UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
Annual
Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934
For
the fiscal year ended February 29, 2008
Commission
file number 0-28839
AUDIOVOX
CORPORATION
(Exact
name of registrant as specified in its charter)
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Delaware
(State
or other jurisdiction of
incorporation
or organization)
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13-1964841
(IRS
Employer Identification No.)
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180
Marcus Blvd., Hauppauge, New York
(Address
of principal executive offices)
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11788
(Zip
Code)
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(631) 231-7750
(Registrant's
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class:
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Name
of Each Exchange on which Registered
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Class A
Common Stock $.01 par value
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The
Nasdaq Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes o No x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
Yes o No x
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 o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
x
1
Indicate
by check mark whether registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer or a smaller reporting company. See definition
of “accelerated filer”, “large accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (check one):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o Smaller
reporting company o
Indicate by check mark whether the
Registrant is a shell company (as defined in rule 12b-2 of the
Act).
Yes o No x
The aggregate market value of the
common stock held by non-affiliates of the Registrant was $180,543,041 (based
upon closing price on the Nasdaq Stock Market on August 31, 2007).
The number of shares outstanding of
each of the registrant's classes of common stock, as of May 14, 2008
was:
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Class
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Outstanding
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Class A
common stock $.01 par value
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20,593,660
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Class B
common stock $.01 par value
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2,260,954
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DOCUMENTS
INCORPORATED BY REFERENCE
Part III
- - (Items 10, 11, 12, 13 and 14) Proxy Statement for Annual Meeting of
Stockholders to be filed on or before June 13, 2008.
2
AUDIOVOX
CORPORATION
Index
to Form 10-K
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Table
of Contents
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PART
I
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Item
1
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Business
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4
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Item
1A
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Risk
Factors
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11
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Item
1B
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Unresolved
Staff Comments
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16
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Item
2
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Properties
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16
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Item
3
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Legal
Proceedings
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16
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Item
4
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Submission
of Matters to a Vote of Security Holders
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17
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PART
II
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Item
5
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Market
for the Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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17
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Item
6
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Selected
Consolidated Financial Data
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19
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Item
7
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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37
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Item
8
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Consolidated
Financial Statements and Supplementary Data
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38
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Item
9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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38
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Item
9A
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Controls
and Procedures
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38
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Item
9B
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Other
Information
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41
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PART
III
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Item
10
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Directors,
Executive Officers and Corporate Governance
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41
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Item
11
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Executive
Compensation
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41
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Item
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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41
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Item
13
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Certain
Relationships and Related Transactions, and Director
Independence
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41
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Item
14
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Principal
Accounting Fees and Services
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41
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PART
IV
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Item
15
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Exhibits,
Financial Statement Schedules
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41
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SIGNATURES
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43
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3
CAUTIONARY
STATEMENT RELATING TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This
Annual Report on Form 10-K and the information incorporated by reference
includes "forward-looking statements" within the meaning of section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. We intend those forward looking-statements to be covered by the
safe harbor provisions for forward-looking statements. All statements regarding
our expected financial position and operating results, our business strategy,
our financing plans and the outcome of any contingencies are forward-looking
statements. Any such forward-looking statements are based on current
expectations, estimates, and projections about our industry and our business.
Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," or variations of those words and similar expressions are intended
to identify such forward-looking statements. Forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those stated in or implied by any forward-looking statements.
Factors that could cause actual results to differ materially from
forward-looking statements include, but are not limited to, matters listed in
Item 1A under “Risk Factors”.
NOTE
REGARDING DOLLAR AMOUNTS AND FISCAL YEAR END CHANGE
In this
annual report, all dollar amounts are expressed in thousands, except for share
prices and per-share amounts. Unless specifically indicated otherwise, all
amounts and percentages in our Form 10-K 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, 2007 and ended February 29,
2008.
Audiovox Corporation (“Audiovox", “We",
"Our", "Us" or “Company") is a leading international distributor and value added
service provider in the accessory, mobile and consumer electronics industries.
We conduct our business through seven wholly-owned subsidiaries: American Radio
Corp., Audiovox Accessories Corp. (“AAC”), Audiovox Consumer
Electronics, Inc., Audiovox Electronics Corporation ("AEC"), Audiovox German
Holdings GmbH ("Audiovox Germany"), Audiovox Venezuela, C.A. and Code
Systems, Inc. ("Code"). We market our products under the Audiovox®
brand name and other brand names, such as Acoustic Research®, Advent®, Ambico®,
Car Link®, Chapman®, Code-Alarm®, Discwasher®, Energizer®, Heco®, Incaar®,
Jensen®, Mac Audio®, Magnat®, Movies2Go®, Oehlbach®, Phase Linear®, Prestige®,
Pursuit®, RCA® (effective January 1, 2008), RCA Accessories®, Recoton®, Road
Gear®, Spikemaster® and Terk®, as well as private labels through a large
domestic and international distribution network. We also function as
an OEM ("Original Equipment Manufacturer") supplier to several customers and
presently have one reportable segment (the "Electronics Group"), which is
organized by product category. We previously announced our intention
to acquire synergistic businesses with gross profit margins higher than our core
business, leverage our overhead, penetrate new markets and to expand our core
business and distribution channels.
Audiovox was incorporated in Delaware
on April 10, 1987, as successor to a business founded in 1960 by John J. Shalam,
our Chairman and controlling stockholder. Our extensive distribution
network and long-standing industry relationships have allowed us to benefit from
growing market opportunities and emerging niches in the electronics
business.
We make available financial
information, news releases and other information on our web site at
www.audiovox.com. There is a direct link from the web site to the Securities and
Exchange Commission's ("SEC") filings web site, where our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and any amendments to these reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available
free of charge as soon as reasonably practicable after we file such reports and
amendments with, or furnish them to the SEC. In addition, we have adopted a code
of business conduct and ethics which is available free of charge upon request.
Any such request should be directed to the attention of: Chris Lis Johnson,
Company Secretary, 180 Marcus Boulevard, Hauppauge, New York 11788,
(631) 231-7750.
4
Acquisitions
We have recently acquired and continue
to integrate the following acquisitions, discussed below, into our existing
business structure:
In December 2007, the Company completed
the acquisition of certain assets and liabilities of Thomson’s U.S., Canada,
Mexico, China and Hong Kong consumer electronics audio/video business for a
total cash purchase price of approximately $3,188 (net of license fee below),
plus a net asset payment of $11,093, transaction costs of $560 and a fee related
to the RCA® brand in connection with future sales for a stated period of time.
The purpose of this acquisition was to control the RCA trademark for the audio
video field of use and to expand our core product offerings in certain
developing markets. Contemporaneous with this transaction, the Company entered
into a license agreement with Multimedia Device Ltd., a Chinese manufacturer, to
market certain product categories acquired in the acquisition for an upfront fee
of $10,000, the purchase of certain inventory and future royalty
payments.
In November 2007, AAC completed
the acquisition of all of the outstanding stock of Technuity, Inc., an emerging
leader in the battery and power products industry and the exclusive licensee of
the Energizer® brand in North America for rechargeable batteries and battery
packs for camcorders, cordless phones, digital cameras, DVD players and other
power supply devices, for a total cash purchase price of $20,373 (net of cash
acquired), plus a working capital credit of $317, transaction costs of $1,085
and a maximum contingent earn out payment of $1,000, if certain sales and gross
margin targets are met. The purpose of this acquisition was to further
strengthen our accessory product lines and core offerings, to be the exclusive
licensee of the Energizer® brand in North America for rechargeable batteries and
power supply systems, and to increase the Company’s market share in the consumer
electronics accessory business.
In August 2007, Audiovox Germany
completed the acquisition of certain assets of Incaar Limited, a U.K. business
that specializes in rear seat electronics systems, for a total purchase price of
$350, plus transaction costs of $51 and a maximum contingent earn out payment of
$400, if certain earnings targets are met. The purpose of this
acquisition was to add the experience, concepts and product development of an
Original Equipment Manufacturer (“OEM”) business to our European
operations.
In March 2007, Audiovox Germany
completed the stock acquisition of Oehlbach, a European market leader in the
accessories business, for a total cash purchase price of $6,611, plus
transaction costs of $200 and a contingent earn out payment, not to exceed 1
million euros. The purpose of this acquisition was to add electronics
accessory product lines to our European business.
In January 2007, we completed the
acquisition of certain assets and liabilities of Thomson’s Americas consumer
electronics accessory business for a total cash purchase price of approximately
$50,000, plus a working capital payment of $7,617, plus a five year fee
estimated to be $4,685 related to the RCA brand in connection with future sales
and approximately $2,414 of transaction costs. The purpose of this
acquisition was to expand our market presence in the accessory business. The
acquisition included the rights to the RCA Accessories brand for consumer
electronics accessories as well as the Recoton, Spikemaster, Ambico and
Discwasher brands for use on any product category and the Jensen, Advent,
Acoustic Research and Road Gear brands for consumer electronics
accessories.
On
January 4, 2005, we purchased certain assets and liabilities of Terk
Technologies Corp. ("Terk") for $15,274, as adjusted. The purpose of
this acquisition was to increase our market share for satellite radio products
as well as accessories, such as antennas for HDTV products.
On July 8, 2003 we acquired, for
$40,406, the U.S. audio operations of Recoton and the outstanding capital stock
of Recoton German Holdings GmbH. The primary reason for this transaction was to
expand the product offerings of Audiovox in the U.S. and Europe and to obtain
certain long-standing trademarks such as Jensen® and Acoustic
Research®.
5
We continue to monitor economic and
industry conditions in order to evaluate potential synergistic business
acquisitions that would allow us to leverage overhead, penetrate new markets and
expand our core business and distribution channels.
Refer to Note 3 “Business
Acquisitions” of the Notes to Consolidated Financial Statements for additional
information regarding the aforementioned acquisitions.
Divestitures
(Discontinued Operations)
On November 7, 2005, we completed the
sale of our majority owned subsidiary, Audiovox Malaysia (“AVM”) to the then
current minority interest shareholder due to increased competition from
non-local OEM’s and deteriorating credit quality of local
customers.
On November 1, 2004, we completed the
divestiture of our Cellular business (formerly known as "ACC", "Cellular" or
"Wireless") to UTStarcom, Inc. ("UTSI"). After paying
outstanding domestic obligations, taxes and other costs associated with the
divestiture, we received net proceeds of approximately $144,053. We
have utilized the net proceeds to invest in strategic and complementary
acquisitions and invest in our current operations.
These divestitures have been presented
as discontinued operations. Refer to Note 2 “Discontinued Operations”
of the Notes to Consolidated Financial Statements for additional information
regarding the aforementioned divestitures.
Strategy
Our objective is to grow our business
by acquiring new brands, embracing new technologies, expanding product
development and applying this to a continued stream of new products that should
increase gross margins and improve operating income. In addition, we
plan to continue to acquire synergistic companies that would allow us to
leverage our overhead, penetrate new markets and expand existing product
categories through our business channels.
The key
elements of our strategy are as follows:
Capitalize on the Audiovox® family
of brands. We believe the "Audiovox®" family of brands, which
includes Acoustic Research®, Advent®, Ambico®, Car Link®, Chapman®, Code-Alarm®,
Discwasher®, Energizer®, Heco®, Incaar®, Jensen®, Mac Audio®, Magnat®,
Movies2Go®, Oehlbach®, Phase Linear®, Prestige®, Pursuit®, RCA® (effective
January 1, 2008), RCA Accessories®, Recoton®, Road Gear®, Spikemaster® and
Terk®, is one of our greatest strengths and offers us significant opportunity
for increased market penetration. To further benefit from the Audiovox® family
of brands, we continue to invest and introduce new products using our brand
names.
Capitalize on niche product and
distribution opportunities in the electronics industry. We
intend to use our extensive distribution and supply networks to capitalize on
niche product and distribution opportunities in the mobile, consumer and
accessory electronics categories.
Leverage our domestic and
international distribution network. We believe our distribution network
which includes power retailers, mass merchandisers, distributors, car dealers
and OEM’s will allow us to increase market penetration.
Grow our international
presence. We continue to expand our international presence in
Europe through Audiovox Germany as well as Canada, Mexico and Hong Kong through
our domestic operations. We continue to pursue additional business opportunities
through acquisitions as well as penetrate new market opportunities.
6
Pursue strategic and complementary
acquisitions. We continue to monitor economic and industry
conditions in order to evaluate potential synergistic business acquisitions that
would allow us to leverage overhead, penetrate new markets and expand our
existing business distribution.
Continue to outsource manufacturing
to increase operating leverage. A key component of our
business strategy is outsourcing the manufacturing of our products, which allows
us to deliver the latest technological advances without the fixed costs
associated with manufacturing.
Monitor operating
expenses. We maintain continuous focus on evaluating the
current business structure in order to create operating efficiencies, including
investments in management information systems, with the primary goal of
increasing operating income.
Industry
We participate in selected product
categories in the mobile, consumer and accessory electronics markets. The mobile
and consumer electronics and accessory industries are large and diverse and
encompass a broad range of products. The significant competitors in our
industries are Sony, Panasonic, JVC, Kenwood, Alpine, Directed Electronics,
Phillips, Monster Cable and Delphi. There are other companies that
specialize in niche product offerings such as those we offer. The introduction
of new products and technological advancements are the major growth drivers in
the electronics industry. We continue to introduce new products
across all product lines.
Products
Effective March 1, 2007, the Company
reported “Accessories” as a separate product group due to the Thomson Accessory,
Oehlbach and Technuity acquisitions. In addition, the Company’s
former mobile and consumer product categories are now combined and recorded in
the “Electronics” product group. As such, certain reclassifications
have been made to prior year amounts as the Company currently reports sales data
for the following two product categories:
Electronics products
include:
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·
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mobile
multi-media video products, including in-dash, overhead, headrest and
portable mobile video systems,
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·
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autosound
products including radios, speakers, amplifiers and CD
changers,
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·
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satellite
radios including plug and play models and direct connect
models,
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·
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automotive
security and remote start systems,
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·
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automotive
power accessories,
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·
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car
to car portable navigation systems,
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·
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rear
observation and collision avoidance
systems,
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·
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Liquid
Crystal Display (“LCD”) flat panel
televisions,
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·
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home
and portable stereos,
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·
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two-way
radios,
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·
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digital
multi-media products such as personal video recorders and MP3
products,
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·
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camcorders,
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·
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clock-radios,
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·
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digital
voice recorders,
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·
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home
speaker systems,
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·
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portable
DVD players, and
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·
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digital
picture frames.
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Accessories
products include:
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·
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High-Definition
Television (“HDTV”) Antennas,
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·
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Wireless
Fidelity (“WiFi”) Antennas,
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·
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High-Definition
Multimedia Interface (“HDMI”)
accessories,
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7
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home
electronic accessories such as
cabling,
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·
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other
connectivity products,
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power
cords,
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·
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performance
enhancing electronics,
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·
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TV
universal remotes,
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·
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flat
panel TV mounting systems,
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·
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iPod
specialized products,
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·
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wireless
headphones,
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·
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rechargeable
battery backups (UPS) for camcorders, cordless phones and portable video
(DVD) batteries and accessories,
and
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·
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power
supply systems.
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We believe our product groups have
expanding market opportunities with certain levels of volatility related to both
domestic and international markets, new car sales, increased competition by
manufacturers, private labels, technological advancements, discretionary
consumer spending and general economic conditions. Also, all of our
products are subject to price fluctuations which could affect the carrying value
of inventories and gross margins in the future.
Net sales by product category are as
follows:
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Three
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Year
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Year
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Months
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Year
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|||||||||||||
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Ended
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Ended
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Ended
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Ended
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February
29,
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February
28,
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February
28,
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November
30,
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2008
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2007
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2006
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2005
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Electronics
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$ | 437,018 | $ | 432,943 | $ | 99,566 | $ | 530,408 | ||||||||
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Accessories
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154,337 | 23,747 | 3,484 | 9,308 | ||||||||||||
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Total
net sales
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$ | 591,355 | $ | 456,690 | $ | 103,050 | $ | 539,716 | ||||||||
Electronics sales, which include
both mobile and consumer electronics, represented approximately 73.9% of net
sales in Fiscal 2008 compared to 94.8% in Fiscal 2007, increased by 0.9% or
$4,075 primarily due to an increase in mobile audio sales as a result of
improved sales in the Company’s car audio and Satellite Radio product lines and
increases in the electronics sales of the Company’s International operations in
Germany and Venezuela. Offsetting these increases were lower consumer electronic
sales as a result of lower than anticipated holiday sales and industry-wide
shortages of LCD panels that adversely affected sales of LCD TV’s, portable
DVD’s and digital picture frames. Electronic sales also declined in certain
mobile video categories due to increased OEM programs that include the video
system as “standard” on more and more vehicles and a decline in new car
sales.
Accessories sales, which represented
26.1% of our net sales in Fiscal 2008 compared to 5.2% in Fiscal 2007, increased
approximately 549.9% or $130,590 due to the incremental sales generated from the
recently acquired Thomson Accessory, Oehlbach and Technuity
operations.
Gross margins have improved due to
acquisitions and margin increases in our core business. We anticipate further
increases in margins through the introduction of new products with technologies
that take advantage of market opportunities created by the digital convergence
of data, navigation and multi-media entertainment as well as future operating
improvements.
Licensing
and Royalties
We have various license and royalty
programs with manufacturers, customers and other electronic suppliers. Such
agreements entitle us to receive license and royalty income for Audiovox
products sold by the licensees without adding any significant costs. Depending
on the terms of each agreement, income is based on either a fixed amount per
unit or percentage of net sales. Current license and royalty agreements have
duration periods, which range from 1 to 8 years, whereas other agreements
are in perpetuity and certain agreements may be renewed at the end of
termination of the agreement. Certain renewals of license and royalty agreements
are dependent on negotiations with licensees as well as current Audiovox
products being sold by the licensee.
8
License and royalty income is recorded
upon sale to the end-user and amounted to $2,190, $2,200, $537 and $1,959 for
the years ended February 29, 2008, February 28, 2007, the three months ended
February 28, 2006 and the year ended November 30, 2005,
respectively.
Distribution
and Marketing
We sell our products to:
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·
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power
retailers,
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·
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mass
merchants,
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·
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regional
chain stores,
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·
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specialty
and internet retailers,
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·
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independent
12 volt retailers,
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·
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distributors,
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·
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new
car dealers,
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·
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vehicle
equipment manufacturers (OEM), and
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|
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·
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the
U.S. military
|
We sell our products under OEM
arrangements with domestic and/or international subsidiaries of automobile
manufacturers such as Ford Motor Company, Daimler Chrysler, General Motors
Corporation, Toyota, Kia, Mazda, Jaguar, Subaru and beginning in Fiscal 2009,
Porsche. These projects require a close partnership with the customer as we
develop products to meet specific requirements. OEM projects
accounted for approximately 9%, 11%, 13% and 10% of net sales for the years
ended February 29, 2008, February 28, 2007, the three months ended February 28,
2006 and the year ended November 30, 2005, respectively.
Our five largest customers represented
25%, 18%, 16%, and 24% of net sales during the years ended February 29, 2008,
February 28, 2007, the three months ended February 28, 2006 and the year ended
November 30, 2005, respectively. During the years ended
February 29, 2008, February 28, 2007, the three months ended February 28, 2006
and the year ended November 30, 2005, no single customer accounted for more than
10% of net sales
We also provide value-added management
services, which include:
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|
·
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product
design and development,
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|
·
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engineering
and testing,
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·
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sales
training and customer packaging,
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|
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·
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instore
display design,
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|
·
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installation
training and technical support,
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|
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·
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product
repair services and warranty,
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|
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·
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nationwide
installation network, and
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|
|
·
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warehousing.
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We have flexible shipping policies
designed to meet customer needs. In the absence of specific customer
instructions, we ship products within 24 to 48 hours from the receipt of an
order from public warehouses and leased facilities throughout the United States,
Canada, Mexico, Venezuela and Germany.
Product
Development, Warranty and Customer Service
Our product development cycle
includes:
|
|
·
|
identifying
consumer trends and potential
demand,
|
9
|
|
·
|
responding
to those trends through product design and feature integration, which
includes software design, electrical engineering, industrial design and
pre-production testing. In the case of OEM customers, the product
development cycle may also include product validation to customer quality
standards, and
|
|
|
·
|
evaluating
and testing new products in our own facilities to ensure compliance with
our design specifications and
standards.
|
We work closely with customers and
suppliers throughout the product design, testing and development process in an
effort to meet the expectations of consumer demand for technologically-advanced
and high quality products. Our Hauppauge, New York facility is ISO
14001:2004, ISO/TS 1649:2002 certified, which requires the monitoring of quality
standards in all facets of business.
We are committed to providing product
warranties for all our product lines, which generally range from 90 days up
to the life of the vehicle for the original owner on some automobile-installed
products. To support our warranties, we have independent warranty centers
throughout the United States, Canada, Mexico, Europe and
Venezuela. We have a customer service group that provides product
information, answers questions and serves as a technical hotline for
installation help for end-users and customers.
Suppliers
We work directly with our suppliers on
industrial design, feature sets, product development and testing in order to
ensure that our products are manufactured to our design
specifications.
We purchase our products from
manufacturers located in several Pacific Rim countries, including Japan, China,
Hong Kong, Indonesia, Malaysia, Taiwan, Singapore and the United States. In
selecting our manufacturers, we consider quality, price, service and reputation.
In order to provide local supervision of supplier performance such as price
negotiations, delivery and quality control, we maintain buying offices or
inspection offices in Malaysia, Taiwan, South Korea, China and Hong
Kong. We consider relations with our suppliers to be good and
alternative sources of supply are generally available within
120 days. We do not have long-term contracts with our suppliers
and we generally purchase our products under short-term purchase
orders. Although we believe that our alternative sources of supply
are currently available, an unplanned shift to a new supplier could result in
product delays and increased cost, which may have a material impact on our
operations.
Competition
The electronics industry is highly
competitive across all product categories, and we compete with a number of
well-established companies that manufacture and sell similar products. Brand
name, design, advancement of technology and features as well as price are the
major competitive factors within the electronics industry. Our Mobile
Electronic products compete against factory-supplied products, including those
provided by, among others, General Motors, Ford and Daimler
Chrysler. Our Mobile Electronic products also compete in the
automotive aftermarket against major companies such as Sony, Panasonic, Kenwood,
Alpine, Directed Electronics, Pioneer and Delphi. Our Accessories and Consumer
Electronics product lines compete against major companies, such as JVC, Sony,
Panasonic, Phillips and Monster Cable.
Financial
Information About Foreign and Domestic Operations
The amounts of net sales and long-lived
assets, attributable to foreign and domestic operations for all periods
presented are set forth in Note 14 of the Notes to Consolidated Financials
Statements, included herein.
Equity
Investment
We have a
50% non-controlling ownership interest in Audiovox Specialized Applications,
Inc. ("ASA") which acts as a distributor to specialized markets for specialized
vehicles, such as, but not limited to, RV's, van conversions and marine
vehicles, of televisions and other automotive sound, security and accessory
products. The goal of this equity investment is to blend financial
and product resources with local operations in an effort to expand our
distribution and marketing capabilities.
10
Employees
As of February 29, 2008, we employed
approximately 1,000 people worldwide. We consider our relations with
employees to be good and no employees are covered by collective bargaining
agreements.
We have identified certain risk factors
that apply to us. You should carefully consider each of the following risk
factors and all of the other information included or incorporated by reference
in this Form 10-K. If any of these risks, or other risks not presently
known to us or that we currently believe not to be significant, develop into
actual events, then our business, financial condition, liquidity, or results of
operations could be adversely affected. If that happens, the market price of our
common stock would likely decline, and you may lose all or part of your
investment.
The
asset purchase agreement with UTSI exposes the Company to contingent
liabilities.
Under the asset purchase agreement for
the sale of the Cellular business to UTSI we agreed to indemnify UTSI for any
breach or violation of 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 our financial condition and results of
operations.
Our
success will depend on a less diversified line of business.
Currently, we generate
substantially all of our sales from the Consumer and Mobile Electronics and
Accessories businesses. We cannot assure you that we can grow the
revenues of our Electronics and Accessories businesses or maintain
profitability. As a result, the Company's revenues and profitability will depend
on our ability to maintain and generate additional customers and develop new
products. A reduction in demand for our existing products and
services would have a material adverse effect on our business. The
sustainability of current levels of our Electronics and Accessories businesses
and the future growth of such revenues, if any, will depend on, among other
factors:
|
|
·
|
the
overall performance of the economy and discretionary consumer
spending,
|
|
|
·
|
competition
within key markets,
|
|
|
·
|
customer
acceptance of newly developed products and services,
and
|
|
|
·
|
the
demand for other products and
services.
|
11
We cannot assure you that we will
maintain or increase our current level of revenues or profits from the
Electronics and Accessories businesses in future periods.
The
Electronics and Accessories Businesses are Highly Competitive and Faces
Significant Competition from Original Equipment Manufacturers (OEMs) and Direct
Imports By Our Retail Customers.
The market for consumer electronics and
accessories is highly competitive across all product lines. We compete against
many established companies who have substantially greater financial and
engineering resources than we do. We compete directly with OEMs, including
divisions of well-known automobile manufacturers, in the autosound, auto
security, mobile video and accessories industry. We believe that OEMs have
diversified and improved their product offerings and place increased sales
pressure on new car dealers with whom they have close business relationships to
purchase OEM-supplied equipment and accessories. To the extent that
OEMs succeed in their efforts, this success would have a material adverse
effect on our sales of automotive entertainment and security products to new car
dealers. In addition, we compete with major retailers who may at any
time choose to direct import products that we may currently supply.
We
Do Not Have Long-term Sales Contracts with Any of Our Customers.
Sales of our products are made by
written purchase orders and are terminable at will by either party. The
unexpected loss of all or a significant portion of sales to any one of our large
customers could have a material adverse effect on our performance.
Sales
in Our Electronics and Accessories Businesses are Dependent on New Products,
Product Development and Consumer Acceptance.
Our Electronics and Accessories
businesses depend, to a large extent, on the introduction and availability of
innovative products and technologies. Significant sales of new products in niche
markets, such as navigation, satellite radios, flat-panel TVs, mobile video
systems and the acquisition of certain consumer electronic accessory businesses,
has fueled the recent growth of our business. If we are not able to continually
introduce new products that achieve consumer acceptance, our sales and profit
margins may decline.
Since
We Do Not Manufacture Our Products, We Depend on Our Suppliers to Provide Us
with Adequate Quantities of High Quality Competitive Products on a Timely
Basis.
We do not manufacture our products, and
we do not have long-term contracts with our suppliers. Most of our products are
imported from suppliers under short-term purchase orders. Accordingly, we can
give no assurance that:
|
|
·
|
our
supplier relationships will continue as presently in
effect,
|
|
|
·
|
our
suppliers will not become
competitors,
|
|
|
·
|
our
suppliers will be able to obtain the components necessary to produce
high-quality, technologically-advanced products for
us,
|
|
|
·
|
we
will be able to obtain adequate alternatives to our supply sources should
they be interrupted,
|
|
|
·
|
if
obtained, alternatively sourced products of satisfactory quality would be
delivered on a timely basis, competitively priced, comparably featured or
acceptable to our customers, and
|
|
|
·
|
our
suppliers have sufficient financial resources to fulfill their
obligations.
|
On occasion our suppliers have not been
able to produce the quantities of products that we desire. Our inability to
supply sufficient quantities of products that are in demand could reduce our
profitability and have a material adverse effect on our relationships with our
customers. If any of our supplier relationships were terminated or interrupted,
we could experience an immediate or long-term supply shortage, which could have
a material adverse effect on our business.
12
The Impact of Future Selling Prices
and Technological Advancements may cause Price Erosion and Adversely Impact our
Profitability and Inventory Value
Since we do not make any of our own
products and do not conduct our own research, we cannot assure you that we will
be able to source technologically advanced products in order to remain
competitive. Furthermore, the introduction or expected introduction of new
products or technologies may depress sales of existing products and
technologies. This may result in declining prices and inventory obsolescence.
Since we maintain a substantial investment in product inventory, declining
prices and inventory obsolescence could have a material adverse effect on our
business and financial results.
Our estimates of excess and obsolete
inventory may prove to be inaccurate, in which case the provision required for
excess and obsolete inventory may be understated or
overstated. Although we make every effort to ensure the accuracy of
our forecasts of future product demand, any significant unanticipated changes in
demand or technological developments could have a significant impact on the
value of our inventory and operating results.
Because
We Purchase a Significant Amount of Our Products from Suppliers in Pacific Rim
Countries, We Are Subject to the Economic Risks Associated with Changes in the
Social, Political, Regulatory and Economic Conditions Inherent in These
Countries.
We import most of our products from
suppliers in the Pacific Rim. Countries in the Pacific Rim have experienced
significant social, political and economic upheaval over the past several years.
Due to the large concentrations of our purchases in Pacific Rim countries,
particularly China, Hong Kong, Malaysia, South Korea, and Taiwan, any adverse
changes in the social, political, regulatory and economic conditions in these
countries may materially increase the cost of the products that we buy from our
foreign suppliers or delay shipments of products, which could have a material
adverse effect on our business. In addition, our dependence on foreign suppliers
forces us to order products further in advance than we would if our products
were manufactured domestically. This increases the risk that our products will
become obsolete or face selling price reductions before we can sell our
inventory.
We
Plan to Expand the International Marketing and Distribution of Our Products,
Which Will Subject Us to Additional Business Risks.
As part of our business strategy, we
intend to increase our international sales, although we cannot assure you that
we will be able to do so. Conducting business outside of the United States
subjects us to significant additional risks, including:
|
|
·
|
export
and import restrictions, tax consequences and other trade
barriers,
|
|
|
·
|
currency
fluctuations,
|
|
|
·
|
greater
difficulty in accounts receivable
collections,
|
|
|
·
|
economic
and political instability,
|
|
|
·
|
foreign
exchange controls that prohibit payment in U.S. dollars,
and
|
|
|
·
|
increased
complexity and costs of managing and staffing international
operations.
|
Our
Products Could Infringe the Intellectual Property Rights of Others and We May Be
Exposed to Costly Litigation.
The products we sell are continually
changing as a result of improved technology. Although we and our
suppliers attempt to avoid infringing known proprietary rights of third parties
in our products, we may be subject to legal proceedings and claims for alleged
infringement by us, our suppliers or our distributors, of third party’s 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 us to
either enter into royalty or license agreements which are not advantageous to us
or pay material amounts of damages. In addition, parties making these
claims may be able to obtain an injunction, which could prevent us from selling
our products. We may increasingly be subject to infringement claims
as we expand our product offerings.
13
If
Our Sales During the Holiday Season Fall below Our Expectations, Our Annual
Results Could Also Fall below Expectations.
Seasonal consumer shopping patterns
significantly affect our business. We generally make a substantial amount of our
sales and net income during September, October and November. We expect this
trend to continue. December is also a key month for us, due largely to the
increase in promotional activities by our customers during the holiday season.
If the economy faltered in these periods, if our customers altered the timing or
frequency of their promotional activities or if the effectiveness of these
promotional activities declined, particularly around the holiday season, it
could have a material adverse effect on our annual financial
results.
A
Decline in General Economic Conditions Could Lead to Reduced Consumer Demand for
the Discretionary Products We Sell.
Consumer spending patterns, especially
discretionary spending for products such as mobile, consumer and accessory
electronics, are affected by, among other things, prevailing economic
conditions, energy costs, raw material costs, wage rates, inflation, consumer
confidence and consumer perception of economic conditions. A general slowdown in
the U.S. and certain international economies or an uncertain economic outlook
could have a material adverse effect on our sales and operating
results.
Acquisitions
and Strategic Investments May Divert Our Resources and Management Attention;
Results May Fall Short of Expectations.
We intend to continue pursuing selected
acquisitions of and investments in businesses, technologies and product lines as
a key component of our growth strategy. Any future acquisition or
investment may result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, incurrence of debt and amortization
expenses related to intangible assets. Acquisitions involve numerous
risks, including:
|
|
·
|
difficulties
in the integration and assimilation of the operations, technologies,
products and personnel of an acquired
business;
|
|
|
·
|
diversion
of management’s attention from other business
concerns;
|
|
|
·
|
increased
expenses associated with the acquisition;
and
|
|
|
·
|
potential
loss of key employees or customers of any acquired
business.
|
We cannot
assure you that our acquisitions will be successful and will not adversely
affect our business, results of operations or financial condition.
We
have recorded goodwill and other intangible assets as a result of acquisitions,
and changes in future business conditions could cause these investments to
become impaired, requiring substantial write-downs that would reduce our
operating income.
Goodwill and other intangible assets
recorded on our balance sheet as of February 29, 2008 was
$124,435. We evaluate the recoverability of recorded goodwill and
other intangible asset amounts annually, or when evidence of potential
impairment exists. The annual impairment test is based on several
factors requiring judgment. Changes in our operating performance or
business conditions, in general, could result in an impairment of goodwill
and/or other intangible assets, which could be material to our results of
operations.
We
Depend Heavily on Existing Directors, Management and Key Personnel and Our
Ability to Recruit and Retain Qualified Personnel.
Our success depends on the continued
efforts of our directors, executives and senior vice presidents, many of whom
have worked with Audiovox for over two decades, as well as our other executive
officers and key employees. We have no employment contracts, with any of our
executive officers or key employees, except our President and Chief Executive
Officer. The loss or interruption of the continued full-time service of certain
of our executive officers and key employees could have a material adverse effect
on our business.
14
In addition, to support our continued
growth, we must effectively recruit, develop and retain additional qualified
personnel both domestically and internationally. Our inability to attract and
retain necessary qualified personnel could have a material adverse effect on our
business.
We
Are Responsible for Product Warranties and Defects.
Even though we outsource manufacturing,
we provide warranties for all of our products for which we have provided an
estimated liability. Therefore, we are highly dependent on the quality of our
supplier’s products.
Our
Capital Resources May Not Be Sufficient to Meet Our Future Capital and Liquidity
Requirements.
We believe that we currently have
sufficient resources to fund our existing operations for the foreseeable future.
However, we may need additional capital to operate our business if:
|
|
·
|
market
conditions change,
|
|
|
·
|
our
business plans or assumptions
change,
|
|
|
·
|
we
make significant acquisitions, and
|
|
|
·
|
we
need to make significant increases in capital expenditures or working
capital.
|
Our
Stock Price Could Fluctuate Significantly.
The market price of our common stock
could fluctuate significantly in response to various factors and events,
including:
|
|
·
|
operating
results being below market
expectations,
|
|
|
·
|
announcements
of technological innovations or new products by us or our
competitors,
|
|
|
·
|
loss
of a major customer or supplier,
|
|
|
·
|
changes
in, or our failure to meet, financial estimates by securities
analysts,
|
|
|
·
|
industry
developments,
|
|
|
·
|
economic
and other external factors,
|
|
|
·
|
general
downgrading of our industry sector by securities
analysts,
|
|
|
·
|
inventory
write-downs, and
|
|
|
·
|
ability
to integrate acquisitions.
|
In addition, the securities markets
have experienced significant price and volume fluctuations over the past several
years that have often been unrelated to the operating performance of particular
companies. These market fluctuations may also have a material adverse effect on
the market price of our common stock.
John J. Shalam,
Our Chairman, Owns a Significant Portion of Our Common Stock and Can Exercise
Control over Our Affairs.
Mr.
Shalam beneficially owns approximately 55% of the combined voting power of both
classes of common stock. This will allow him to elect our Board of Directors
and, in general, to determine the outcome of any other matter submitted to the
stockholders for approval. Mr. Shalam's voting power may have the effect of
delaying or preventing a change in control of the Company.
We have two classes of common stock:
Class A common stock is traded on the Nasdaq Stock Market under the symbol
VOXX and Class B common stock, which is not publicly traded and
substantially all of which is beneficially owned by Mr. Shalam. Each share
of Class A common stock is entitled to one vote per share and each share of
Class B common stock is entitled to ten votes per share. Both classes vote
together as a single class, except in certain circumstances, for the election
and removal of directors and as otherwise may be required by Delaware law. Since
our charter permits shareholder action by written consent, Mr. Shalam may
be able to take significant corporate actions without prior notice and a
shareholder meeting.
15
Other Risks
Other risks and uncertainties
include:
|
|
·
|
changes
in U.S. federal, state and local
law,
|
|
|
·
|
our
ability to implement operating cost structures that align with revenue
growth,
|
|
|
·
|
trade
sanctions against or for foreign
countries,
|
|
|
·
|
successful
integration of business acquisitions and new brands in our distribution
network,
|
|
|
·
|
compliance
with the Sarbanes-Oxley Act, and
|
|
|
·
|
compliance
with complex financial accounting and tax
standards.
|
As of the filing of this annual report
on Form 10-K, there were no unresolved comments from the staff of the Securities
and Exchange Commission.
Our Corporate headquarters is located
at 180 Marcus Blvd. in Hauppauge, New York. In addition, as of
February 29, 2008, the Company leased a total of 36 operating facilities or
offices located in 14 states as well as Germany, China, Malaysia, Canada,
Venezuela, Mexico, Taiwan, Hong Kong and England. The leases have been
classified as operating leases, with the exception of one, which is recorded as
a capital lease. These facilities are located in California, Florida,
Georgia, New York, Ohio, Tennessee, Indiana, Michigan and Arkansas. These
facilities serve as offices, warehouses, distribution centers or retail
locations. Additionally, we utilize public warehouse facilities located in
Virginia, Nevada, Mississippi, Illinois, Indiana, Mexico, Germany and
Canada.
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 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:
This
matter was settled in May 2007 and received final Chancery court approval in
June 2007. As a result of the settlement, the Company received $6,750
in gross proceeds. The gross proceeds were offset by $2,378 in
plaintiff legal fees and $1,023 in accrued legal and administrative costs for
defending all remaining ACC legal claims. The items discussed above
resulted in a pre-tax benefit of $3,349 recorded in discontinued operations for
the fiscal year ended February 29,2008.
Certain consolidated class actions
transferred to a Multi-District Litigation Panel of the United States District
Court of the District of Maryland against the Company and other suppliers,
manufacturers and distributors of hand-held wireless telephones alleging damages
relating to exposure to radio frequency radiation from hand-held wireless
telephones are still pending. No assurances regarding the
outcome of this matter can be given, as the Company is unable to assess the
degree of probability of an unfavorable outcome or estimated loss or liability,
if any. Accordingly, no estimated loss has been recorded for the
aforementioned case.
The products the Company sells are
continually changing as a result of improved technology. As a result,
although the Company and its suppliers attempt to avoid infringing known
proprietary rights, the Company may be subject to legal proceedings and claims
for alleged infringement by its suppliers or distributors, of third party
patents, trade secrets, trademarks or copyrights. Any claims relating
to the infringement of third-party proprietary rights,
even if not meritorious, could result in costly litigation, divert management’s
attention and resources, or require the Company to either enter into royalty or
license agreements which are not advantageous to the Company or pay material
amounts of damages.
16
Under the
asset purchase agreement for the sale of the Company’s Cellular business to
UTSI, the Company agreed to indemnify UTSI for any breach or violation by
Audiovox Communications Corporation and its representations, warranties and
covenants contained in the asset purchase agreement and for other matters,
subject to certain limitations. Significant indemnification claims by
UTSI could have a material adverse effect on the Company's financial condition
and results of operation. The Company is not aware of any such
claim(s) for indemnification.
Item 4-Submission of Matters to a
Vote of Security Holders
No matters were submitted to a vote of
security holders during the quarter ended February 29, 2008.
Market
Information
The Class A Common Stock of
Audiovox is traded on the Nasdaq Stock Market under the symbol
"VOXX". The following table sets forth the low and high sale
price of our Class A Common Stock, based on the last daily sale in each of the
last eight fiscal quarters:
|
Year
ended February 29, 2008
|
High
|
Low
|
||||||
|
First
Quarter
|
$ | 15.29 | $ | 12.67 | ||||
|
Second
Quarter
|
13.48 | 9.63 | ||||||
|
Third
Quarter
|
13.04 | 10.02 | ||||||
|
Fourth
Quarter
|
13.47 | 9.00 | ||||||
|
Year
ended February 28, 2007
|
High
|
Low
|
||||||
|
First
Quarter
|
$ | 12.98 | $ | 11.20 | ||||
|
Second
Quarter
|
14.81 | 11.78 | ||||||
|
Third
Quarter
|
15.19 | 12.63 | ||||||
|
Fourth
Quarter
|
15.99 | 12.82 | ||||||
Dividends
We have not paid or declared any cash
dividends on our common stock. We have retained, and currently anticipate that
we will continue to retain, all of our earnings for use in developing our
business. Future cash dividends, if any, will be paid at the discretion of our
Board of Directors and will depend, among other things, upon our future
operations and earnings, capital requirements and surplus, general financial
condition, contractual restrictions and such other factors as our Board of
Directors may deem relevant.
Holders
There are approximately 664 holders of
record of our Class A Common Stock and 4 holders of Class B
Convertible Common Stock.
17
Issuer Purchases of Equity
Securities
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 February 29, 2008, the cumulative
total of acquired shares pursuant to the program was 1,820,562, with a
cumulative value of $18,404 reducing the remaining authorized share repurchase
balance to 1,742,438. During the year ended February 29, 2008, we
purchased 128,100 shares for $1,425 resulting in an average price paid per share
of $11.12. No treasury stock purchases were made during the three
months ended February 29, 2008.
Performance
Graph
The following table compares the annual
percentage change in our cumulative total stockholder return on our common Class
A common stock during a period commencing on February 28, 2003 and ending on
February 29, 2008 with the cumulative total return of the Nasdaq Stock Market
(US) Index and our SIC Code Index, during such period.
18
Item 6-Selected Consolidated
Financial Data
The following selected consolidated
financial data for the last five years should be read in conjunction with the
consolidated financial statements and related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of this Form
10-K.
|
Three
|
||||||||||||||||||||||||
|
Year
|
Year
|
Months
|
||||||||||||||||||||||
|
Ended
|
Ended
|
Ended
|
||||||||||||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
Years
ended November 30,
|
|||||||||||||||||||||
|
2008 (5)
|
2007
|
2006
|
2005 (4)
|
2004
|
2003 (2)
|
|||||||||||||||||||
|
Consolidated
Statement of Operations Data
|
||||||||||||||||||||||||
|
Net
sales (1)
|
$ | 591,355 | $ | 456,690 | $ | 103,050 | $ | 539,716 | $ | 563,653 | $ | 510,899 | ||||||||||||
|
Operating
income (loss) (1)
|
4,422 | (5,077 | ) | (3,159 | ) | (27,690 | ) | (1,356 | ) | 14,008 | ||||||||||||||
|
Net
income (loss) from continuing operations (1)
|
6,746 | 3,692 | 367 | (6,687 | ) | 64 | 8,027 | |||||||||||||||||
|
Net
income (loss) from discontinued operations (3)
|
1,719 | (756 | ) | (184 | ) | (2,904 | ) | 77,136 | 3,212 | |||||||||||||||
|
Net
income (loss)
|
$ | 8,465 | $ | 2,936 | $ | 183 | $ | (9,591 | ) | $ | 77,200 | $ | 11,239 | |||||||||||
|
Net
income (loss) per common share from continuing operations:
|
||||||||||||||||||||||||
|
Basic
|
$ | 0.29 | $ | 0.16 | $ | 0.02 | $ | (0.30 | ) | $ | 0.00 | $ | 0.36 | |||||||||||
|
Diluted
|
$ | 0.29 | $ | 0.16 | $ | 0.02 | $ | (0.30 | ) | $ | 0.00 | $ | 0.36 | |||||||||||
|
Net
income (loss) per common share:
|
||||||||||||||||||||||||
|
Basic
|
$ | 0.37 | $ | 0.13 | $ | 0.01 | $ | (0.43 | ) | $ | 3.52 | $ | 0.51 | |||||||||||
|
Diluted
|
$ | 0.37 | $ | 0.13 | $ | 0.01 | $ | (0.43 | ) | $ | 3.45 | $ | 0.51 | |||||||||||
|
As
of February 29,
|
As
of February 28,
|
As
of November 30,
|
||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||||||
|
Consolidated
Balance Sheet Data
|
(as
adjusted)
|
|||||||||||||||||||||||
|
Total
assets
|
$ | 533,036 | $ | 499,120 | $ | 466,012 | $ | 485,864 | $ | 543,338 | $ | 583,360 | ||||||||||||
|
Working
capital
|
275,787 | 305,960 | 340,564 | 340,488 | 362,018 | 304,354 | ||||||||||||||||||
|
Long-term
obligations
|
27,260 | 22,026 | 18,385 | 18,425 | 18,598 | 29,639 | ||||||||||||||||||
|
Stockholders'
equity
|
423,513 | 404,362 | 400,732 | 401,157 | 404,187 | 325,728 | ||||||||||||||||||
(1) Amounts
exclude the financial results of discontinued operations (see Note 2 of the
Notes to Consolidated Financial Statements).
(2) 2003
amounts reflect the acquisition of Recoton.
(3) 2004
amount reflects the results of the divestiture of the Cellular business and 2005
amount reflects the divestiture of Malaysia (see Note 2 of the Notes
to Consolidated Financial
Statements).
(4) 2005
amounts reflect the acquisition of Terk (see Note 3 of the Notes to
Consolidated Financial Statements).
(5) 2007
amounts reflect the acquisition of Thomson Accessory business (see Note 3
of the Notes to Consolidated
Financial Statements).
(6) 2008
amounts reflect the acquisition of Oehlbach, Incaar, Technuity and Thomson A/V
(see Note 3 of the Notes
to Consolidated Financial Statements).
This section should be read in
conjunction with the “Cautionary Statements” and “Risk Factors” in Item 1A of
Part I, and Item 8 of Part II, “Consolidated Financial Statements and
Supplementary Data.”
We begin Management’s Discussion and
Analysis of Financial Condition and Results of Operations with an overview of
the business, including our strategy to give the reader a summary of the goals
of our business and the direction in which our business is
moving. 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 year ended February
29, 2008 compared to the years ended February 28, 2007 and 2006. We then provide
an analysis of changes in our balance sheet and cash flows, and discuss our
financial commitments in the sections entitled “Liquidity and Capital Resources,
including Contractual and Commercial Commitments”. We conclude this
MD&A with a discussion of “Related Party Transactions” and “Recent
Accounting Pronouncements”.
19
Business
Overview and Strategy
Audiovox Corporation ("Audiovox", "We",
"Our", "Us" or "Company") is a leading international distributor and value added
service provider in the accessory, mobile and consumer electronics industries.
We conduct our business through seven wholly-owned subsidiaries: American Radio
Corp., Audiovox Electronics Corporation ("AEC"), Audiovox Consumer Electronics,
Inc., Audiovox Accessories Corp. (“AAC”), Audiovox German Holdings
GmbH ("Audiovox Germany"), Audiovox Venezuela, C.A and Code Systems,
Inc. ("Code"). We market our products under the Audiovox® brand name
and other brand names, such as Acoustic Research®, Advent®, Ambico®, Car Link®,
Chapman®, Code-Alarm®, Discwasher®, Energizer®, Heco®, Incaar®, Jensen®, Mac
Audio®, Magnat®, Movies2Go®, Oehlbach®, Phase Linear®, Prestige®, Pursuit®, RCA®
(effective January 1, 2008), RCA Accessories®, Recoton®, Road Gear®,
Spikemaster® and Terk®, as well as private labels through a large domestic and
international distribution network. We also function as an OEM
("Original Equipment Manufacturer") supplier to several customers and presently
have one reportable segment (the "Electronics Group"), which is organized by
product category. We previously announced our intention to acquire
synergistic businesses with gross profit margins higher than our core business,
leverage overhead, penetrate new markets and to expand our core business and
distribution channels.
Effective March 1, 2007, the Company
reported “Accessories” as a separate product group due to the Thomson Accessory,
Oehlbach and Technuity acquisitions. In addition, the Company’s
former mobile and consumer product categories are now combined and recorded in
the “Electronics” product group. As such, certain reclassifications
have been made to prior year amounts as the Company currently reports sales data
for the following two product categories:
Electronics products
include:
|
|
·
|
mobile
multi-media video products, including in-dash, overhead, headrest and
portable mobile video systems,
|
|
|
·
|
autosound
products including radios, speakers, amplifiers and CD
changers,
|
|
|
·
|
satellite
radios including plug and play models and direct connect
models,
|
|
|
·
|
automotive
security and remote start systems,
|
|
|
·
|
automotive
power accessories,
|
|
|
·
|
car
to car portable navigation systems,
|
|
|
·
|
rear
observation and collision avoidance
systems,
|
|
|
·
|
Liquid
Crystal Display (“LCD”) flat panel
televisions,
|
|
|
·
|
home
and portable stereos,
|
|
|
·
|
two-way
radios,
|
|
|
·
|
digital
multi-media products such as personal video recorders and MP3
products,
|
|
|
·
|
camcorders,
|
|
|
·
|
clock-radios,
|
|
|
·
|
digital
voice recorders,
|
|
|
·
|
home
speaker systems,
|
|
|
·
|
portable
DVD players, and
|
|
|
·
|
digital
picture frames.
|
Accessories
products include:
|
|
·
|
High-Definition
Television (“HDTV”) Antennas,
|
|
|
·
|
Wireless
Fidelity (“WiFi”) Antennas,
|
|
|
·
|
High-Definition
Multimedia Interface (“HDMI”)
accessories,
|
|
|
·
|
home
electronic accessories such as
cabling,
|
|
|
·
|
other
connectivity products,
|
|
|
·
|
power
cords,
|
|
|
·
|
performance
enhancing electronics,
|
|
|
·
|
TV
universal remotes,
|
|
|
·
|
flat
panel TV mounting systems,
|
|
|
·
|
iPod
specialized products,
|
|
|
·
|
wireless
headphones,
|
|
|
·
|
rechargeable
battery backups (UPS) for camcorders, cordless phones and portable video
(DVD) batteries and accessories,
and
|
|
|
·
|
power
supply systems.
|
20
We believe our product groups have
expanding market opportunities with certain levels of volatility related to both
domestic and international markets, new car sales, increased competition by
manufacturers, private labels, technological advancements, discretionary
consumer spending and general economic conditions. Also, all of our
products are subject to price fluctuations which could affect the carrying value
of inventories and gross margins in the future.
Acquisitions
We have recently acquired and continue
to integrate the following acquisitions, discussed below, into our existing
business structure:
In December 2007, the Company completed
the acquisition of certain assets and liabilities of Thomson’s U.S., Canada,
Mexico, China and Hong Kong consumer electronics audio/video business for a
total cash purchase price of approximately $3,188 (net of license fee below),
plus a net asset payment of $11,093, transaction costs of $560 and a fee related
to the RCA® brand in connection with future sales for a stated period of time.
The purpose of this acquisition was to control the RCA trademark for the audio
video field of use and to expand our core product offerings in certain
developing markets. Contemporaneous with this transaction, the Company entered
into a license agreement with Multimedia Device Ltd., a Chinese manufacturer, to
market certain product categories acquired in the acquisition for an upfront fee
of $10,000, the purchase of certain inventory and future royalty
payments.
In November 2007, AAC completed
the acquisition of all of the outstanding stock of Technuity, Inc., an emerging
leader in the battery and power products industry and the exclusive licensee of
the Energizer® brand in North America for rechargeable batteries and battery
packs for camcorders, cordless phones, digital cameras, DVD players and other
power supply devices, for a total cash purchase price of $20,373 (net of cash
acquired), plus a working capital credit of $317, transaction costs of $1,085
and a maximum contingent earn out payment of $1,000, if certain sales and gross
margin targets are met. The purpose of this acquisition was to further
strengthen our accessory product lines and core offerings, to be the exclusive
licensee of the Energizer® brand in North America for rechargeable batteries and
power supply systems and to increase the Company’s market share in the consumer
electronics accessory business.
In August 2007, Audiovox Germany
completed the acquisition of certain assets of Incaar Limited, a U.K. business
that specializes in rear seat electronics systems, for a total purchase price of
$350, plus transaction costs of $51 and a maximum contingent earn out payment of
$400, if certain earnings targets are met. The purpose of this
acquisition was to add the experience, concepts and product development of an
Original Equipment Manufacturer (“OEM”) business to our European
operations.
In March 2007, Audiovox Germany
completed the stock acquisition of Oehlbach, a European market leader in the
accessories business, for a total cash purchase price of $6,611, plus
transaction costs of $200 and a contingent earn out payment, not to exceed 1
million euros. The purpose of this acquisition was to add electronics
accessory product lines to our European business.
In January 2007, we completed the
acquisition of certain assets and liabilities of Thomson’s Americas consumer
electronics accessory business for a total cash purchase price of approximately
$50,000, plus a working capital payment of $7,617, plus a five year fee
estimated to be $4,685 related to the RCA brand in connection with future sales
and approximately $2,414 of transaction costs. The purpose of this
acquisition was to expand our market presence in the accessory business. The
acquisition included the rights to the RCA Accessories brand for consumer
electronics accessories as well as the Recoton, Spikemaster, Ambico and
Discwasher brands for use on any product category and the Jensen, Advent,
Acoustic Research and Road Gear brands for consumer electronics
accessories.
21
On
January 4, 2005, we purchased certain assets and liabilities of Terk
Technologies Corp. ("Terk") for $15,274, as adjusted. The purpose of
this acquisition was to increase our market share for satellite radio products
as well as accessories, such as antennas for HDTV products.
On July 8, 2003 we acquired, for
$40,406, the U.S. audio operations of Recoton and the outstanding capital stock
of Recoton German Holdings GmbH. The primary reason for this transaction was to
expand the product offerings of Audiovox in the U.S. and Europe and to obtain
certain long-standing trademarks such as Jensen® and Acoustic
Research®.
We continue to monitor economic and
industry conditions in order to evaluate potential synergistic business
acquisitions that would allow us to leverage overhead, penetrate new markets and
expand our core business and distribution channels.
Refer to Note 3 “Business
Acquisitions” of the Notes to Consolidated Financial Statements for additional
information regarding the aforementioned acquisitions.
Divestitures (Discontinued
Operations)
On November 7, 2005, we completed the
sale of our majority owned subsidiary, Audiovox Malaysia (“AVM”), to the then
current minority interest shareholder due to increased competition from
non-local OEM’s and deteriorating credit quality of local
customers. We sold our remaining equity in AVM in exchange for a $550
promissory note and were released from all of our Malaysian liabilities,
including bank obligations resulting in a loss on sale of
$2,079.
On November 1, 2004, we completed the
divestiture of our Cellular business to UTSI. The Cellular
business was a major driver in our growth over the past twenty years. However,
consolidation within the Cellular industry, extensive price competition and the
inability to successfully partner with a manufacturer created a difficult
challenge to compete within the Cellular industry. The competitive
nature of the Cellular business caused inconsistency in Cellular results, which
led to the sale of selected assets and certain liabilities of our Cellular
business to UTSI for an initial purchase price of $165,170, a working capital
adjustment of $8,472 and the retention of certain account receivables of
$148,494 for total gross proceeds of $322,136. After paying
outstanding domestic obligations, taxes and other costs associated with the
divestiture, we received net proceeds of approximately $144,053. As a
result of the sale of the Cellular business, we recorded a gain of $67,000
within discontinued operations for the year ended November 30,
2004.
We have
used the net proceeds to invest in strategic and complementary acquisitions and
invest in our current business.
These divestitures have been presented
as discontinued operations, as such, certain reclassifications have been made to
prior year amounts in order to conform to the current period
presentation. Refer to Note 2 “Discontinued Operations” of the Notes
to Consolidated Financial Statements for additional information regarding the
aforementioned divestitures.
Net Sales
Growth
Net sales have a compound growth rate
of 9.9% from $361,087 for the year ended November 30, 2002 to $591,355 for the
year ended February 29, 2008. During this period, our sales were
impacted by the following items:
|
|
·
|
acquisition
of Thomson’s Americas consumer electronics accessory
business,
|
|
|
·
|
acquisition
of Oehlbach’s accessory business,
|
|
|
·
|
acquisition
of Incaar’s OEM business,
|
|
|
·
|
acquisition
of Technuity’s accessory business,
|
|
|
·
|
acquisition
of Thomson’s audio/video business,
|
|
|
·
|
acquisition
of Terk Technologies,
|
|
|
·
|
acquisition
of Recoton and growth in Jensen
sales,
|
|
|
·
|
acquisition
of Code-Alarm branded products,
|
|
|
·
|
the
introduction of new products and lines such as portable DVD players,
flat-panel TVs, satellite radio, GPS navigation and mobile multi-media
devices,
|
|
|
·
|
volatility
in core mobile, consumer and accessories sales due to increased
competition and lower selling
prices.
|
22
Strategy
Our objective is to grow our business
by acquiring new brands, embracing new technologies, expanding product
development and applying this to a continued stream of new products that should
increase gross margins and improve operating income. In addition, we
plan to continue to acquire synergistic companies that would allow us to
leverage overhead, penetrate new markets and expand existing product categories
through our business channels.
The key
elements of our strategy are as follows:
|
|
·
|
Capitalize
and increase the Audiovox® family of
brands,
|
|
|
·
|
Capitalize
on niche product and distribution opportunities in the electronics
industry,
|
|
|
·
|
Leverage
our distribution network,
|
|
|
·
|
Grow
our international presence,
|
|
|
·
|
Pursue
strategic and complementary
acquisitions,
|
|
|
·
|
Continue
to outsource manufacturing to increase operating leverage,
and
|
|
|
·
|
Monitor
operating expenses.
|
Critical
Accounting Policies and Estimates
General
Our consolidated financial statements
are prepared in conformity with accounting principles generally accepted in the
United States of America. The preparation of these financial statements require
us to make certain estimates, judgments and assumptions that we believe are
reasonable based upon the information available. These estimates and assumptions
can be subjective and complex and may affect the reported amounts of assets and
liabilities, revenues and expenses reported in those financial statements. As a
result, actual results could differ from such estimates and assumptions. The
significant accounting policies and estimates which we believe are the most
critical in fully understanding and evaluating the reported consolidated
financial results include the following:
Revenue
Recognition
We recognize revenue from product sales
at the time of passage of title and risk of loss to the customer either at FOB
Shipping Point or FOB Destination, based upon terms established with the
customer. Any customer acceptance provisions, which are related to product
testing, are satisfied prior to revenue recognition. We have no further
obligations subsequent to revenue recognition except for returns of product from
customers. We do accept returns of products, if properly requested, authorized
and approved. We continuously monitor and track such product returns
and record the provision for the estimated amount of such future returns at
point of sale, based on historical experience and any notification we receive of
pending returns.
Sales
Incentives
We offer sales incentives to our
customers in the form of (1) co-operative advertising allowances;
(2) market development funds; (3) volume incentive rebates
and (4) other trade allowances. We account for sales
incentives in accordance with EITF 01-9, "Accounting for Consideration Given by
a Vendor to a Customer (Including a Reseller of Vendor's Products)" (“EITF
01-9”). Except for other trade allowances, all sales incentives require the
customer to purchase our products during a specified period of time. All sales
incentives require customers to claim the sales incentive within a certain time
period (referred to as the "claim period") and claims are settled either by the
customer claiming a deduction against an outstanding account receivable or by
the customer requesting a check. All costs associated with sales
incentives are classified as a reduction of net sales, and the following is a
summary of the various sales incentive programs:
23
Co-operative advertising allowances are
offered to customers as a reimbursement towards their costs for
print or media advertising in which our product is featured on its own or in
conjunction with other companies' products. The amount offered is either a fixed
amount or is based upon a fixed percentage of sales revenue or fixed amount per
unit sold to the customer during a specified time period.
Market development funds are offered to
customers in connection with new product launches or entrance into new
markets. The amount offered for new product launches is based upon a
fixed amount or fixed percentage of our sales revenue to the customer or a fixed
amount per unit sold to the customer during a specified time period. We accrue
the cost of co-operative advertising allowances and market development funds at
the later of when the customer purchases our products or when the sales
incentive is offered to the customer.
Volume incentive rebates offered to
customers require that minimum quantities of product be purchased during a
specified period of time. The amount offered is either based upon a fixed
percentage of our sales revenue to the customer or a fixed amount per unit sold
to the customer. We make an estimate of the ultimate amount of the
rebate customers will earn based upon past history with the customer and other
facts and circumstances. We have the ability to estimate these volume incentive
rebates, as there does not exist a relatively long period of time for a
particular rebate to be claimed. Any changes in the estimated amount
of volume incentive rebates are recognized immediately using a cumulative
catch-up adjustment.
Other trade allowances are additional
sales incentives that we provide to customers subsequent to the related revenue
being recognized. In accordance with EITF 01-9, we record the provision for
these additional sales incentives at the later of when the sales incentive is
offered or when the related revenue is recognized. Such additional sales
incentives are based upon a fixed percentage of the selling price to the
customer, a fixed amount per unit, or a lump-sum amount.
The accrual balance for sales
incentives at February 29, 2008 and February 28, 2007 was $10,768 and $7,410,
respectively. Although we make our best estimate of sales incentive
liabilities, many factors, including significant unanticipated changes in the
purchasing volume and the lack of claims from customers could have a significant
impact on the liability for sales incentives and reported operating
results.
We reverse earned but unclaimed sales
incentives based upon the expiration of the claim period of each
program. Unclaimed sales incentives that have no specified claim
period are reversed in the quarter following one year from the end of the
program. We believe that 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.
For the years ended February 29, 2008,
February 28, 2007, the three months ended February 28, 2006 and the year ended
November 30, 2005, reversals of previously established sales incentive
liabilities amounted to $4,108, $2,460, $480 and $2,836, respectively. These
reversals include unearned and unclaimed sales incentives. Unearned sales
incentives are volume incentive rebates where the customer did not purchase the
required minimum quantities of product during the specified time. Volume
incentive rebates are reversed into income in the period when the customer did
not reach the required minimum purchases of product during the specified time.
Reversals of unearned sales incentives for the years ended February 29, 2008,
February 28, 2007, the three months ended February 28, 2006 and the year ended
November 30, 2005 amounted to $1,970, $1,148, $0, and $1,007, respectively.
Unclaimed sales incentives are sales incentives earned by the customer but the
customer has not claimed payment within the claim period (period after program
has ended). Reversals of unclaimed sales incentives for the years ended February
29, 2008, February 28, 2007, the three months ended February 28, 2006 and the
year ended November 30, 2005 amounted to $2,138, $1,312, $480, and $1,829,
respectively.
24
Accounts
Receivable
We perform ongoing credit evaluations
of our customers and adjust credit limits based upon payment history and current
credit worthiness, as determined by a review of current credit information. We
continuously monitor collections from our customers and maintain a provision for
estimated credit losses based upon historical experience and any specific
customer collection issues that have been identified. We record
charges for estimated credit losses against operating expenses and charges for
price adjustments against net sales in the consolidated financial statements.
The reserve for estimated credit losses at February 29, 2008 and February 28,
2007 was $6,386 and $5,062, respectively. While such credit losses have
historically been within management's expectations and the provisions
established, we cannot guarantee that we will continue to experience the same
credit loss rates that have been experienced in the past. Since our accounts
receivable are concentrated in a relatively few number of large customers, a
significant change in the liquidity or financial position of any one of these
customers could have a material adverse impact on the collectability of accounts
receivable and our results of operations.
Inventories
We value our inventory at the lower of
the actual cost to purchase (primarily on a weighted moving average basis)
and/or the current estimated market value of the inventory less expected costs
to sell the inventory. We regularly review inventory quantities on-hand and
record a provision, in cost of sales, for excess and obsolete inventory based
primarily from selling price reductions subsequent to the balance sheet date,
indications from customers based upon current negotiations, and purchase orders.
A significant sudden increase in the demand for our products could result in a
short-term increase in the cost of inventory purchases while a significant
decrease in demand could result in an increase in the amount of excess inventory
quantities on-hand. In addition, our industry is characterized by rapid
technological change and frequent new product introductions that could result in
an increase in the amount of obsolete inventory quantities
on-hand. During the years ended February 29, 2008, February 28, 2007,
the three months ended February 28, 2006 and the year ended November 30, 2005,
we recorded inventory write-downs of $4,925, $2,977, $689, and $16,924,
respectively.
Estimates of excess and obsolete
inventory may prove to be inaccurate, in which case we may have understated or
overstated the provision required for excess and obsolete
inventory. Although we make every effort to ensure the accuracy of
our forecasts of future product demand, any significant unanticipated changes in
demand or technological developments could have a significant impact on the
carrying value of inventory and our results of operations.
Goodwill and Other
Intangible Assets
Goodwill and other intangible assets,
which consists of the excess cost over fair value of assets acquired (goodwill)
and other intangible assets (patents, contracts, trademarks and customer
relationships) amounted to $124,435 at February 29, 2008 and $75,388 at February
28, 2007. Goodwill, which includes equity investment goodwill, is
calculated as the excess of the cost of purchased businesses over the value of
their underlying net assets. Goodwill and other intangible assets that have an
indefinite useful life are not amortized. Intangible assets that have
a definite useful life are amortized over their estimated useful
life.
On an annual basis, we test goodwill
and other intangible assets for impairment. To determine the fair value of these
intangible assets, there are many assumptions and estimates used that directly
impact the results of the testing. We have the ability to influence the outcome
and ultimate results based on the assumptions and estimates we choose. To
mitigate undue influence, we set criteria that are reviewed and approved by
various levels of management. Additionally, we evaluate our recorded intangible
assets with the assistance of a third-party valuation firm, as
necessary. These impairment tests may result in impairment
losses that could have a material adverse impact on our results of
operations.
Warranties
We offer warranties of various lengths
depending upon the specific product. Our standard warranties require
us to repair or replace defective product returned by both end users and
customers during such warranty period at no cost. We record an estimate for
warranty related costs, in cost of sales, based upon actual historical return
rates and repair costs at the time of sale. The estimated liability for future
warranty expense, which has been included in accrued expenses and other current
liabilities, amounted to $13,272 and $5,856 at February 29, 2008 and February 28
2007, respectively. While warranty costs have historically been
within expectations and the provisions established, we cannot guarantee that we
will continue to experience the same warranty return rates or repair costs that
have been experienced in the past. A significant increase in product return
rates, or a significant increase in the costs to repair products, could have a
material adverse impact on our operating results.
25
Stock-Based
Compensation
As discussed further in “Notes to
Consolidated Financial Statements – Note 1(s) Accounting for Stock-Based
Compensation,” we adopted Statement of Financial Accounting Standards (“SFAS”)
No. 123(R) on December 1, 2005 using the modified prospective
method. Through November 30, 2005 we accounted for our stock option
plans under the intrinsic value method of Accounting Principles Board (“APB”)
Opinion No. 25, and as a result no compensation costs had been recognized in our
historical consolidated statements of operations.
We have used and expect to continue to
use the Black-Sholes option pricing model to compute the estimated fair value of
stock-based awards. The Black-Scholes option pricing model includes
assumptions regarding dividend yields, expected volatility, expected option term
and risk-free interest rates. The assumptions used in computing the
fair value of stock-based awards reflect our best estimates, but involve
uncertainties relating to market and other conditions, many of which are outside
of our control. We estimate expected volatility by considering the
historical volatility of our stock, the implied volatility of publicly traded
stock options in our stock and our expectations of volatility for the expected
term of stock-based compensation awards. As a result, if other
assumptions or estimates had been used for options granted in the current and
prior periods, the stock-based compensation expense of $886 that was recorded
for the year ended February 29, 2008 could have been materially
different. Furthermore, if different assumptions are used in future
periods, stock-based compensation expense could be materially impacted in the
future.
Income
Taxes
We account for income taxes in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" and Financial Accounting Standards Board
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN No.
48"). We record a valuation allowance to reduce our deferred tax
assets to the amount of future tax benefit that is more likely than not to be
realized. We decrease the valuation allowance when, based on the
weight of available evidence, it is more likely than not that the amount of
future tax benefit will be realized. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, there is no assurance that the
valuation allowance will not need to be increased to cover additional deferred
tax assets that may not be realized. Any increase or decline in the
valuation allowance could have a material adverse impact on our income tax
provision and net income in the period in which such determination is
made.
Under FIN 48, the Company may recognize
the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing
authorities based on the technical merits of the position. The tax
benefits recognized in the financial statements from such position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. It is possible that the
amount of unrecognized tax benefits could change in the next 12 months, however,
the Company does not expect the change to have a significant impact on its
results of operations or financial position. Furthermore, the Company provides
loss contingencies for state and international tax matters relating to potential
tax examination issues, planning initiatives and compliance responsibilities.
The development of these reserves requires judgments about tax issues, potential
outcomes and timing, which if are different, may materially impact the Company’s
financial condition and results of operations.
Segment
We have determined that we operate in
one reportable segment, the Electronics Group, based on review of Statement of
Financial Accounting Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (“SFAS 131”). The
characteristics of our operations that are relied on in making and reviewing
business decisions include the similarities in our products, the commonality of
our customers, suppliers and product developers across multiple brands, our
unified marketing and distribution strategy, our centralized inventory
management and logistics, and the nature of the financial information used by
our Executive Officers. Management reviews the financial results of
the Company based on the performance of the Electronics Group.
26
Results
of Operations
In February 2006, we changed our fiscal
year end from November 30th to
February 28th. Included
in Item 8 of this annual report on Form 10-K are the consolidated balance sheets
at February 29, 2008 and February 28, 2007 and the consolidated
statements of operations, consolidated statements of stockholders’ equity and
consolidated statements of cash flows for the years ended February 29, 2008,
February 28, 2007, the three month transition period ending February 28, 2006
and the year ended November 30, 2005. In order to provide the reader meaningful
comparison, the following analysis provides comparison of the audited year ended
February 29, 2008 with the audited year ended February 28, 2007, and the audited
year ended February 28, 2007 with the unaudited year ended February 28, 2006
(derived from the results of operations of the last nine months of the fiscal
year ended November 30, 2005 and the transition quarter ended February 28,
2006). Refer to the previously filed Form 10-QT for the transition
period ended February 28, 2006, which discusses the results of operations for
the three months ended February 28, 2006 compared to the three months ended
February 28, 2005. We analyze and explain the differences between
periods in the specific line items of the consolidated statements of
operations.
Year Ended February 29, 2008
Compared to the Year Ended February 28, 2007
Continuing
Operations
The following table sets forth, for the
periods indicated, certain Statement of Operations data for the years ended
February 29, 2008 (“Fiscal 2008”) and February 28, 2007 (“Fiscal
2007”).
Net
Sales
|
Fiscal
|
Fiscal
|
$ | % | |||||||||||||
|
2008
|
2007
|
Change
|
Change
|
|||||||||||||
|
Electronics
|
$ | 437,018 | $ | 432,943 | $ | 4,075 | 0.9 | % | ||||||||
|
Accessories
|
154,337 | 23,747 | 130,590 | 549.9 | ||||||||||||
|
Total
net sales
|
$ | 591,355 | $ | 456,690 | $ | 134,665 | 29.5 | % | ||||||||
Electronics sales, which include both
mobile and consumer electronics, represented approximately 73.9% of net sales in
Fiscal 2008 compared to 94.8% in Fiscal 2007, increased by 0.9% or $4,075
primarily due to an increase in mobile audio sales as a result of improved sales
in the Company’s car audio and Satellite Radio product lines and increases in
the electronics sales of the Company’s International operations in Germany and
Venezuela. Offsetting these increases were lower consumer electronic sales as a
result of lower than anticipated holiday sales and industry-wide shortages of
LCD panels that adversely affected sales of LCD TV’s, portable DVD’s and digital
picture frames. Electronic sales also declined in certain mobile video
categories due to increased OEM programs that include the video system as
“standard” on more and more vehicles and a decline in new car
sales.
Accessories sales, which represented
26.1% of our net sales in Fiscal 2008 compared to 5.2% in Fiscal 2007, increased
approximately 549.9% or $130,590 due to the incremental sales generated from the
recently acquired Thomson Accessory, Oehlbach and Technuity
operations.
Sales
incentive expense increased $11,504 to $24,005 in Fiscal 2008, as a result of a
general increase in sales, specifically an increase in accessories net sales
which offer more sales incentive programs, which was partially offset by a
$1,648 increase in reversals to $4,108 during the year. The increase in
reversals was primarily due to a $873 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
unearned and earned but unclaimed sales incentives upon the expiration of the
claim period is a disciplined, rational, consistent and systematic method of
reversing unearned and earned but unclaimed sales incentives. These sales
incentive programs are expected to continue and will either increase or decrease
based upon competition and customer demands.
27
Gross
Profit
|
Fiscal
|
Fiscal
|
|||||||
|
2008
|
2007
|
|||||||
|
Gross
profit
|
$ | 111,328 | $ | 79,319 | ||||
|
Gross
margin percentage
|
18.8
|
% | 17.4 | % | ||||
Gross
margins increased by 140 basis points to 18.8% in Fiscal 2008 as compared to
17.4% in the prior year. Gross margins were favorably impacted by higher margins
generated from the recently acquired companies, improved overall margins in our
core business and improved buying programs and inventory management. Gross
margins were adversely impacted by increased warehouse and assembly costs as a
result of incremental transition costs necessary to facilitate the newly
acquired companies as well as increased warranty and repair costs, freight and
shipping costs and inventory provisions as a result of increased accessories
sales. In addition, reversals of sales incentive expenses favorably impacted
gross margins by 0.7% during Fiscal 2008.
Operating Expenses and
Operating Income / (Loss)
|
Fiscal
|
Fiscal
|
$ | % | |||||||||||||
|
2008
|
2007
|
Change
|
Change
|
|||||||||||||
|
Operating
Expenses:
|
||||||||||||||||
|
Selling
|
$ | 35,703 | $ | 28,220 | $ | 7,483 | 26.5 | % | ||||||||
|
General
and administrative
|
61,220 | 48,920 | 12,300 | 25.1 | ||||||||||||
|
Engineering
and technical support
|
9,983 | 7,256 | 2,727 | 37.6 | ||||||||||||
|
Total
Operating Expenses
|
$ | 106,906 | $ | 84,396 | $ | 22,510 | 26.7 | % | ||||||||
|
Operating
income (loss)
|
$ | 4,422 | $ | (5,077 | ) | $ | 9,499 | 187.1 | % | |||||||
Operating expenses increased $22,510 or
26.7% in Fiscal 2008 as compared to Fiscal 2007. As a percentage of net sales,
operating expenses decreased to 18.1% in Fiscal 2008 from 18.5% in Fiscal 2007
as a result of higher sales and better controls over our fixed costs. The
increase in total operating expenses is due to the incremental costs related to
the recently acquired Thomson Accessory, Oehlbach, Incaar, Technuity and Thomson
Audio/Video operations, which contributed total operating expenses of $25,097 in
Fiscal 2008 and $1,180 in Fiscal 2007. Operating expenses for our core business
was $81,809 in Fiscal 2008, a decrease of $1,407 or 1.7% over the prior
year.
The following table sets forth, for the
periods indicated, total operating expenses from our core business and the
incremental operating expenses related to the recently acquired Thomson
Accessory, Oehlbach, Incaar, Technuity and Thomson Audio/Video
businesses.
|
Fiscal
|
Fiscal
|
$ | % | |||||||||||||
|
2008
|
2007
|
Change
|
Change
|
|||||||||||||
|
Core
operating expenses
|
$ | 81,809 | $ | 83,216 | $ | (1,407 | ) | (1.7 | ) % | |||||||
|
Operating
expenses from acquired businesses
|
25,097 | 1,180 | 23,917 | 2,026.9 | ||||||||||||
|
Total
operating expenses
|
$ | 106,906 | $ | 84,396 | $ | 22,510 | 26.7 | % | ||||||||
Selling expenses increased $7,483
or 26.5% primarily due to $10,072 of selling expenses in Fiscal 2008 related to
the recently acquired Thomson Accessory, Oehlbach, Incaar, Technuity and Thomson
Audio/Video operations, an increase in the cost of travel and an increase in
commission expense as a result of increases in commissionable sales and salesmen
salaries and related benefits. These increases were partially offset by a
decline in advertising expenses due to a decline in the budgeted amounts for
general and print media advertising in Fiscal 2008. Selling expenses for our
core business were $25,631 in Fiscal 2008, a decrease of $2,052 or 8% over the
prior year.
28
General and administrative expenses
increased $12,300 or 25.1% over the prior year due to the
following:
|
|
·
|
$12,149
of expenses in Fiscal 2008 for the recently acquired operations of Thomson
Accessory, Oehlbach, Incaar, Technuity and Thomson Audio/Video
operations,
|
|
|
·
|
$1,392
increase in salaries and related payroll taxes and benefits due to an
increase in executive bonuses and profit sharing as a result of the
company meeting certain earnings targets and general fiscal wage
increases,
|
|
|
·
|
$454
increase in a non-cash stock based compensation and warrant expense due to
the vesting of options to employees and outside
consultants,
|
|
|
·
|
$559
increase in depreciation and amortization due to an increase in capital
expenditures and amortizable intangibles as a result of acquisitions and
investments in new systems,
|
|
|
·
|
$501
increase in communication expenses,
|
|
|
·
|
$344
increase in software maintenance fees,
and
|
|
|
·
|
$602
increase in legal settlements from claims by a
licensor.
|
The above increases were partially
offset by a $1,099 decrease in professional fees due to a reduction in audit
fees, legal and consulting costs and a $289 reduction in general insurance
expenses offset by a $790 benefit related to a call/put option previously
granted to certain employees. The benefit recorded for the year ended February
29, 2008 was due to a reduction in the call/put liability calculation as a
result of the Oehlbach and Incaar acquisitions.
General and administrative costs from
our core business were $48,448 in Fiscal 2008, an increase of $151 over the
prior year.
Engineering and technical support
expenses increased $2,727 or 37.6% due to $2,253 of expenses in Fiscal 2008
related to the recently acquired Thomson Accessory, Oehlbach, Incaar, Technuity
and Thomson Audio/Video operations and an increase in domestic direct labor and
related payroll benefits as a result of increased product development efforts
and general wage increases. Engineering and technical support expenses for our
core business were $7,730 in Fiscal 2008, an increase of $493 over the prior
year.
Other
Income/(Expense)
|
Fiscal
|
Fiscal
|
$ | % | |||||||||||||
|
2008
|
2007
|
Change
|
Change
|
|||||||||||||
|
Interest
and bank charges
|
$ | (2,127 | ) | $ | (1,955 | ) | $ | (172 | ) | 8.8 | % | |||||
|
Equity
in income of equity investees
|
3,590 | 2,937 | 653 | 22.2 | ||||||||||||
|
Other,
net
|
4,709 | 6,253 | (1,544 | ) | (24.7 | ) | ||||||||||
|
Total
other income
|
$ | 6,172 | $ | 7,235 | $ | (1,063 | ) | (14.7 | ) % | |||||||
Interest
and bank charges increased due to the additional debt assumed in connection with
the acquisition of Oehlbach, one time bank charges related to the Euro Term loan
agreement, which was repaid in full during September 2007, as well as increased
working capital needs of our domestic and foreign subsidiaries. Interest and
bank charges represent expenses for bank obligations of Audiovox Corporation,
Audiovox Germany and Venezuela and interest payments 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.
29
Other income decreased due to a decline
in interest income as a result of a decline in our short-term investment
holdings due to cash utilized for acquisitions as well as current working
capital requirements. This decrease was partially offset by realized gains on
the sale of a portion of our marketable equity securities.
Income Tax
Benefit
The effective tax rate in Fiscal 2008
was a provision of 36.3% as compared to a benefit of 71.1% in the prior year.
The increase in the effective tax rate is due to lower tax exempt interest
income earned on our short-term investments and increased income from
operations. The effective tax rate is greater than the Federal statutory rate
due to the impact of state and local taxes and the resolution of certain
domestic and foreign tax audits.
Income (loss) from
Discontinued Operations
The following is a summary of financial
results included within discontinued operations :
|
Fiscal
|
Fiscal
|
|||||||
|
2008
|
2007
|
|||||||
|
Net
sales from discontinued operations
|
$ | - | $ | - | ||||
|
Income
(loss) from discontinued operations before income taxes
|
3,248 | (1,163 | ) | |||||
|
Income
tax (provision) benefit
|
(1,529 | ) | 407 | |||||
|
Net
income (loss) from discontinued operations
|
$ | 1,719 | $ | (756 | ) | |||
The
income (loss) from discontinued operations in Fiscal 2007 is primarily due to
legal and related costs associated with contingencies pertaining to our
discontinued Cellular business. The increase in the income from discontinued
operations in Fiscal 2008 is due to a derivative legal settlement which resulted
in pre-tax income of $3,349, net of legal fees and other administrative costs of
$3,401 (see Note 16 to the Consolidated Financial Statements). The effective tax
rate from discontinued operations for Fiscal 2008 was impacted by state and
local taxes and the resolution of a domestic tax audit.
Net
Income
The
following table sets forth, for the periods indicated, selected statement of
operations data beginning with operating income (loss) from continuing
operations to reported net income and basic and diluted net income per common
share :
|
Fiscal
|
Fiscal
|
|||||||
|
2008
|
2007
|
|||||||
|
Operating
income (loss)
|
$ | 4,422 | $ | (5,077 | ) | |||
|
Other
income, net
|
6,172 | 7,235 | ||||||
|
Income
from continuing operations before income taxes
|
10,594 | 2,158 | ||||||
|
Income
tax (expense) benefit
|
(3,848 | ) | 1,534 | |||||
|
Net
income from continuing operations
|
6,746 | 3,692 | ||||||
|
Net
income (loss) from discontinued operations, net of tax
|
1,719 | (756 | ) | |||||
|
Net
income
|
$ | 8,465 | $ | 2,936 | ||||
|
Net
income per common share:
|
||||||||
|
Basic
|
$ | 0.37 | $ | 0.13 | ||||
|
Diluted
|
$ | 0.37 | $ | 0.13 | ||||
30
Net income was favorably impacted by sales incentive reversals of $4,108 ($2,506
after taxes) and $2,460 ($1,501 after taxes) in Fiscal 2008 and 2007,
respectively, and pre-tax income of $3,248 ($1,719 after taxes) recorded in
discontinued operations in Fiscal 2008.
Year Ended February 28, 2007
Compared to Year Ended February 28, 2006
Continuing
Operations
The following tables sets forth, for
the periods indicated, certain statement of operations data for the years ended
February 28, 2007 (“Fiscal 2007”) and 2006 (“Fiscal 2006”).
Net
Sales
|
Fiscal
|
Fiscal
|
$ | % | |||||||||||||
|
2007
|
2006
|
Change
|
Change
|
|||||||||||||
|
Electronics
|
$ | 432,943 | $ | 512,022 | $ | (79,079 | ) | (15.4 | ) % | |||||||
|
Accessories
|
23,747 | 14,764 | 8,983 | 60.8 | ||||||||||||
|
Total
net sales
|
$ | 456,690 | $ | 526,786 | $ | (70,096 | ) | (13.3 | ) % | |||||||
Electronics sales, which include both
mobile and consumer electronics, represented 94.8% of our net sales in Fiscal
2007, decreased due to the absence of Rampage, Prestige and Video-in-a-Bag
sales, which were the result of our decision to exit those product lines at the
end of Fiscal 2006. In addition, we suspended sales of Plug & Play XM
satellite radio receivers for five months pending the outcome of a Federal
Communication Commission (‘‘FCC’’) issue. Electronic 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.
Electronics sales also decreased due to a decrease in average selling prices on
LCD TVs and Plasma TVs during Fiscal 2007. In anticipation of the decline in
selling prices we limited inventory for the holiday season, which adversely
affected consumer electronics sales but reduced exposure from post holiday
inventory write downs. In addition, during Fiscal 2007, the Company continued
its policy of eliminating low margin retail programs which adversely impacted
consumer sales. These decreases were partially offset by increased sales in
Phase Linear, Audiovox Germany and Code Systems.
Accessories
sales, which represented 5.2% of our net sales in Fiscal 2007, increased due to
the incremental sales generated from the Thomson Accessories acquisition in
January of 2007.
Sales incentive expense decreased
$4,524 to $12,501 for fiscal 2007 as a result of a decline in sales and
increased reversals of $465. 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
|
Fiscal
|
Fiscal
|
|||||||
|
2007
|
2006
|
|||||||
|
Gross
profit
|
$ | 79,319 | $ | 60,418 | ||||
|
Gross
margin percentage
|
17.4 | % | 11.5 | % | ||||
Gross margins increased to 17.4% for Fiscal 2007 as compared to 11.5% for
the prior year. Gross margins increased as a result of improving
margins in the mobile category and improved inventory management which resulted
in less inventory writedowns. Specifically, gross margins were
favorably impacted by an $11,700 decrease (or 2.6% favorable impact) in
inventory write downs primarily 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.
31
Operating Expenses and
Operating / (Loss)
|
Fiscal
|
Fiscal
|
$ | % | |||||||||||||
|
2007
|
2006
|
Change
|
Change
|
|||||||||||||
|
Operating
Expenses:
|
||||||||||||||||
|
Selling
|
$ | 28,220 | $ | 30,632 | $ | (2,412 | ) | (7.9 | ) % | |||||||
|
General
and administrative
|
48,920 | 48,643 | 277 | 0.6 | ||||||||||||
|
Engineering
and technical support
|
7,256 | 6,191 | 1,065 | 17.2 | ||||||||||||
|
Total
Operating Expenses
|
$ | 84,396 | $ | 85,466 | $ | (1,070 | ) | (1.3 | ) % | |||||||
|
Operating
Loss
|
$ | (5,077 | ) | $ | (25,048 | ) | $ | 19,971 | (79.7 | ) % | ||||||
Operating
expenses decreased $1,070 or 1.3% for Fiscal 2007, as compared to
2006. As a percentage of net sales, operating expenses increased to
18.5% for Fiscal 2007 from 16.2% in 2006 due to the decline in sales during the
period. Operating expenses for Fiscal 2007 includes stock-based
compensation expense of $432, legal settlements of $1,588 and $1,180 of expenses
from the newly acquired Thomson accessory business.
The
following table sets forth, for the periods indicated, total operating expenses
from our core business and the incremental operating expenses related to the
recently acquired Thomson Accessory business.
|
Fiscal
|
Fiscal
|
$ | % | |||||||||||||
|
2007
|
2006
|
Change
|
Change
|
|||||||||||||
|
Core
operating expenses
|
$ | 83,216 | $ | 85,466 | $ | (2,250 | ) | (2.6 | ) % | |||||||
|
Operating
expenses from acquired businesses
|
1,180 | - | 1,180 | 100 | ||||||||||||
|
Total
operating expenses
|
$ | 84,396 | $ | 85,466 | $ | (1,070 | ) | (1.3 | ) % | |||||||
Selling expenses decreased $2,412 or
7.9% primarily due to a $1,924 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
increased $277 or 0.6% due to the following:
|
|
·
|
$719
increase in occupancy costs as a result of transition services costs
necessary to support the newly acquired Thomson
operations.
|
|
|
·
|
$1,517
increase in employee benefits due to increased health care costs under the
Company’s medical and dental plan as well as increased employer
contributions to the 401(k) plan.
|
The above
increases in general and administrative expenses were partially offset by the
following:
|
|
·
|
$476
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 fiscal 2007,
|
|
|
·
|
$817
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,
|
|
|
·
|
increased
MIS billings of $489 for services performed in connection with a
transition service
agreement.
|
32
Engineering and technical support
expenses increased $1,065 or 17.2% due to an increase in direct labor as a
result of wage increases and increased labor costs.
Other
Income (Expense)
|
Fiscal
|
Fiscal
|
$ | % | |||||||||||||
|
2007
|
2006
|
Change
|
Change
|
|||||||||||||
|
Interest
and bank charges
|
$ | (1,955 | ) | $ | (2,405 | ) | $ | 450 | (18.7 | ) % | ||||||
|
Equity
in income of equity investees
|
2,937 | 2,463 | 474 | 19.2 | ||||||||||||
|
Other,
net
|
6,253 | 6,894 | (641 | ) | (9.3 | ) | ||||||||||
|
Total
other income
|
$ | 7,235 | $ | 6,952 | $ | 283 | 4.1 | % | ||||||||
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 fiscal 2006 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 fiscal
2006. 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 fiscal 2007
was a benefit of 71.1% compared to a benefit of 68.1% 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 fiscal 2006 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 results
included within discontinued operations:
|
Fiscal
|
Fiscal
|
|||||||
|
2007
|
2006
|
|||||||
|
Net
sales from discontinued operations
|
$ | - | $ | 2,690 | ||||
|
Loss
from discontinued operations before income taxes
|
(1,163 | ) | (774 | ) | ||||
|
Income
tax benefit
|
407 | 418 | ||||||
| (756 | ) | (356 | ) | |||||
|
Loss
on sale of discontinued operations, net of tax
|
- | (2,079 | ) | |||||
|
Loss
from discontinued operations
|
$ | (756 | ) | $ | (2,435 | ) | ||
Included in loss from
discontinued operations for fiscal 2006 is the financial results of Audiovox
Malaysia which was sold on November 7, 2005. The loss from
discontinued operations for fiscal 2007 is primarily due to legal and related
costs associated with contingencies pertaining to our discontinued Cellular
business.
33
Net Income
(Loss)
The
following table sets forth, for the periods indicated, selected statement of
operations data beginning with operating loss from continuing operations to
reported net income (loss) and basic and diluted net income (loss) per common
share.
|
Fiscal
|
Fiscal
|
|||||||
|
2007
|
2006
|
|||||||
|
Operating
loss
|
$ | (5,077 | ) | $ | (25,048 | ) | ||
|
Other
income, net
|
7,235 | 6,952 | ||||||
|
Income
(loss) from continuing operations before income taxes
|
2,158 | (18,096 | ) | |||||
|
Income
tax benefit
|
1,534 | 12,328 | ||||||
|
Net
income (loss) from continuing operations
|
3,692 | (5,768 | ) | |||||
|
Net
loss from discontinued operations, net of tax
|
(756 | ) | (2,435 | ) | ||||
|
Net
income (loss)
|
$ | 2,936 | $ | (8,203 | ) | |||
|
Net
income (loss) per common share:
|
||||||||
|
Basic
|
$ | 0.13 | $ | (0.36 | ) | |||
|
Diluted
|
$ | 0.13 | $ | (0.36 | ) | |||
Net income for fiscal 2007 was $2,936
compared to a net loss of $8,203 in fiscal 2006. Income per share for
fiscal 2007 was $0.13 (diluted) as compared to a loss per share of $0.36
(diluted) for fiscal 2006. Net income (loss) was favorably impacted
by sales incentive reversals of $2,460 ($1,501 after taxes) and $1,995 ($1,217
after taxes) for fiscal 2007 and 2006, respectively.
Liquidity
and Capital Resources
Cash Flows, Commitments and
Obligations
As of February 29, 2008, we had working
capital of $275,787 which includes cash and short-term investments of $39,341
compared with working capital of $305,960 at February 28, 2007, which included
cash and short-term investments of $156,345. The decrease in
short-term investments is primarily due to the acquisitions of Oehlbach, Incaar,
Technuity and Thomson's audio/video business totaling $42,265, the funding of
our working capital, investments in capital equipment, repayment of certain bank
and debt obligations and the repurchase of our common stock, partially offset by
the proceeds received from the exercise of stock options and the sale of certain
short and long-term investments. We plan to utilize our current cash
position as well as collections from accounts receivable, the cash generated
from our operations and the income on our investments 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. The following table summarizes our cash flow
activity for all periods presented:
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
Cash
provided by (used in):
|
||||||||||||||||
|
Operating
activities
|
$ | (64,691 | ) | $ | 43,420 | $ | 55,298 | $ | (42,085 | ) | ||||||
|
Investing
activities
|
93,465 | (40,897 | ) | (51,018 | ) | 13,629 | ||||||||||
|
Financing
activities
|
(5,241 | ) | (3,449 | ) | (2,188 | ) | (555 | ) | ||||||||
|
Effect
of exchange rate changes on cash
|
335 | 119 | 24 | (234 | ) | |||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
$ | 23,868 | $ | (807 | ) | $ | 2,116 | $ | (29,245 | ) | ||||||
34
Operating
activities used cash of $64,691 for the year ended February 29, 2008 due to: i)
net income generated from continuing operations of $6,746, ii) increased
inventory, accounts receivable and prepaid balances due to increased sales
activity from our acquisitions and iii) decreased accounts payable and
accrued expenses due to the timing and payment of invoices and
expenses partially offset by depreciation and
amortization. Cash provided or used by operating activities is
primarily generated from net income from continuing operations, the collection
of accounts receivable, inventory turnover and payment of accounts payable,
accrued expenses and income taxes. The timing of payments and collections
can fluctuate and are often impacted by the timing of sales and inventory
purchases.
Investing
activities provided cash of $93,465 during the year ended February 29, 2008,
primarily due to the sale (net of purchases) of short and long-term investments
partially offset by the purchase of acquired businesses and capital
expenditures. Cash provided or used by investing activities is primarily
generated from activity related to investments as well as acquisitions and
divestitures.
Financing activities used $5,241during
the year ended February 29, 2008, primarily from the purchase of treasury stock
and payment of bank and other debt obligations partially offset by proceeds
received from the exercise of stock options and warrants.
As of February 29, 2008, we have a
domestic credit line to fund the temporary short-term working capital needs of
the Company. This line expires on June 30, 2008 and allows aggregate
borrowings of up to $25,000 at an interest rate of Prime (or similar
designations) plus 1%. In addition, Audiovox Germany has a 16,000
Euro accounts receivable factoring arrangement and a 6,000 Euro Asset-Based
Lending (“ABL”) credit facility.
Certain contractual cash obligations
and other commercial commitments will impact our short and long-term
liquidity. At February 29, 2008, 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)
|
$ | 11,450 | $ | 521 | $ | 1,043 | $ | 1,108 | $ | 8,778 | ||||||||||
|
Operating
leases (2)
|
23,250 | 4,205 | 6,148 | 4,630 | 8,267 | |||||||||||||||
|
Total
contractual cash obligations
|
$ | 34,700 | $ | 4,726 | $ | 7,191 | $ | 5,738 | $ | 17,045 | ||||||||||
|
Amount
of Commitment
|
||||||||||||||||||||
|
Expiration
per period
|
||||||||||||||||||||
|
Total
|
||||||||||||||||||||
|
Amounts
|
Less
than
|
1-3 | 4-5 |
After
|
||||||||||||||||
|
Other
Commercial Commitments
|
Committed
|
1
Year
|
Years
|
Years
|
5
years
|
|||||||||||||||
|
Bank
obligations (3)
|
$ | 3,070 | $ | 3,070 | $ | - | $ | - | $ | - | ||||||||||
|
Stand-by
letters of credit (4)
|
2,399 | 2,399 | - | - | - | |||||||||||||||
|
Commercial
letters of credit (4)
|
3,803 | 3,803 | - | - | - | |||||||||||||||
|
Debt
(5)
|
1,703 | 935 | 530 | 238 | - | |||||||||||||||
|
Contingent
earn-out payments (6)
|
5,893 | 890 | 3,916 | 1,087 | - | |||||||||||||||
|
Unconditional
purchase obligations (7)
|
71,546 | 71,546 | - | - | - | |||||||||||||||
|
Total
commercial commitments
|
$ | 88,414 | $ | 82,643 | $ | 4,446 | $ | 1,325 | $ | - | ||||||||||
|
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 $70 and
$5,607, respectively at February 29,
2008.
|
35
|
2.
|
We
enter into operating leases in the normal course of
business.
|
|
3.
|
Represents
amounts outstanding under the Audiovox Germany factoring agreement at
February 29, 2008.
|
|
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 term loan agreements in connection with the
Oehlbach acquisition. This amount also includes amounts due
under a call-put option with certain employees of Audiovox
Germany.
|
|
6.
|
Represents
contingent payments in connection with the Thomson Accessory, Oehlbach and
Incaar acquisitions (see Note 3 of the Consolidated Financial
Statements).
|
|
7.
|
Open
purchase obligations represent inventory commitments. These
obligations are not recorded in the consolidated financial statements
until commitments are fulfilled and such obligations are subject to change
based on negotiations with
manufacturers.
|
We regularly review our cash funding
requirements and attempt to meet those requirements through a combination of
cash on hand, cash provided by operations, available borrowings under bank lines
of credit and possible future public or private debt and/or equity
offerings. At times, we evaluate possible acquisitions of, or
investments in, businesses that are complementary to ours, which transactions
may require the use of cash. We believe that our cash, other liquid
assets, operating cash flows, credit arrangements, access to equity capital
markets, taken together, provides adequate resources to fund ongoing operating
expenditures. In the event that they do not, we may require additional funds in
the future to support our working capital requirements or for other 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.
Impact
of Inflation and Currency Fluctuation
To the extent that we expand our
operations into Europe, Canada, Latin America and the Pacific Rim, the effects
of inflation and currency fluctuations could impact our financial condition and
results of operations. While the prices we pay for products purchased
from our suppliers are principally denominated in United States dollars, price
negotiations depend in part on the foreign currency of foreign manufacturers, as
well as market, trade and political factors.
Seasonality
We typically experience seasonality in
our operations. We generally sell a substantial amount of our products during
September, October and November due to increased promotional and advertising
activities during the holiday season. Our business is also
significantly impacted by the holiday season and electronic trade shows in
December and January.
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. This capital lease was refinanced in
December 2006 and the lease expires on November 30, 2026. 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 which expires on November
30, 2016. Total lease payments required under all related party
leases for the five-year period ending February 28, 2012 are
$6,089.
36
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157
defines fair value, establishes guidelines for measuring fair value and expands
disclosures regarding fair value measurement. SFAS No. 157 does not
require any new fair value measurements, but rather eliminates inconsistencies
in guidance found in other accounting pronouncements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2008, as it was amended
by FASB Staff Position No. 157-b, Effective Date of FASB Statement No.
157. The transition adjustment of the difference between the carrying
amounts and the fair values of those financial instruments should be recognized
as a cumulative effect adjustment to retained earnings as of the beginning of
the year of adoption. The Company is currently evaluating the impact of SFAS No.
157, but does not expect the adoption of this pronouncement to have a material
impact on the Company’s financial position or results of
operations.
In
February 2007, the FASB released SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”) to provide
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS No. 159 is to reduce both the
complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities
differently. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007 with early adoption permitted. The Company is
currently evaluating the impact of SFAS No. 159, but does not expect the
adoption of this pronouncement to have a material impact on the Company’s
financial position or results of operations.
On December 4, 2007, the Financial
Accounting Standards Board (“FASB”) issued Statement No. 141(R), Business Combinations
(“Statement No. 141(R)”) and Statement No. 160, Accounting and Reporting of
Noncontrolling Interests in Consolidated Financial Statements, an amendment of
ARB No. 51 (“Statement No. 160”). These new standards will significantly
change the financial accounting and reporting of business combination
transactions and noncontrolling (or minority) interests in consolidated
financial statements. Issuance of these standards is also noteworthy in that
they represent the culmination of the first major collaborative convergence
project between the International Accounting Standards Board and the FASB.
Statement No. 141(R) is required to be adopted concurrently with Statement No.
160 and is effective for business combination transactions for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Early adoption is prohibited.
Application of Statement No. 141(R) and Statement No. 160 is required to be
adopted prospectively, except for certain provisions of Statement No. 160, which
are required to be adopted retrospectively. Business combination transactions
accounted for before adoption of Statement No. 141(R) should be accounted for in
accordance with Statement No. 141 and that accounting previously completed under
Statement No. 141 should not be modified as of or after the date of adoption of
Statement No. 141(R). The Company is currently evaluating the impact of
Statement No. 141(R) and Statement No. 160, but does not expect the adoption of
these pronouncements to have a material impact on the Company’s financial
position or results of operations.
The market risk inherent in our
market instruments and positions is the potential loss arising from adverse
changes in marketable equity security prices, interest rates and foreign
currency exchange rates.
Marketable
Securities
Marketable securities at February
29, 2008, which are recorded at fair value of $15,033, include an unrealized
gain of $377 and have exposure to price fluctuations. This risk is estimated as
the potential loss in fair value resulting from a hypothetical 10% adverse
change in prices quoted by stock exchanges and amounts to $1,503 as of February
29, 2008. Actual results may differ.
Interest
Rate Risk
Our earnings and cash flows are
subject to fluctuations due to changes in interest rates on investment of
available cash balances in money market funds and investment grade corporate and
U.S. government securities. Under our
current policies, we do not use interest rate derivative instruments to manage
exposure to interest rate changes. In addition, our bank loans expose us to
changes in short-term interest rates since interest rates on the underlying
obligations are either variable or fixed.
37
Foreign
Exchange Risk
We are subject to risk from changes
in foreign exchange rates for our subsidiaries and marketable securities that
use a foreign currency as their functional currency and are translated into U.S.
dollars. These changes result in cumulative translation adjustments, which are
included in accumulated other comprehensive income (loss). At
February 29, 2008, we had translation exposure to various foreign currencies
with the most significant being the Euro, Thailand Baht, Malaysian Ringgit, Hong
Kong Dollar and Canadian Dollar. The potential loss resulting from a
hypothetical 10% adverse change in quoted foreign currency exchange rates, as of
February 29, 2008 amounts to $3,385. Actual results may
differ.
The information required by this item
begins on page F-1 of this Annual Report on Form 10-K and is incorporated herein
by reference.
Not
Applicable
Evaluation
of Disclosure Controls and Procedures
Audiovox
Corporation and subsidiaries (the “Company”) maintains disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits under the Securities and
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in accordance with the SEC’s rules and regulations, and that
such information is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required financial
disclosures.
As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to the Securities and Exchange Act Rule 13a-15. Based upon
this evaluation as of February 29, 2008, the Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures are effective and adequately designed.
Management's
Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting; as such term is defined in the
Securities and Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
|
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
38
Management
evaluated the effectiveness of the Company’s internal control over financial
reporting using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Under the supervision and with the participation of the Company’s
management, including the Chief Executive Officer and Chief Financial Officer,
the Company conducted an evaluation of the effectiveness of its internal control
over financial reporting as of February 29, 2008. Based on that evaluation,
management concluded that the Company's internal control over financial
reporting was effective as of February 29, 2008 based on the COSO
criteria.
The
certifications of the Company’s Chief Executive Officer and Chief Financial
Officer included in Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K
includes, in paragraph 4 of such certifications, information concerning the
Company’s disclosure controls and procedures and internal control over financial
reporting. Such certifications should be read in conjunction with the
information contained in this Item 9A. Controls and Procedures, for a more
complete understanding of the matters covered by such
certifications.
The
effectiveness of the Company’s internal control over financial reporting as of
February 29, 2008, has been audited by Grant Thornton LLP, an independent
registered public accounting firm who also audited the Company’s consolidated
financial statements. Grant Thornton LLP’s attestation report on the
effectiveness of the Company’ s internal control over financial reporting is
included below.
39
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Audiovox
Corporation
We have
audited Audiovox Corporation (a Delaware corporation) and subsidiaries’ (the
“Company”) internal control over financial reporting as of February 29, 2008,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Audiovox Corporation and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of February 29,
2008, based on criteria established in Internal Control – Integrated Framework
issued by COSO.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Audiovox
Corporation and subsidiaries as of February 29, 2008 and February 28, 2007, and
the related consolidated statements of operations, stockholders’ equity and
comprehensive income (loss), and cash flows for the years then ended, three
months ended February 28, 2006 and the year ended November 30, 2005, and our
report dated May 14, 2008 expressed an unqualified opinion thereon.
GRANT
THORNTON LLP
Melville,
New York
May 14,
2008
40
Changes
in Internal Controls Over Financial Reporting
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 most recently completed fiscal
fourth quarter ended February 29, 2008 covered by this report, that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
Not
Applicable
The information required by Item 10
(Directors, Executive Officers and Corporate Governance), Item 11 (Executive
Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters), Item 13 (Certain Relationships and
Related Transactions, and Director Independence) and Item 14 (Principal
Accounting Fees and Services) of Form 10-K, will be included in our Proxy
Statement for the Annual meeting of Stockholders, which will be filed on or
before June 13, 2008, and such information is incorporated herein by
reference.
|
(1
and 2)
|
Financial
Statements and Financial Statement Schedules. See Index to
Consolidated Financial Statements attached
hereto.
|
|
|
(3)
|
Exhibits. The
following is a list of
exhibits:
|
41
|
Exhibit
|
||
|
Number
|
Description
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of the Company as filed with the
Delaware Secretary of State on April 17, 2000 (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended November
30, 2000).
|
|
|
3.2
|
By-laws
of the Company (incorporated by reference to the Company's Registration
Statement on Form S-1; No. 33-10726, filed May 4,
1987).
|
|
|
3.2a
|
Amendment
to the Bylaws of the Company (incorporated by reference to the Company's
Form 8-K filed via EDGAR on July 3, 2007).
|
|
|
10.1
|
Purchase
Agreement made and entered into as of December 20, 2006 by and between
Thomson and Audiovox Corporation (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended February 28,
2007).
|
|
|
10.2
|
Audiovox
Corporation 2006 Stock Compensation Plan (incorporated by reference to the
Company's Form S-8 filed via EDGAR on October 13, 2006)
|
|
|
10.3
|
Employment
Agreement made effective as of the 1st day of March, 2007 by and between
the Company and Patrick M. Lavelle (incorporated by reference to the
Company's Form 8-K filed via EDGAR on June 15, 2007)
|
|
|
10.4
|
Form
of Transition Services Agreement (incorporated by reference to the
Company's Form 8-K filed via EDGAR August 10, 2004).
|
|
|
10.5
|
Form
of Trademark License Agreement (incorporated by reference to the Company's
Form 8-K filed via EDGAR August 10, 2004).
|
|
|
21
|
Subsidiaries
of the Registrant (filed herewith).
|
|
|
23
|
Consent
of Grant Thornton LLP (filed herewith).
|
|
|
31.1
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14(a) and rule
15d-14(a) of the Securities Exchange Act of 1934 (filed
herewith).
|
|
|
31.2
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14(a) and rule
15d-14(a) of the Securities Exchange Act of 1934 (filed
herewith).
|
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith).
|
|
|
32.2
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith).
|
|
|
99.1
|
Consolidated
Financial Report of Audiovox Specialized Applications LLC (ASA) as of
November 30, 2007 and 2006 and for the Years Ended November 30, 2007, 2006
and 2005 (filed herewith).
|
|