financial statements.
RESULTS OF OPERATIONS
As you read this discussion and analysis, refer to the accompanying
consolidated statements of operations, which present the results of our
operations for the three and nine months ended November 30, 2005 and 2006. We
analyze and explain the differences between periods based on the specific line
items of the consolidated statements of operations.
THREE MONTHS ENDED NOVEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED
-----------------------------------------------------------------------
NOVEMBER 30, 2006
-----------------
Continuing Operations
---------------------
The following tables set forth, for the periods indicated, certain
statement of operations data for the three months ended November 30, 2005 and
2006.
Net Sales
$ %
2005 2006 CHANGE CHANGE
-------- -------- -------- --------
Mobile Electronics ........... $ 93,151 $ 88,545 $(4,606) (4.9)%
Consumer Electronics ......... 63,139 63,288 149 0.2 %
-------- -------- ------- -----
Total net sales ............ $156,290 $151,833 $(4,457) (2.9)%
======== ======== ======= =====
Mobile Electronics, which represented 58.3% of net sales, was impacted by
the absence of Prestige and Video-in-a-Bag sales, which were the result of our
decision to exit those product lines at the end of 2005. Mobile sales were also
adversely affected by lower average selling prices in our mobile multi media
line due to the maturing of the category and increased competition in the
market. This decrease was partially offset by increases in our Phase Linear and
Satellite radio product lines as well as Audiovox Germany and Code Systems.
Consumer Electronics sales represented 41.7% of net sales for the three
months ended November 30, 2006. Unit sales in both the portable DVD and LCD
categories increased however, the increases were partially offset by lower
average selling prices, which continue to affect these categories.
22
Sales incentive expense decreased $664 to $5,086 for the three months ended
November 30, 2006 as a result of a decline in sales partially offset by a $140
decline in reversals. We believe the reversal of earned but unclaimed sales
incentives upon the expiration of the claim period is a disciplined, rational,
consistent and systematic method of reversing unclaimed sales incentives. These
sales incentive programs are expected to continue and will either increase or
decrease based upon competition and customer demands.
Gross Profit
2005 2006
----------- ----------
Gross profit ........................ $ 9,704 $ 25,371
Gross margins ....................... 6.2% 16.7%
Gross margins increased to 16.7% for the three months ended November 30,
2006 as compared to 6.2% for the prior period. Gross margins were favorably
impacted by a $9,012 decrease (or 5.9% favorable impact) in inventory write
downs as a result of an inventory adjustment of $8,775 recorded in the prior
year related to the discontinuance of certain products within select product
lines. The increase in gross margins is also due to reduced freight charges,
improved margins in the mobile electronics category and improved inventory
management.
Operating Expenses and Operating (Loss) Income
$ %
2005 2006 CHANGE CHANGE
----------- ----------- ---------- ----------
Operating expenses:
Selling ......................................... $ 8,235 $ 8,114 $ (121) (1.5)%
General and administrative ...................... 13,500 13,649 149 1.1
Engineering and technical support ............... 1,438 1,888 450 31.3
-------- -------- -----
Total operating expenses ....................... $ 23,173 $ 23,651 $ 478 2.1 %
-------- -------- -----
Operating (loss) income .......................... $(13,469) $ 1,720 $ 15,189 112.8 %
Operating expenses increased $478 or 2.1% for the three months ended
November 30, 2006, as compared to 2005. As a percentage of net sales, operating
expenses increased to 15.6% for the three months ended November 30, 2006, from
14.8% in 2005. Stock-based compensation expense of $373 and legal settlements of
$1,588 is included in operating expenses for the three months ended November 30,
2006.
Selling expenses decreased $121 or 1.5% due to a $566 decrease in
advertising as a result of reduced consumer and print media advertisements based
on changes in marketing programs. This decrease was partially offset by a $443
increase in salesman salaries due to stock based compensation expense of $156
and increased fixed compensation for salesmen.
General and administrative expenses increased $149 or 1.1% due to the
following:
o a $1,106 increase in professional fees due to $1,588 in legal
settlements from claims by licensors during the three months ended
November 30, 2006 partially offset by a reduction in audit, legal and
consulting costs, and
o a $222 increase in employee benefits primarily due to increased
medical costs and increased employer contributions to the Company's
401(k) plan.
23
The above increases were partially offset by:
o A $927 decline in bad debt expense due to improved collectibility of
accounts receivable and a reduction in the accounts receivable balance
as a result of the decline in sales, and
o increased MIS billings of $236 for services performed in connection
with a third party service agreement.
Engineering and technical support expenses increased $450 or 31.3% due to
an increase in direct labor as a result of wage increases and increased labor
costs.
As a result of increased gross margins, we recorded operating income of
$1,720 for the three months ended November 30, 2006 compared to an operating
loss of $13,469 in 2005.
Other (Expense) Income
$ %
2005 2006 CHANGE CHANGE
----------- ---------- ---------- -----------
Interest and bank charges ........................... $ (555) $ (429) $ 126 22.7%
Equity in income of equity investees ................ 397 659 262 66.0
Other, net .......................................... (85) 1,118 1,203 1,415.3
------- ------- ------- -------
Total other (expense) income, net ................... $ (243) $ 1,348 $ 1,591 654.7%
======= ======= ======= =======
Interest and bank charges decreased due to reductions in outstanding bank
obligations and long term debt. Interest and bank charges represent expenses for
debt and bank obligations of 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 gross margins in the Jensen Audio and Voyager product lines.
Other income increased due to a $1,758 other than temporary impairment
charge recorded for the CellStar investment during the three months ended
November 30, 2005 as a result of the extended decline in stock price of this
investment. In addition, other income was favorably impacted by increased
interest income as a result of increased short-term investments and higher
interest rates as compared to the prior year.
Income Tax Benefit
The effective tax rate for the three months ended November 30, 2006 was a
benefit of 25.4% compared to a benefit of 39.4% in the prior period. The
interest income earned on our short-term investments is tax exempt, which
results in our effective tax rate being less than the statutory rate.
24
Income (Loss) from Discontinued Operations
The following is a summary of financial results included within
discontinued operations:
NOVEMBER 30,
---------------------
2005 2006
--------- ---------
Net sales from discontinued operations .................. $ 624 $ --
======= =======
Loss from discontinued operations before income taxes ... $ (63) $ (148)
Recovery of income taxes ................................ 152 154
------- -------
89 6
Loss on sale of business, net of tax .................... (2,079) --
------- -------
Net income (loss) from discontinued operations .......... $(1,990) $ 6
======= =======
Included in loss from discontinued operations for the three months ended
November 30, 2005 is the financial results of Audiovox Malaysia which was sold
on November 7, 2005. The income from discontinued operations for the three
months ended November 30, 2006 is primarily due to legal and related costs
offset by associated income tax benefits pertaining to our discontinued Cellular
business.
Net Income (Loss)
Net loss for the three months ended November 30, 2005 was $10,296 compared
to net income of $3,854 in 2006. Loss per share for the three months ended
November 30, 2005 was $0.46 (diluted) as compared to income per share of $0.17
(diluted) for 2006. Net income (loss) was favorably impacted by sales incentive
reversals of $668 ($405 after taxes) and $528 ($343 after taxes) for the three
months ended November 30, 2005 and 2006, respectively.
25
NINE MONTHS ENDED NOVEMBER 30, 2005 AS COMPARED TO THE NINE MONTHS ENDED
------------------------------------------------------------------------
NOVEMBER 30, 2006
-----------------
Continuing Operations
---------------------
The following tables set forth, for the periods indicated, certain
statement of operations data for the nine months ended November 30, 2005 and
2006.
Net Sales
$ %
2005 2006 CHANGE CHANGE
---------- ----------- --------- ----------
Mobile Electronics ...................... $264,677 $238,990 $(25,687) (9.7)%
Consumer Electronics .................... 159,059 121,566 (37,493) (23.6)%
-------- -------- --------- -------
Total net sales ....................... $423,736 $360,556 $(63,180) (14.9)%
======== ======== ========= =======
Mobile Electronics, which represented 66.3% of net sales, were impacted
by the absence of Prestige and Video-in-a-Bag sales, which were the result of
our decision to exit those product lines at the end of 2005. In addition,
insolvency of one of the Company's vendors and decline in satellite radio sales
as a result of a Federal Communications Commission ("FCC") compliance issue,
which was resolved in September 2006, caused Mobile sales to decline. Mobile
sales were also adversely impacted by lower average selling prices in our mobile
multi-media line due to the maturing of the category and increased competition
in the market. This decrease was partially offset by increased sales in Phase
Linear, Audiovox Germany and Code Systems.
Consumer Electronics sales represented 33.7% of net sales for the nine
months ended November 30, 2006. Unit sales in both the portable DVD and LCD
categories increased however, the increases were partially offset by lower
selling average selling prices, which continue to affect these categories. In
addition, during fiscal 2006, the Company elected to eliminate low margin retail
programs which adversely impacted Consumer sales.
Sales incentive expense decreased $3,974 to $10,005 for the nine months
ended November 30, 2006 as a result of a decline in sales and increased
reversals of $277. The increase in reversals is primarily due to an increase in
reversals of unearned sales incentives as a result of large retail customers not
reaching minimum sales targets required to earn sales incentive funds. 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
2005 2006
----------- -----------
Gross profit ......................... $ 44,768 $ 61,224
Gross margins ........................ 10.6% 17.0%
Gross margins increased to 17.0% for the nine months ended November 30,
2006 as compared to 10.6% for the prior period. Gross margins were favorably
impacted by an $11,980 decrease (or 3.3% favorable impact) in inventory write
downs as a result of a $3,789 inventory adjustment related to satellite radio
inventory and an $8,775 adjustment related to the discontinuance of certain
products within select product lines recorded in the prior year. The increase in
gross margins is also due to improved margins in the mobile category and
improved inventory management.
26
Operating Expenses and Operating Loss
$ %
2005 2006 CHANGE CHANGE
----------- ------------ ----------- -----------
Operating expenses:
Selling ............................................. $ 23,808 $ 21,626 $ (2,182) (9.2)%
General and administrative .......................... 38,126 36,682 (1,444) (3.8)
Engineering and technical support ................... 4,723 5,418 695 14.7
-------- -------- -----
Total operating expenses ........................... $ 66,657 $ 63,726 $ (2,931) (4.4)%
-------- -------- ------
Operating loss ....................................... $(21,889) $ (2,502) $ 19,387 (88.6)%
Operating expenses decreased $2,931 or 4.4% for the nine months ended
November 30, 2006, as compared to 2005. As a percentage of net sales, operating
expenses increased to 17.7% for the nine months ended November 30, 2006, from
15.7% in 2005 due to the decline in sales during the period. Stock-based
compensation expense of $411 and legal settlements of $1,588 is included in
operating expenses for the nine months ended November 30, 2006.
Selling expenses decreased $2,182 or 9.2% primarily due to a $1,643
decrease in commission expense as a result of the decline in commissionable
sales. The remaining decline in selling expenses is primarily due to a decline
in consumer and print media advertisements.
General and administrative expenses decreased $1,444 or 3.7% due to the
following:
o $217 decrease in professional fees due to reduced audit, legal and
consulting costs, partially offset by $1,588 in legal settlements from
claims by licensors during the three months ended November 30, 2006,
o $1,440 decrease in bad debt expense due to a decline in the accounts
receivable balance and improved collectibility efforts. The Company
does not consider this to be a trend in the overall accounts
receivable,
o a decline in salaries and headcount as a result of the 2005 overhead
reduction plan which resulted in a one-time severance charge of $471
recorded in the prior year, and
o increased MIS billings of $526 for services performed in connection
with a transition service agreement.
The above decreases were partially offset by a $1,286 increase in employee
benefits due to increased medical costs and increased employer contributions to
the Company's 401(k) plan, and a $400 reduction in the prior year for legal
costs as a result of a Venezuela legal claim that was withdrawn from the court.
Engineering and technical support expenses increased $695 or 14.7% due to
an increase in direct labor as a result of wage increases and increased labor
costs.
27
Other Income (Expense)
$ %
2005 2006 CHANGE CHANGE
----------- ---------- ---------- -----------
Interest and bank charges ............................... $(1,845) $(1,491) $ 354 19.2%
Equity in income of equity investees .................... 1,989 2,423 434 21.8
Other, net .............................................. 5,125 4,827 (298) (5.8)
------- ------- -----
Total other income, net ................................. $ 5,269 $ 5,759 $ 490 9.3%
======= ======= ======= =====
Interest and bank charges decreased due to reductions in outstanding bank
obligations and long term debt. Interest and bank charges represent expenses for
debt and bank obligations of 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 declined due to a one time $2,455 unrealized gain recorded
during the nine months ended November 30, 2005 in connection with the Bliss-tel
investment partially offset by an other than temporary impairment charge of
$1,758 recorded for the CellStar investment during the nine months ended
November 30, 2005. The decline in other income was further offset by increased
interest income as a result of increased short-term investment holdings and
higher interest rates as compared to the prior year.
Income Tax Benefit
The effective tax rate for the nine months ended November 30, 2006, was a
benefit of 22.7% compared to a benefit of 63.1% in the prior period. The
interest income earned on our short-term investments is tax exempt, which
results in our effective tax rate being less than the statutory rate. The tax
benefit for 2005 was positively impacted by the favorable outcome of $3,307 in
tax accrual reductions due to the completion of certain tax examinations.
Loss from Discontinued Operations
The following is a summary of financial results included within
discontinued operations:
NINE MONTHS ENDED
NOVEMBER 30,
------------------------------------
2005 2006
---------------- ----------------
Net sales from discontinued operations ............................ $ 2,690 $ --
======= =======
Loss from discontinued operations before income taxes ............. $ (493) $ (886)
Recovery of income taxes .......................................... 321 310
------- -------
(172) (576)
Loss on sale of business, net of tax .............................. (2,079) --
------- -------
Net loss from discontinued operations ............................. $(2,251) $ (576)
======= =======
Included in loss from discontinued operations for the nine months ended
November 30, 2005 is the financial results of Audiovox Malaysia which was sold
on November 7, 2005. The loss from discontinued operations for the nine months
ended November 30, 2006 is primarily due to legal and related costs associated
with contingencies pertaining to our discontinued Cellular business.
28
Net Income (Loss)
Net loss for the nine months ended November 30, 2005 was $8,386 compared to
net income of $3,421 in 2006. Loss per share for the nine months ended November
30, 2005 was $0.38 (diluted) as compared to income per share of $0.15 (diluted)
for 2006. Net income (loss) was favorably impacted by sales incentive reversals
of $1,515 ($954 after taxes) and $1,792 ($1,165 after taxes) for the nine months
ended November 30, 2005 and 2006, respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash Flows, Commitments and Obligations
---------------------------------------
As of November 30, 2006, we had working capital of $342,020, which includes
cash and short-term investments of $149,665 compared with working capital of
$340,564 at February 28, 2006, which included cash and short-term investments of
$177,079. The decrease in short-term investments is primarily due to increased
inventory purchases to fulfill holiday season sales orders and increased
accounts receivable which are expected to be collected during the three months
ended February 28, 2007. We plan to utilize our current cash position as well as
collections from accounts receivable to fund the current operations of the
business. However, we may utilize all or a portion of current capital resources
to pursue other business opportunities, including acquisitions. We expect to
utilize approximately $50,000 of our cash and short-term investments to acquire
the Thomson Americas electronics accessory business during the three months
ended February 28, 2007.
Operating activities used cash of $21,429 for the nine months ended
November 30, 2006 compared to $45,760 in 2005. Net income from continuing
operations for the nine months ended November 30, 2006 was $3,997 compared to a
net loss of $6,135 in the prior year. The decrease in cash used by operating
activities as compared to the prior year was also due to a decline in payments
for accounts payable and income taxes.
The following significant fluctuations in the balance sheet accounts impacted
cash flows from operations:
o Cash flows from operating activities for the nine months ended
November 30, 2006 were unfavorably impacted by an increase in accounts
receivable primarily from holiday season sales during the three months
ended November 30, 2006. Accounts receivable turnover approximated 4.2
during the nine months ended November 30, 2006 compared to 4.4 in the
prior year.
o Cash flows from operations were favorably impacted by a decrease in
inventory due to improved inventory management. Inventory turnover
approximated 4.1 during the nine months ended November 30, 2006
compared to 3.4 in the prior year.
o In addition, cash flows from operating activities for the nine months
ended November 30, 2006 were impacted by an increase in accounts
payable due to the timing of payments. The timing of payments made can
fluctuate and are often impacted by the timing of inventory purchases
and amount of inventory on hand.
Investing activities provided cash of $24,216 during the nine months ended
November 30, 2006, primarily due to the sales (net of purchases) of short-term
investments. Investing activities provided cash of $37,898 during the nine
months ended November 30, 2005, primarily due to sales (net of purchase) of
short-term investments and proceeds from the sale of the cellular business.
Financing activities used $5,272 during the nine months ended November 30,
2006, primarily from the purchase of treasury stock and payment of bank
obligations and debt partially offset by proceeds received from the exercise of
stock options and warrants. Financing activities for the nine months ended
November 30, 2005 provided cash of $3,610 due to proceeds received from the
exercise of stock options partially offset by payments of bank obligations and
debt.
29
As of November 30, 2006, we have a domestic credit line to fund the
temporary short-term working capital needs of the Company. This line expires on
August 31, 2007 and allows aggregate borrowings of up to $25,000 at an interest
rate of Prime (or similar designations) plus 1%. In addition, Audiovox Germany
has a 16,000 Euro accounts receivable factoring arrangement and a 6,000 Euro
Asset-Based Lending ("ABL") credit facility and Audiovox Venezuela has a $1,000
credit facility borrowing arrangement with an interest rate of 13%.
Certain contractual cash obligations and other commercial commitments will
impact our short and long-term liquidity. At November 30, 2006, 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) ............. $11,945 $ 578 $ 1,156 $ 1,159 $ 9,052
Operating leases (2) ..................... 13,360 2,848 4,144 2,537 3,831
------- ------- ------- ------- -------
Total contractual cash obligations ....... $25,305 $ 3,426 $ 5,300 $ 3,696 $12,883
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) ..................... $ 4,346 $ 4,346 $ -- $ -- $ --
Stand-by letters of credit (4) ........... 2,047 2,047 -- -- --
Commercial letters of credit (4) ......... 7,150 7,150 -- -- --
Debt (5) ................................. 7,201 1,522 4,503 1,176 --
Unconditional purchase obligations (6) ... 83,959 83,959 -- -- --
-------- -------- -------- -------- ------
Total commercial commitments ............. $104,703 $ 99,024 $ 4,503 $ 1,176 $ --
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 $107 and $5,810,
respectively at November 30, 2006.
2. We enter into operating leases in the normal course of business.
3. Represents amounts outstanding under the Audiovox Germany factoring
agreement and Venezuela bank obligation at November 30, 2006.
4. Commercial letters of credit are issued during the ordinary course of
business through major domestic banks as requested by certain suppliers. We
also issue standby letters of credit to secure certain bank obligations and
insurance requirements.
5. Represents amounts outstanding under a loan agreement for Audiovox Germany.
This amount also includes amounts due under a call-put option with certain
employees of Audiovox Germany.
6. Open purchase obligations represent inventory commitments. These
obligations are not recorded in the consolidated financial statements until
commitments are fulfilled and such obligations are subject to change based
on negotiations with manufacturers.
30
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
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. In July 2006, we extended an existing operating
lease agreement with our principal stockholder until November 30, 2016. The
lease extension requires 125 monthly installments for an aggregate total of
$7,701 in payments. Total lease payments required under all related party leases
for the five-year period ending November 30, 2011 are $6,286.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In July 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48. "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 clarifies the accounting for uncertain income tax positions that are
recognized in the company's financial statements in accordance with the
provisions of FASB Statement No. 109, "Accounting for Income Taxes". FIN 48 also
provides guidance on the derecognition of uncertain positions, financial
statement classification, accounting for interest and penalties, accounting for
interim periods and new disclosure requirements. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company is currently evaluating the
impact that the adoption of FIN 48 will have on its financial position and the
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.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
There has been no significant change in our market risk sensitive
instruments since February 28, 2006.
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e)
as of the end of the period covered by this report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of the period covered by this report, these disclosure controls and
procedures are effective at a "reasonable assurance" level.
There were no material changes in our internal control over financial
reporting (as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) during the three month period ended November 30, 2006 that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
32
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
----------------------------
See Note 17 of the Notes to the Consolidated Financial Statements in Part I,
Item 1 of this Form 10-Q 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 November 30,
2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
---------------------------------------------------------------------
Treasury Stock/Share Repurchase Program
---------------------------------------
In September 2000, we were authorized by the Board of Directors to
repurchase up to 1,563,000 shares of Class A Common Stock in the open market
under a share repurchase program (the "Program"). In July 2006, the Board of
Directors authorized an additional repurchase up to 2,000,000 Class A Common
Stock in the open market in connection with the Program. As of November 30,
2006, the cumulative total of acquired shares pursuant to the program was
1,693,652 reducing the remaining authorized share repurchase balance to
1,869,348. During the nine months ended November 30, 2006, we purchased 305,100
shares for $4,155 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, 2006 ................. -- $ 9.24 1,388,552 174,448
March 2006 purchases .................... 23,400 13.15 1,411,952 151,048
April ................................... -- -- -- --
May ..................................... -- -- -- --
June .................................... -- -- -- --
July (2) ................................ -- -- -- 2,151,048
August .................................. 170,100 13.16 1,582,052 1,980,948
September ............................... 94,100 14.63 1,676,152 1,886,848
October ................................. 17,500 12.66 1,693,652 1,869,348
November ................................ -- -- -- --
-------
Total purchases ......................... 305,100
(1) Prior to the purchases made during the nine months ended November 30, 2006,
we had 1,388,552 shares of treasury stock purchased as part of a publicly
announced program. As of November 30, 2006, we had 1,693,652 shares of treasury
stock purchased with an average paid price per share of $10.03.
(2) In July 2006, an additional 2 million shares were authorized to be
repurchased under the Program.
33
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).
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUDIOVOX CORPORATION
By: /s/Patrick M. Lavelle
----------------------
Patrick M. Lavelle
President and Chief
Executive Officer
Dated: January 9, 2007
By: /s/Charles M. Stoehr
-------------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer