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).
|
|
|
99.2
|
Consent
of McGladrey & Pullen, LLP (filed
herewith).
|
(d) All
other schedules are omitted because the required information is shown in the
financial statements or notes thereto or because they are not
applicable.
42
SIGNATURES
Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AUDIOVOX
CORPORATION
May 14,
2008 BY: /s/ Patrick M.
Lavelle
Patrick M.
Lavelle,
President and Chief
Executive Officer
43
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/ Patrick
M. Lavelle
Patrick
M. Lavelle
|
President;
Chief Executive Officer
(Principal
Executive Officer) and Director
|
May
14, 2008
|
|
/s/
Charles M. Stoehr
Charles
M. Stoehr
|
Senior
Vice President,
Chief
Financial Officer (Principal
Financial
and Accounting Officer) and Director
|
May
14, 2008
|
|
/s/ John
J. Shalam
John
J. Shalam
|
Chairman
of the Board of Directors
|
May
14, 2008
|
|
/s/ Philip
Christopher
Philip
Christopher
|
Director
|
May
14, 2008
|
|
/s/ Paul
C. Kreuch, Jr.
Paul
C. Kreuch, Jr.
|
Director
|
May
14, 2008
|
|
/s/ Dennis
McManus
Dennis
McManus
|
Director
|
May
14, 2008
|
|
/s/ Peter
A. Lesser
Peter
A. Lesser
|
Director
|
May
14, 2008
|
44
AUDIOVOX
CORPORATION
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Financial
Statements:
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets as of February 29, 2008 and February 28,
2007
|
F-3
|
|
Consolidated
Statements of Operations for the years ended February 29, 2008, February
28, 2007, the three months ended February 28, 2006 and the year ended
November 30, 2005
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the
years ended February 29, 2008,
February 28, 2007, the three months
ended February 28, 2006 and the year ended November 30,
2005
|
F-5
|
|
Consolidated
Statements of Cash Flows for the years ended February 29, 2008, February 28,
2007, the three months ended February
28, 2006 and the year ended November 30, 2005
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
|
Financial
Statement Schedule:
|
|
|
Schedule
II - Valuation and Qualifying Accounts
|
S-1
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Audiovox
Corporation
We have
audited the accompanying consolidated balance sheets of Audiovox Corporation (a
Delaware corporation) and subsidiaries (the “Company”) 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, the three months ended February 28, 2006 and the year ended
November 30, 2005. Our audits of the basic financial statements included the
financial statement schedule listed in the index appearing under Item
15. These financial statements and financial statement schedule are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.
We
conducted our audits 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 the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Audiovox Corporation and
subsidiaries as of February 29, 2008 and February 28, 2007, and the results of
their operations and their cash flows for the years then ended, the three months
ended February 28, 2006 and the year ended November 30, 2005 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
As
discussed in Note 1 of the notes to consolidated financial statements, on
December 1, 2005 the Company adopted Financial Accounting Standards Board
Statement No. 123(R), “Share-Based Payment”, and on March 1, 2007 the Company
adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,
Accounting for Income Taxes”.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s 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) and our report dated May 14,
2008 expressed an unqualified opinion thereon.
GRANT
THORNTON LLP
Melville,
New York
May 14,
2008
F-2
Audiovox
Corporation and Subsidiaries
Consolidated
Balance Sheets
February
29, 2008 and February 28, 2007
(In
thousands, except share data)
|
2008
|
2007
|
|||||||
|
Assets
|
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 39,341 | $ | 15,473 | ||||
|
Short-term
investments
|
- | 140,872 | ||||||
|
Accounts
receivable, net
|
112,688 | 86,003 | ||||||
|
Inventory
|
155,748 | 104,972 | ||||||
|
Receivables
from vendors
|
29,358 | 13,935 | ||||||
|
Prepaid
expenses and other current assets
|
13,780 | 11,427 | ||||||
|
Income
taxes receivable
|
- | 3,518 | ||||||
|
Deferred
income taxes
|
7,135 | 2,492 | ||||||
|
Total
current assets
|
358,050 | 378,692 | ||||||
|
Investment
securities
|
15,033 | 13,179 | ||||||
|
Equity
investments
|
13,222 | 11,353 | ||||||
|
Property,
plant and equipment, net
|
21,550 | 18,019 | ||||||
|
Goodwill
|
23,427 | 17,514 | ||||||
|
Intangible
assets
|
101,008 | 57,874 | ||||||
|
Deferred
income taxes
|
- | 1,858 | ||||||
|
Other
assets
|
746 | 631 | ||||||
|
Total
assets
|
$ | 533,036 | $ | 499,120 | ||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 24,433 | $ | 34,344 | ||||
|
Accrued
expenses and other current liabilities
|
38,575 | 26,564 | ||||||
|
Income
taxes payable
|
5,335 | - | ||||||
|
Accrued
sales incentives
|
10,768 | 7,410 | ||||||
|
Bank
obligations
|
3,070 | 2,890 | ||||||
|
Current
portion of long-term debt
|
82 | 1,524 | ||||||
|
Total
current liabilities
|
82,263 | 72,732 | ||||||
|
Long-term
debt
|
1,621 | 5,430 | ||||||
|
Capital
lease obligation
|
5,607 | 5,676 | ||||||
|
Deferred
compensation
|
4,406 | 7,573 | ||||||
|
Other
tax liabilities
|
4,566 | 3,347 | ||||||
|
Deferred
tax liabilities
|
6,057 | - | ||||||
|
Other
long term liabilities (Note 3)
|
5,003 | - | ||||||
|
Total
liabilities
|
109,523 | 94,758 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Series
preferred stock, $.01 par value; 1,500,000 shares authorized, no shares
issued or outstanding
|
- | - | ||||||
|
Common
stock:
|
||||||||
|
Class
A, $.01 par value; 60,000,000 shares authorized, 22,414,217 and
22,005,346 shares issued, 20,593,660 and
20,312,299 shares
outstanding
at February 29, 2008 and February 28 2007,
respectively
|
224 | 220 | ||||||
|
Class
B convertible, $.01 par value; 10,000,000 shares authorized, 2,260,954
shares issued and outstanding
|
22 | 22 | ||||||
|
Paid-in
capital
|
274,282 | 271,056 | ||||||
|
Retained
earnings
|
162,542 | 151,363 | ||||||
|
Accumulated
other comprehensive income (loss)
|
4,847 | (1,320 | ) | |||||
|
Treasury
stock, at cost, 1,820,552 and 1,693,047 shares of Class A common stock at
February 29, 2008 and February
28, 2007, respectively
|
(18,404 | ) | (16,979 | ) | ||||
|
Total
stockholders' equity
|
423,513 | 404,362 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 533,036 | $ | 499,120 | ||||
See
accompanying notes to consolidated financial statements.
F-3
Audiovox
Corporation and Subsidiaries
Years
Ended February 29, 2008, February 28, 2007,
the
Three Months Ended February 28, 2006 and the Year Ended November 30,
2005
(In
thousands, except share and per share data)
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
Net
sales
|
$ | 591,355 | $ | 456,690 | $ | 103,050 | $ | 539,716 | ||||||||
|
Cost
of sales
|
480,027 | 377,371 | 87,400 | 478,877 | ||||||||||||
|
Gross
profit
|
111,328 | 79,319 | 15,650 | 60,839 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling
|
35,703 | 28,220 | 6,824 | 31,799 | ||||||||||||
|
General
and administrative
|
61,220 | 48,920 | 10,517 | 50,540 | ||||||||||||
|
Engineering
and technical support
|
9,983 | 7,256 | 1,468 | 6,190 | ||||||||||||
|
Total
operating expenses
|
106,906 | 84,396 | 18,809 | 88,529 | ||||||||||||
|
Operating
income (loss)
|
4,422 | (5,077 | ) | (3,159 | ) | (27,690 | ) | |||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Interest
and bank charges
|
(2,127 | ) | (1,955 | ) | (560 | ) | (2,478 | ) | ||||||||
|
Equity
in income of equity investees
|
3,590 | 2,937 | 474 | 2,342 | ||||||||||||
|
Other,
net (Note 1(q))
|
4,709 | 6,253 | 1,769 | 9,730 | ||||||||||||
|
Total
other income, net
|
6,172 | 7,235 | 1,683 | 9,594 | ||||||||||||
|
Income
(loss) from continuing operations before income taxes
|
10,594 | 2,158 | (1,476 | ) | (18,096 | ) | ||||||||||
|
Income
tax (expense) benefit
|
(3.848 | ) | 1,534 | 1,843 | 11,409 | |||||||||||
|
Net
income (loss) from continuing operations
|
6,746 | 3,692 | 367 | (6,687 | ) | |||||||||||
|
Net
income (loss) from discontinued operations, net of tax (Note
2)
|
1,719 | (756 | ) | (184 | ) | (2,904 | ) | |||||||||
|
Net
income (loss)
|
$ | 8,465 | $ | 2,936 | $ | 183 | $ | (9,591 | ) | |||||||
|
Net
income (loss) per common share (basic):
|
||||||||||||||||
|
From
continuing operations
|
$ | 0.29 | $ | 0.16 | $ | 0.02 | $ | (0.30 | ) | |||||||
|
From
discontinued operations
|
0.08 | (0.03 | ) | (0.01 | ) | (0.13 | ) | |||||||||
|
Net
income (loss) per common share (basic)
|
$ | 0.37 | $ | 0.13 | $ | 0.01 | $ | (0.43 | ) | |||||||
|
Net
income (loss) per common share (diluted):
|
||||||||||||||||
|
From
continuing operations
|
$ | 0.29 | $ | 0.16 | $ | 0.02 | $ | (0.30 | ) | |||||||
|
From
discontinued operations
|
0.08 | (0.03 | ) | (0.01 | ) | (0.13 | ) | |||||||||
|
Net
income (loss) per common share (diluted)
|
$ | 0.37 | $ | 0.13 | $ | 0.01 | $ | (0.43 | ) | |||||||
|
Weighted-average
common shares outstanding (basic)
|
22,853,482 | 22,366,413 | 22,526,497 | 22,278,542 | ||||||||||||
|
Weighted-average
common shares outstanding (diluted)
|
22,876,112 | 22,557,272 | 22,766,593 | 22,278,542 | ||||||||||||
F-4
Audiovox
Corporation and Subsidiaries
Consolidated
Statements of Stockholders' Equity and Comprehensive Income
(Loss)
Years
Ended February 29, 2008, February 28, 2007,
the
Three Months Ended February 28, 2006 and the Year Ended November 30,
2005
(In
thousands, except share data)
|
Class
A
|
Accumulated
|
Total
|
||||||||||||||||||||||||||
|
and
Class B
|
other
|
Stock-
|
||||||||||||||||||||||||||
|
Preferred
|
Common
|
Paid-in
|
Retained
|
comprehensive
|
Treasury
|
holders'
|
||||||||||||||||||||||
|
Stock
|
Stock
|
Capital
|
Earnings
|
income
(loss)
|
stock
|
equity
|
||||||||||||||||||||||
|
Balances
at November 30, 2004
|
$ | 2,500 | $ | 231 | $ | 253,959 | $ | 157,835 | $ | (1,841 | ) | $ | (8,497 | ) | $ | 404,187 | ||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | (9,591 | ) | - | - | (9,591 | ) | |||||||||||||||||||
|
Foreign
currency translation
adjustment,
net of
reclassification adjustment
(see disclosure
below)
|
- | - | - | - | (157 | ) | - | (157 | ) | |||||||||||||||||||
|
Unrealized
loss on marketable
securities,
net
of tax effect of $190
|
- | - | - | - | (310 | ) | - | (310 | ) | |||||||||||||||||||
|
Other
comprehensive loss
|
- | - | - | - | - | - | (467 | ) | ||||||||||||||||||||
|
Comprehensive
loss
|
- | - | - | - | - | - | (10,058 | ) | ||||||||||||||||||||
|
Exercise
of stock options into
660,500
shares of common
stock
|
- | 6 | 7,686 | - | - | - | 7,692 | |||||||||||||||||||||
|
Tax
benefit of stock options
exercised
|
- | - | 1,357 | - | - | - | 1,357 | |||||||||||||||||||||
|
Purchase
of 150,000 shares of
treasury
stock
|
- | - | - | - | - | (2,037 | ) | (2,037 | ) | |||||||||||||||||||
|
Issuance
of 1,205 shares of
treasury stock
|
- | - | 6 | - | - | 10 | 16 | |||||||||||||||||||||
|
Balances
at November 30, 2005
|
2,500 | 237 | 263,008 | 148,244 | (2,308 | ) | (10,524 | ) | 401,157 | |||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | 183 | - | - | 183 | |||||||||||||||||||||
|
Foreign
currency translation
adjustment, net
|
- | - | - | - | 263 | - | 263 | |||||||||||||||||||||
|
Unrealized
gain on marketable
securities,
net
of tax effect of $881
|
- | - | - | - | 1,437 | - | 1,437 | |||||||||||||||||||||
|
Other
comprehensive income
|
- | - | - | - | - | - | 1,700 | |||||||||||||||||||||
|
Comprehensive
income
|
- | - | - | - | - | - | 1,883 | |||||||||||||||||||||
|
Purchase
of 168,800 shares of
treasury
stock
|
- | - | - | - | - | (2,308 | ) | (2,308 | ) | |||||||||||||||||||
|
Balances
at February 28, 2006
|
2,500 | 237 | 263,008 | 148,427 | (608 | ) | (12,832 | ) | 400,732 | |||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | 2,936 | - | - | 2,936 | |||||||||||||||||||||
|
Foreign
currency translation
adjustment,
net of
reclassification adjustment
(see disclosure
below)
|
- | - | - | - | 1,180 | - | 1,180 | |||||||||||||||||||||
|
Unrealized
loss on marketable
securities,
net of
tax effect of $1,210, and
reclassification adjustment
(see disclosure below)
|
- | - | - | - | (1,892 | ) | - | (1,892 | ) | |||||||||||||||||||
|
Other
comprehensive loss
|
- | - | - | - | - | - | (712 | ) | ||||||||||||||||||||
|
Comprehensive
income
|
- | - | - | - | - | - | 2,224 | |||||||||||||||||||||
|
Exercise
of stock options into
485,000
shares of common
stock
|
- | 5 | 4,223 | - | - | - | 4,228 | |||||||||||||||||||||
|
Purchase
of 305,100 shares of
treasury
stock
|
- | - | - | - | - | (4,155 | ) | (4,155 | ) | |||||||||||||||||||
|
Tax
benefit of stock options
exercised
|
- | - | 896 | - | - | - | 896 | |||||||||||||||||||||
|
Stock
based compensation expense
|
- | - | 432 | - | - | - | 432 | |||||||||||||||||||||
|
Repurchase
of preferred stock
|
(2,500 | ) | - | 2,495 | - | - | - | (5 | ) | |||||||||||||||||||
|
Issuance
of 605 shares of treasury
stock
|
- | - | 2 | - | - | 8 | 10 | |||||||||||||||||||||
|
Balances
at February 28, 2007
|
- | 242 | 271,056 | 151,363 | (1,320 | ) | (16,979 | ) | 404,362 | |||||||||||||||||||
F-5
Audiovox
Corporation and Subsidiaries
Consolidated
Statements of Stockholders' Equity and Comprehensive Income (Loss), continued
Years
Ended February 29, 2008, February 28, 2007,
the
Three Months Ended February 28, 2006 and the Year Ended November 30,
2005
(In
thousands, except share data)
|
Class
A
|
Accumulated
|
Total
|
||||||||||||||||||||||||||
|
and
Class B
|
other
|
Stock-
|
||||||||||||||||||||||||||
|
Preferred
|
Common
|
Paid-in
|
Retained
|
comprehensive
|
Treasury
|
holders'
|
||||||||||||||||||||||
|
Stock
|
Stock
|
Capital
|
Earnings
|
income
(loss)
|
stock
|
equity
|
||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | 8,465 | - | - | 8,465 | |||||||||||||||||||||
|
Foreign
currency translation adjustment,
net of reclassification adjustment
(see disclosure below)
|
- | - | - | - | 4,229 | - | 4,229 | |||||||||||||||||||||
|
Unrealized
gain on marketable securities,
net of tax effect of
$1,239 and reclassification adjustment (see disclosure
below)
|
- | - | - | - | 1,938 | - | 1,938 | |||||||||||||||||||||
|
Other
comprehensive income
|
- | - | - | - | - | - | 6,167 | |||||||||||||||||||||
|
Comprehensive
income
|
- | - | - | - | - | - | 14,632 | |||||||||||||||||||||
|
Exercise
of stock options into 131,464 shares
of common stock
|
- | 4 | 3,144 | - | - | - | 3,148 | |||||||||||||||||||||
|
Reversal
of tax benefits from
stock options exercised
|
- | - | (805 | ) | - | - | - | (805 | ) | |||||||||||||||||||
|
Stock-based
compensation expense
|
- | - | 886 | - | - | - | 886 | |||||||||||||||||||||
|
Cumulative
effect of a change in accounting
principles (FIN No. 48)
|
- | - | - | 2,714 | - | - | 2,714 | |||||||||||||||||||||
|
Purchase
of 128,100 shares of treasury
stock
|
- | - | - | - | - | (1,431 | ) | (1,431 | ) | |||||||||||||||||||
|
Issuance
of 585 shares of treasury
stock
|
- | - | 1 | - | - | 6 | 7 | |||||||||||||||||||||
|
Balances
at February 29, 2008
|
$ | 0 | $ | 246 | $ | 274,282 | $ | 162,542 | $ | 4,847 | $ | (18,404 | ) | $ | 423,513 | |||||||||||||
| Year | Year |
Three
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Months
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
Disclosure
of reclassification amount:
|
||||||||||||||||
|
Unrealized
foreign currency translation gain (loss)
|
$ | 3,886 | $ | 1,119 | $ | 263 | $ | (1,522 | ) | |||||||
|
Less:
reclassification adjustments for loss included in net income
(loss)
|
(343 | ) | (61 | ) | - | (1,365 | ) | |||||||||
|
Net
unrealized foreign currency translation gain (loss)
|
$ | 4,229 | $ | 1,180 | $ | 263 | $ | (157 | ) | |||||||
|
Year
Ended
|
Year
Ended
|
|||||||
|
February
29,
|
February
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Disclosure
of reclassification amount:
|
||||||||
|
Unrealized
gain (loss) on marketable securities
|
$ | 3,814 | $ | (2,009 | ) | |||
|
Less:
reclassification adjustments for gain (loss) included in net
income
|
1,876 | (117 | ) | |||||
|
Net
unrealized gain (loss) on marketable securities, net of
tax
|
$ | 1,938 | $ | (1,892 | ) | |||
See accompanying notes to
consolidated financial statements.
F-6
Consolidated
Statements of Cash Flows
Years
Ended February 29, 2008, February 28, 2007,
the
Three Months Ended February 28, 2006 and the Year Ended November 30,
2005
(Dollars in
thousands)
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
|
||||||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||||||
|
Net
income (loss)
|
$ | 8,465 | $ | 2,936 | $ | 183 | $ | (9,591 | ) | |||||||
|
Net (income)
loss from discontinued operations
|
(1,719 | ) | 756 | 184 | 2,904 | |||||||||||
|
Net
income (loss) from continuing operations
|
6,746 | 3,692 | 367 | (6,687 | ) | |||||||||||
|
Adjustments
to reconcile net income (loss) to net cash (used in) provided by
continuing
operating activities:
|
||||||||||||||||
|
Depreciation
and amortization
|
5,750 | 3,994 | 951 | 3,635 | ||||||||||||
|
Bad
debt expense (recovery)
|
297 | (23 | ) | (595 | ) | 1,105 | ||||||||||
|
Equity
in income of equity investees
|
(3,590 | ) | (2,937 | ) | (474 | ) | (2,342 | ) | ||||||||
|
Other-than-temporary
decline in market value of investment
|
- | - | - | 1,758 | ||||||||||||
|
Deferred
income tax (benefit) expense, net
|
(1,198 | ) | 606 | 2,959 | (3,104 | ) | ||||||||||
|
Loss
(gain) on disposal of property, plant and equipment
|
19 | 7 | (155 | ) | 3 | |||||||||||
|
Tax
benefit on stock options exercised
|
805 | (896 | ) | - | 1,357 | |||||||||||
|
Non-cash
compensation (benefit) expense adjustment
|
(790 | ) | 353 | (115 | ) | 408 | ||||||||||
|
Unrealized
gain on trading security
|
- | - | - | (4,971 | ) | |||||||||||
|
Non-cash
stock based compensation expense
|
886 | 432 | - | - | ||||||||||||
|
Realized
(gain) loss on sale of investment
|
(1,533 | ) | 178 | - | - | |||||||||||
|
Changes
in operating assets and liabilities (net of assets and liabilities
acquired):
|
||||||||||||||||
|
Accounts
receivable
|
(17,925 | ) | 4,066 | 40,560 | (2,378 | ) | ||||||||||
|
Inventory
|
(19,210 | ) | 23,589 | 33,091 | 17,805 | |||||||||||
|
Receivables
from vendors
|
(15,275 | ) | (4,079 | ) | (1,752 | ) | (1,064 | ) | ||||||||
|
Prepaid
expenses and other
|
(3,560 | ) | (1,147 | ) | 945 | (2,359 | ) | |||||||||
|
Investment
securities-trading
|
3,167 | (1,026 | ) | (395 | ) | (1,279 | ) | |||||||||
|
Accounts
payable, accrued expenses,accrued sales incentives and other
current liabilities
|
(23,387 | ) | 7,466 | (18,314 | ) | (19,954 | ) | |||||||||
|
Income
taxes payable
|
4,107 | 9,145 | (1,775 | ) | (41,245 | ) | ||||||||||
|
Change
in assets and liabilities of discontinued operations
|
- | - | - | 17,227 | ||||||||||||
|
Net
cash (used in) provided by operating activities
|
(64,691 | ) | 43,420 | 55,298 | (42,085 | ) | ||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||
|
Purchases
of property, plant and equipment
|
(7,326 | ) | (2,711 | ) | (479 | ) | (2,450 | ) | ||||||||
|
Proceeds
from sale of property, plant and equipment
|
94 | 50 | 677 | 18 | ||||||||||||
|
Proceeds
from distribution from an equity investee
|
1,720 | 3,419 | 713 | 1,147 | ||||||||||||
|
Proceeds
from a liquidating distribution from an available-for-sale
investment
|
646 | - | - | - | ||||||||||||
|
Purchase
of long-term investment
|
- | (1,000 | ) | - | - | |||||||||||
|
Net
proceeds from sale of Cellular business
|
- | - | - | 16,736 | ||||||||||||
|
Escrow
payment for minority interest
|
- | - | - | (1,702 | ) | |||||||||||
|
Purchase
of short-term investments
|
(33,750 | ) | (158,230 | ) | (52,000 | ) | (143,075 | ) | ||||||||
|
Sale
of short-term investments
|
169,855 | 178,175 | - | 158,450 | ||||||||||||
|
Sale
of long-term investment
|
4,561 | 360 | - | - | ||||||||||||
|
Purchase
of patents
|
(70 | ) | (475 | ) | - | (150 | ) | |||||||||
|
(Purchase
of) proceeds from acquired businesses, less cash acquired
|
(42,265 | ) | (60,485 | ) | 71 | (15,345 | ) | |||||||||
|
Net
cash provided by (used in) investing activities
|
93,465 | (40,897 | ) | (51,018 | ) | 13,629 | ||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||
|
Borrowings
from bank obligations
|
- | - | 654 | 1,100 | ||||||||||||
|
Repayments
on bank obligations
|
(1,758 | ) | (2,853 | ) | (114 | ) | (5,350 | ) | ||||||||
|
Principal
payments on capital lease obligation
|
(69 | ) | (89 | ) | (37 | ) | (69 | ) | ||||||||
|
Proceeds
from exercise of stock options and warrants
|
3,148 | 4,228 | - | 7,692 | ||||||||||||
|
Repurchase
of Class A common stock
|
(1,425 | ) | (4,155 | ) | (2,308 | ) | (2,037 | ) | ||||||||
|
Repurchase
of preferred stock
|
- | (5 | ) | - | - | |||||||||||
|
Principal
payments on debt
|
(4,332 | ) | (1,471 | ) | (383 | ) | (1,831 | ) | ||||||||
|
Tax
benefit on stock options exercised
|
(805 | ) | 896 | - | - | |||||||||||
|
Cash
used by discontinued operations
|
- | - | - | (60 | ) | |||||||||||
|
Net
cash used in 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 | ) | ||||||||||
|
Cash
and cash equivalents at beginning of period
|
15,473 | 16,280 | 14,164 | 43,409 | ||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 39,341 | $ | 15,473 | $ | 16,280 | $ | 14,164 | ||||||||
|
Supplemental
Cash Flow Information:
|
||||||||||||||||
|
Cash
paid during the period for:
|
||||||||||||||||
|
Interest,
excluding bank charges
|
$ | 1,795 | $ | 1,739 | $ | 495 | $ | 1,699 | ||||||||
|
Income
taxes (net of refunds)
|
$ | 2,316 | $ | (10,226 | ) | $ | (2,116 | ) | $ | 31,639 | ||||||
See accompanying notes to
consolidated financial statements.
F-7
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
February
29, 2008
(Dollars
in thousands, except share and per share data)
a) Description
of Business and Accounting Principles
Audiovox
Corporation and subsidiaries (the “Company”) is a leading international
distributor and value added service provider in the mobile, consumer and
accessory electronics industries. The Company designs and markets a diverse line
of electronic products under the Audiovox® and other brand names throughout the
world. The Company has one reportable segment, the Electronics Group,
which is organized by product category. 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"). The Company completed the divestiture of
Audiovox Malaysia on November 7, 2005 (see Note
2). Unless specifically indicated otherwise, all amounts and
percentages presented in the notes below are exclusive of discontinued
operations.
In
February 2006, the Company changed its fiscal year end from November 30th to
February 28th. The
Company’s current fiscal year began March 1, 2007 and ended on February 29,
2008. This annual report on Form 10-K supplements the transition
report on Form 10-Q for the three month transition period ended February 28,
2006 and compares the financial position as of February 29, 2008 to February 28,
2007 and the results of operations for the years ended February 29, 2008,
February 28, 2007, the three months ended February 28, 2006 and the year ended
November 30, 2005.
The
financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of
America.
b) Principles
of Consolidation
The
consolidated financial statements include the financial statements of Audiovox
Corporation and its wholly-owned and majority-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Equity
investments in which the Company exercises significant influence but does not
control and is not the primary beneficiary, as defined in FIN No.
46(R), are accounted for using the equity method. The Company's
share of its equity method investees earnings or losses are included in other
income in the accompanying Consolidated Statements of Operations. The Company
eliminates its pro rata share of gross profit on sales to its equity method
investees for inventory on hand at the investee at the end of the year.
Investments in which the Company is not able to exercise significant influence
over the investee are accounted for under the cost method.
c) Use of
Estimates
The
preparation of these financial statements require the Company to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenue and
expenses. Such estimates include the allowance for doubtful accounts,
inventory valuation, recoverability of deferred tax assets, reserve for
uncertain tax positions, valuation of long-lived assets, accrued sales
incentives, warranty reserves, stock-based compensation
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements. Actual results could differ from
those estimates.
F-8
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
d) Cash and
Cash Equivalents
Cash and
cash equivalents consist of demand deposits with banks and highly liquid money
market funds with original maturities of three months or less when
purchased. Cash equivalents amounted to $35,400 and $14,017 at
February 29, 2008 and February 28, 2007, respectively. Cash amounts
held in foreign bank accounts amounted to $5,383 and $2,882 at February 29, 2008
and February 28, 2007, respectively.
e) Investment
Securities
The
Company classifies its investment securities in one of two categories: trading
or available-for-sale. Trading securities are bought and held principally for
the purpose of selling them in the near term. All other securities not included
in trading are classified as available-for-sale.
Trading
and available-for-sale securities are recorded at fair value. Unrealized holding
gains and losses on trading securities are included in earnings. Unrealized
holding gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a component of
accumulated other comprehensive income (loss) until realized. Realized gains and
losses from the sale of available-for-sale securities are determined on a
specific identification basis. Dividend and interest income are
recognized when earned.
The cost,
gross unrealized gains (losses) and aggregate fair value of investment
securities as of February 29, 2008 and February 28, 2007 are as
follows:
|
February
29, 2008
|
||||||||||||
|
Unrealized
|
Aggregate
|
|||||||||||
|
Holding
|
Fair
|
|||||||||||
|
Cost
|
Gain/(Loss)
|
Value
|
||||||||||
|
Long-term
investment securities*
|
$ | 4,550 | - | $ | 4,550 | |||||||
|
CellStar
Common Stock*
|
1 | 110 | 111 | |||||||||
|
Bliss-tel
Stock and Warrants* (see Note 13)
|
3,825 | 1,141 | 4,966 | |||||||||
|
Other
Investment*
|
1,000 | 1,000 | ||||||||||
|
Trading
Securities (see Note 10)
|
4,406 | 4,406 | ||||||||||
|
Long-term
investments
|
$ | 13,782 | $ | 1,251 | $ | 15,033 | ||||||
|
February
28, 2007
|
||||||||||||
|
Unrealized
|
Aggregate
|
|||||||||||
|
Holding
|
Fair
|
|||||||||||
|
Cost
|
Gain/(Loss)
|
Value
|
||||||||||
|
Short-term
investment securities*
|
$ | 140,872 | - | $ | 140,872 | |||||||
|
CellStar
Common Stock*
|
$ | 643 | $ | 168 | $ | 811 | ||||||
|
Bliss-tel
Stock and Warrants* (see Note 13)
|
6,510 | (2,755 | ) | 3,755 | ||||||||
|
Other
Investment*
|
1,040 | - | 1,040 | |||||||||
|
Trading
Securities
|
7,573 | - | 7,573 | |||||||||
|
Long-term
investments
|
$ | 15,766 | $ | (2,587 | ) | $ | 13,179 | |||||
*
Represents investments that are classified as available-for-sale
securities.
F-9
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
Long-term
investment securities consist of taxable auction rate notes which have long-term
maturity dates (October 2038) and are classified as available-for-sale at
February 29, 2008.
During
fiscal 2007, short-term investment securities consisted of tax-exempt auction
rate notes, which are available for sale one year or less when
purchased. The Company's overall goal for short-term investments is
to invest primarily in low risk, fixed income securities with the intention of
maintaining principal while generating a moderate return. In
accordance with the Company's investment policy, all long and short-term
investment securities are invested in "investment grade" rated securities and
all investments have an Aaa or better rating at February 29,
2008. Trading securities consist of mutual funds, which are held in
connection with the Company’s deferred compensation plan.
Deferred
tax (liabilities) assets of $(488) and $1,009 related to available-for-sale
securities were recorded at February 29, 2008 and February 28, 2007,
respectively, as a reduction to the unrealized holding gain (loss) included in
accumulated other comprehensive income (loss).
During
the year ended November 30, 2005, the Company recorded an-other-than temporary
impairment charge of $1,758 for its investment in CellStar common stock and such
charge has been included in other income (expense) on the accompanying
Consolidated Statement of Operations. The Company recorded this
charge as a result of the inability of the investment to regain its
marketability, stock listing and the unlikelihood that the cost of this
investment would be recovered due to the extended decline in stock
price. A decline in the market value of any available-for-sale
security below cost that is deemed other-than-temporary results in a reduction
in carrying amount to fair value. The impairment is charged to earnings and a
new cost basis for the security is established. The Company considers
numerous factors, on a case-by-case basis, in evaluating whether the decline in
market value of an available-for-sale security below cost is
other-than-temporary. Such factors include, but are not limited to, (i) the
length of time and the extent to which the market value has been less than cost;
(ii) the financial condition and the near-term prospects of the issuer of
the investment; and (iii) whether the Company's intent to retain the
investment for the period of time is sufficient to allow for any anticipated
recovery in market value.
f) Revenue Recognition
The
Company recognizes 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. The Company's
selling price to its customers is a fixed amount that is not subject to refund
or adjustment or contingent upon additional rebates. Any customer
acceptance provisions, which are related to product testing, are satisfied prior
to revenue recognition. There are no further obligations on the part of the
Company subsequent to revenue recognition except for product returns from the
Company's customers. The Company does accept product returns, if properly
requested, authorized, and approved by the Company. The Company records an
estimate of product returns by its customers and records the provision for the
estimated amount of such future returns at point of sale, based on historical
experience and any notification the Company receives of pending
returns.
The
Company includes all costs incurred for shipping and handling as cost of sales
and all amounts billed to customers as revenue.
F-10
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
g) Accounts
Receivable
The
majority of the Company's accounts receivable are due from companies in the
retail, mass merchant and OEM industries. Credit is extended based on an
evaluation of a customer's financial condition. Accounts receivable are
generally due within 30-60 days and are stated at amounts due from
customers, net of an allowance for doubtful accounts. Accounts outstanding
longer than the contracted payment terms are considered past due.
Accounts
receivable is comprised of the following:
|
February
29,
|
February
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Trade
accounts receivable and other
|
$ | 119,349 | $ | 91,330 | ||||
|
Less:
|
||||||||
|
Allowance
for doubtful accounts
|
6,386 | 5,062 | ||||||
|
Allowance
for cash discounts
|
275 | 265 | ||||||
| $ | 112,688 | $ | 86,003 | |||||
The
Company performs ongoing credit evaluations of its customers and adjusts credit
limits based upon payment history and the customer's current credit worthiness,
as determined by a review of their current credit information. The Company
continuously monitors collections and payments from its customers and maintains
a provision for estimated credit losses based upon historical experience and any
specific customer collection issues that have been identified. While such credit
losses have historically been within management's expectations and the
provisions established, the Company cannot guarantee it will continue to
experience the same credit loss rates that have been experienced in the past.
Since the Company's accounts receivable are concentrated in a relatively few
number of 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 the Company's accounts receivable and future operating
results.
h) Inventory
The
Company values its inventory (finished goods) 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. The Company regularly reviews inventory quantities on-hand and
records a provision for excess and obsolete inventory based primarily from
selling prices, indications from customers based upon current price negotiations
and purchase orders. The Company's 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. The Company recorded inventory write-downs of $4,925,
$2,977, $689, and $16,924 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.
As a
result of the Company’s: a) post holiday season review of inventory
and sales projections, b) review of products which were at the end of their
product life cycle at the completion of the fourth quarter and c) market
information obtained from industry competitors and customers regarding pricing
and product demand at the January 2006 Consumer Electronics trade show, the
Company decided to discontinue certain product lines resulting in a $9,972
inventory writedown in the fourth quarter of fiscal 2005.
In
addition, the Company recorded a $3,789 inventory writedown during the third
quarter of fiscal 2005 primarily for satellite radio plug and play products as a
result of sudden reduced pricing by a competitor.
F-11
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share
data)
The
Company's estimates of excess and obsolete inventory may prove to be inaccurate,
in which case the Company may have understated or overstated the provision
required for excess and obsolete inventory. Although the Company
makes every effort to ensure the accuracy of its forecasts of future product
demand, any significant unanticipated changes in demand, price or technological
developments could have a significant impact on the value of the Company's
inventory and reported operating results.
i) Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation. Property
under a capital lease is stated at the present value of minimum lease payments.
Major improvements are capitalized and minor replacements, maintenance and
repairs are charged to expense as incurred. Upon retirement or disposal of
assets, the cost and related accumulated depreciation are removed from the
consolidated balance sheets.
A summary
of property, plant and equipment, net, are as
follows:
|
February
29,
|
February
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Land
|
$ | 338 | $ | 338 | ||||
|
Buildings
|
6,667 | 5,806 | ||||||
|
Property
under capital lease
|
6,981 | 6,981 | ||||||
|
Furniture,
fixtures and displays
|
3,049 | 2,457 | ||||||
|
Machinery
and equipment
|
6,515 | 5,912 | ||||||
|
Construction-in-progress
|
26 | 48 | ||||||
|
Computer
hardware and software
|
20,134 | 15,146 | ||||||
|
Automobiles
|
1,274 | 977 | ||||||
|
Leasehold
improvements
|
5,898 | 5,136 | ||||||
| 50,882 | 42,801 | |||||||
|
Less
accumulated depreciation and amortization
|
29,332 | 24,782 | ||||||
| $ | 21,550 | $ | 18,019 | |||||
Depreciation
is calculated on the straight-line method over the estimated useful lives of the
assets as follows:
|
Buildings
|
20-30
years
|
|
|
Furniture,
fixtures and displays
|
5-10
years
|
|
|
Machinery
and equipment
|
5-10
years
|
|
|
Computer
hardware and software
|
3-5
years
|
|
|
Automobiles
|
3
years
|
Leasehold
improvements are amortized over the shorter of the lease term or estimated
useful life of the asset. Assets acquired under capital leases are amortized
over the term of the respective lease. Capitalized computer software
costs obtained for internal use are amortized on a straight-line
basis.
F-12
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share
data)
Depreciation
and amortization of property, plant and equipment amounted to $4,609, $3,599,
$893 and $3,399 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. Included in depreciation and amortization expense is amortization
of computer software costs of $812, $334, $65 and $179 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. Also included in
depreciation expense is $251 of depreciation related to property under a capital
lease for the year ended February 29, 2008, $240 for the years ended February
28, 2007 and November 30, 2005, and $60 for the three months ended February 28,
2006.
Accumulated
depreciation and amortization includes $2,389 and $2,138 related to property
under a capital lease at February 29, 2008 and February 28, 2007,
respectively. Computer software includes approximately $3,302 and
$1,240 of unamortized costs as of February 29, 2008 and February 28, 2007,
respectively, related to the acquisition and installation of management
information systems for internal use.
j) Goodwill
and Other Intangible Assets
Goodwill
and other intangible assets consist of the excess over the fair value of assets
acquired (goodwill) and other intangible assets (patents, contracts,
trademarks/tradenames and customer relationships).
Statement
of Financial Accounting Standards No. 142 “Goodwill and Other Intangible
Assets” (“SFAS No. 142”) requires that goodwill and intangible assets with
indefinite useful lives be tested for impairment at least annually or more
frequently if an event occurs or circumstances change that could more likely
than not reduce the fair value of a reporting unit below its carrying
amount. Equity method goodwill, which amounted to $4,602 at February
29, 2008 and February 28, 2007, is evaluated for impairment under Accounting
Principles Board No. 18, "The Equity Method of Accounting for
Investments in Common Stock", as amended. SFAS No. 142
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (“SFAS No. 144”).
For
intangible assets with indefinite lives, including goodwill, the Company
performed its annual impairment test, as of the end of the fiscal fourth
quarter, which indicated no impairment is required. The cost of other
intangible assets with definite lives are amortized on a straight-line basis
over their respective lives.
Goodwill
The
change in the carrying amount of goodwill is as follows:
|
February
29,
|
February
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Net
beginning balance
|
$ | 17,514 | $ | 16,067 | ||||
|
Technuity
purchase price allocation (see Note 3)
|
5,913 | - | ||||||
|
Purchase
of minority interest (see Note 16)
|
- | 1,447 | ||||||
|
Net
ending balance
|
$ | 23,427 | $ | 17,514 | ||||
F-13
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
Other Intangible
Assets
|
February
29, 2008
|
||||||||||||
|
Gross
|
Total
Net
|
|||||||||||
|
Carrying
|
Accumulated
|
Book
|
||||||||||
|
Value
|
Amortization
|
Value
|
||||||||||
|
Trademarks/Tradenames
not subject to amortization
|
$ | 86,368 | $ | - | $ | 86,368 | ||||||
|
Customer
relationships subject to amortization (5-15 years)
|
14,685 | 741 | 13,944 | |||||||||
|
Patents
subject to amortization (5-10 years)
|
695 | 385 | 310 | |||||||||
|
Contract
subject to amortization (5 years)
|
1,104 | 718 | 386 | |||||||||
|
Total
|
$ | 102,852 | $ | 1,844 | $ | 101,008 | ||||||
|
February
28, 2007
|
||||||||||||
|
Gross
|
Total
Net
|
|||||||||||
|
Carrying
|
Accumulated
|
Book
|
||||||||||
|
Value
|
Amortization
|
Value
|
||||||||||
|
Trademarks/Tradenames
not subject to amortization
|
$ | 56,835 |
$
|
- | $ | 56,835 | ||||||
|
Patents
subject to amortization
|
625 | 193 | 432 | |||||||||
|
Contract
subject to amortization (5 years)
|
1,104 | 497 | 607 | |||||||||
|
Total
|
$ | 58,564 | $ | 690 | $ | 57,874 | ||||||
During
the year ended February 29, 2008, the Company purchased $70 of patents subject
to amortization with an estimated useful life of eighty-nine
months. In addition, the Company acquired in November and December
2007, $27,435 of intangible assets in connection with two acquisitions, which
has been preliminarily allocated to trademarks not subject to
amortization and customer relationships subject to amortization (see
Note 3). The weighted-average amortization period for customer relationships as
of February 29, 2008 is approximately 11.5 years.
Amortization
expense for intangible assets amounted to $1,141, $395, $58 and $236 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. The estimated aggregate amortization expense for all
amortizable intangibles for each of the succeeding years ending February 28,
2013 is as follows:
|
Fiscal
Year
|
Amount
|
|||
|
2009
|
$ | 1,606 | ||
|
2010
|
1,477 | |||
|
2011
|
1,278 | |||
|
2012
|
1,278 | |||
|
2013
|
1,239 | |||
| $ | 6,878 | |||
k) Sales
Incentives
The
Company offers sales incentives to its customers in the form of
(1) co-operative advertising allowances; (2) market development funds;
(3) volume incentive rebates and (4) other trade allowances. The
Company accounts for sales incentives in accordance with Emerging Issues Task
Force 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 the Company's 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 cash payout. All costs associated with sales incentives
are classified as a reduction of net sales. The following is a summary of the
various sales incentive programs:
Co-operative
advertising allowances are offered to customers as reimbursement towards their
costs for print or media advertising in which the Company’s 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 a fixed amount per unit sold to the
customer during a specified time period.
F-14
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
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 percentage of sales revenue to
the customer or a fixed amount per unit sold to the customer during a specified
time period.
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 sales revenue to the customer or a fixed
amount per unit sold to the customer. The Company makes an estimate of the
ultimate amount of the rebate their customers will earn based upon past history
with the customer and other facts and circumstances. The Company has 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. The Company accrues the cost
of co-operative advertising allowances, volume incentive rebates and market
development funds at the later of when the customer purchases our products or
when the sales incentive is offered to the customer.
Other
trade allowances are additional sales incentives that the Company provides to
customers subsequent to the related revenue being recognized. In accordance with
EITF 01-9, the Company records 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 the Company makes its
best estimate of its sales incentive liability, many factors, including
significant unanticipated changes in the purchasing volume of its customers and
the lack of claims made by customers could have a significant impact on the
sales incentives liability and reported operating
results.
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. Reversals of 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. 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 from the Company within the claim period (period after program has ended). 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.
The
Company reverses 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. The Company believes 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.
F-15
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share
data)
A
summary of the activity with respect to sales incentives is provided
below:
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
Opening
balance
|
$ | 7,410 | $ | 8,512 | $ | 9,826 | $ | 7,584 | ||||||||
|
Accruals
|
29,084 | ** | 14,961 | 3,526 | 20,609 | * | ||||||||||
|
Payments
|
(21,618 | ) | (13,603 | ) | (4,360 | ) | (15,531 | ) | ||||||||
|
Reversals
for unearned incentives
|
(1,970 | ) | (1,148 | ) | - | (1,007 | ) | |||||||||
|
Reversals
for unclaimed incentives
|
(2,138 | ) | (1,312 | ) | (480 | ) | (1,829 | ) | ||||||||
|
Ending
balance
|
$ | 10,768 | $ | 7,410 | $ | 8,512 | $ | 9,826 | ||||||||
The
majority of the reversals of previously established sales incentive liabilities
pertain to sales recorded in prior periods.
* Included
in accruals for the year ended November 30, 2005 is $1,255 of accrued sales
incentives from the acquisition of Terk (see Note 4).
**
Included in accruals for the year ended February 29, 2008 is $325 and $646 of
accrued sales incentives acquired from the acquisitions of Oehlbach and
Technuity, respectively
(see Note 3).
l) Advertising
Excluding
co-operative advertising, the Company expensed the cost of advertising, as
incurred, of $5,854, $6,194, $1,682 and $8,214 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.
m) Product
Warranties and Product Repair Costs
The
Company generally warranties its products against certain manufacturing and
other defects. The Company provides warranties for all of its products ranging
from 90 days to the lifetime of the product. Warranty expenses are accrued
at the time of sale based on the Company's estimated cost to repair expected
product returns for warranty matters. This liability is based primarily on
historical experiences of actual warranty claims as well as current information
on repair costs. The warranty liability of $13,272 and $5,856 is recorded in
accrued expenses in the accompanying consolidated balance sheets as of February
29, 2008 and February 28, 2007, respectively. In addition, the Company records a
reserve for product repair costs which is based upon the quantities of defective
inventory on hand and an estimate of the cost to repair such defective
inventory. The reserve for product repair costs of $4,047 and $3,730 is recorded
as a reduction to inventory in the accompanying consolidated balance sheets as
of February 29, 2008 and February 28, 2007, respectively. Warranty claims and
product repair costs expense for the years ended February 29, 2008, February 28,
2007, the three months ended February 28, 2006 and the year ended November 30,
2005 were $9,401, $8,047, $477 and $6,063, respectively.
Changes
in the Company's product warranties and product repair costs are as
follows:
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
Beginning
balance
|
$ | 9,586 | $ | 9,947 | $ | 10,329 | $ | 11,794 | ||||||||
|
Liabilities
acquired during acquisitions (see Note 3)
|
12,848 | 1,705 | - | - | ||||||||||||
|
Liabilities
accrued for warranties issued
|
9,401 | 8,047 | 477 | 6,063 | ||||||||||||
|
Warranty
claims paid
|
(14,516 | ) | (10,113 | ) | (859 | ) | (7,528 | ) | ||||||||
|
Ending
balance
|
$ | 17,319 | $ | 9,586 | $ | 9,947 | $ | 10,329 | ||||||||
F-16
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
n) Foreign
Currency
Assets
and liabilities of those subsidiaries and former equity investees located
outside the United States whose cash flows are primarily in local currencies
have been translated at rates of exchange at the end of the period or historical
exchange rates, as appropriate in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation"
(“SFAS No. 52”). Revenues and expenses have been translated at the
weighted-average rates of exchange in effect during the period. Gains
and losses resulting from translation are recorded in the cumulative foreign
currency translation account in accumulated other comprehensive income (loss).
For the years ended February 29, 2008, February 28, 2007, the three months ended
February 28, 2006 and the year ended November 30, 2005, the Company recorded
foreign currency transaction losses (gains) in the amount of $(218), $(285), $43
and $(315), respectively.
Exchange
gains and losses on inter-company balances of a long-term nature are also
recorded in the cumulative foreign currency translation account in accumulated
other comprehensive income (loss).
o) Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled (see Note 8). The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Uncertain Tax
Positions
The
Financial Accounting Standards Board issued Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,
Accounting for Income Taxes” (“FIN No. 48”) which was effective for the Company
on March 1, 2007. FIN No. 48 addresses the determination of whether
tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN No. 48, the Company
may recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities based on the technical merits of the position. The
tax benefits recognized in the financial statements from such position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. FIN No. 48
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure requirements.
p) Income
(Loss) Per Common Share
Basic
income (loss) per common share is based upon the weighted-average number of
common shares outstanding during the period. Diluted income (loss) per common
share reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common
stock.
F-17
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share
data)
A reconciliation between the
denominators of the basic and diluted income (loss) per common share are as
follows:
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
Weighted-average
number of common shares outstanding (basic)
|
22,853,482 | 22,366,413 | 22,526,497 | 22,278,542 | ||||||||||||
|
Effect
of dilutive securities:
|
||||||||||||||||
|
Stock
options and stock warrants
|
22,680 | 190,859 | 240,096 | - | ||||||||||||
|
Weighted-average
number of common and potential common shares outstanding
(diluted)
|
22,876,162 | 22,557,272 | 22,766,593 | 22,278,542 | ||||||||||||
Stock
options and stock warrants totaling 1,336,787, 1,157,226, 1,028,000 and 611,923
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, were not
included in the net income (loss) per common share calculation because the
exercise price of these options and warrants were greater than the average
market price of common stock during the period or these options and warrants
were anti-dilutive due to losses during the respective periods.
q) Other
Income (Loss)
Other
income (loss) is comprised of the following:
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
CellStar
impairment (see Note 1 (e))
|
$ | - | $ | - | $ | - | $ | (1,758 | ) | |||||||
|
Bliss-tel
(see Note 13)
|
1,533 | (178 | ) | - | 4,971 | |||||||||||
|
Interest
Income
|
3,078 | 6,218 | 1,108 | 3,813 | ||||||||||||
|
Rental
income
|
552 | 552 | 143 | 610 | ||||||||||||
|
Other
|
(454 | ) | (339 | ) | 518 | 2,094 | ||||||||||
|
Total
other, net
|
$ | 4,709 | $ | 6,253 | $ | 1,769 | $ | 9,730 | ||||||||
r) Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed
of
Long-lived
assets and certain identifiable intangibles are reviewed for impairment in
accordance with SFAS No. 144 whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. Recoverability of assets held for sale is measured by
comparing the carrying amount of the assets to their estimated fair market
value. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets.
F-18
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
s) Accounting
for Stock-Based Compensation
The
Company has stock option plans under which employees and non-employee directors
may be granted incentive stock options (“ISO's”) and non-qualified stock options
(“NQSO's”) to purchase shares of Class A common stock. Under the stock
option plans, the exercise price of the ISO's will not be less than the market
value of the Company's Class A common stock or greater than 110% of the
market value of the Company's Class A common stock on the date of grant.
The exercise price of the NQSO's may not be less than 50% of the market value of
the Company's Class A common stock on the date of grant. The options must
be exercised no later than ten years after the date of grant. The vesting
requirements are determined by the Board of Directors at the time of
grant. Exercised options are issued from authorized Class A Common
Stock. As of February 29, 2008, 1,228,750 shares were available for
future grants under the terms of these plans.
Prior to
December 1, 2005, the Company accounted for stock-based employee compensation
under the intrinsic value method as outlined in the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees” (“APB No. 25"), and related interpretations while disclosing
pro-forma net income (loss) and pro-forma net income (loss) per share as if the
fair value method had been applied in accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation” (“SFAS No. 123”). Under the intrinsic value
method, no compensation expense was recognized if the exercise price of the
Company's employee stock options equaled or exceeded the market price of the
underlying stock on the date of grant. The Company issued all stock
option grants with exercise prices equal to, or greater than, the market value
of the underlying common stock on the date of grant. Accordingly, no
compensation expense relating to the grant of such options was recognized in the
consolidated statements of operations through November 30, 2005.
Effective
December 1, 2005, the Company adopted Statement of Financial Accounting
Standards No. 123(R), “Share-Based Payment” (“SFAS
No. 123(R)”). SFAS No. 123(R) replaces SFAS No. 123 and supersedes
APB No. 25. SFAS 123(R) requires that all stock-based compensation be recognized
as an expense in the financial statements and that such costs be measured at the
fair value of the award at the date of grant and be recognized as an expense
over the requisite service period. Compensation expense related to stock-based
awards with vesting terms are amortized using the straight-line attribution
method. This statement was adopted using the modified prospective
method, which requires the Company to recognize compensation expense on a
prospective basis for all unvested stock options
outstanding. Therefore, prior period financial statements have not
been restated. Under this method, in addition to reflecting
compensation expense for new share-based payment awards, expense is also
recognized to reflect the remaining vesting period of awards that had been
included in pro-forma disclosures in prior periods. Since all options
outstanding as of December 1, 2005 were fully vested and exercisable, there was
no compensation expense recognized for options granted prior to the adoption of
SFAS No. 123 (R) in the consolidated statement of operations. Prior
to adopting SFAS No. 123(R), the Company presented all tax benefits related to
stock-based compensation as an operating cash inflow, which was
$1,357 for the year ended November 30, 2005. SFAS No. 123(R) requires
tax benefits related to stock based compensation be presented as an operating
activity outflow and finance activity inflow on a prospective basis, which was
$850 and $896 for the years ended February 29, 2008 and February 28,
2007. In addition, the Company elected to use the “short cut” method
to calculate the historical pool of windfall tax benefits upon adoption of SFAS
No. 123(R), which resulted in no historical pool of windfall tax
benefits. The election of the “short cut” method did not have an
impact on the Company’s consolidated financial statements.
The
following table illustrates the effect on net loss and net loss per common share
as if the Company had measured the compensation cost for stock option programs
under SFAS No. 123 during the year ended November 30, 2005.
F-19
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
|
Year Ended
|
||||
|
November
30,
|
||||
|
2005
|
||||
|
Net
loss:
|
||||
|
As
reported
|
$ | (9,591 | ) | |
|
Stock
based compensation expense
|
(490 | ) | ||
|
Pro-forma
|
$ | (10,081 | ) | |
|
Net
loss per common share (basic and diluted):
|
||||
|
As
reported
|
$ | (0.43 | ) | |
|
Pro-forma
|
$ | (0.45 | ) | |
The
Company granted 257,500 stock options during August 2007, which vest one-third
on August 31, 2007, one-third on November 30, 2007, and one-third on February
28, 2008, expire three years from date of vesting (August 31, 2010, November 30,
2010, and February 28, 2011, respectively), have an exercise price equal to
$1.00 above the lowest sales price of the Company’s stock on the day prior to
the date of grant ($10.90), have a contractual term between 2 years and 3.7
years and a grant date fair value of $3.26 per share determined based upon a
Black-Sholes valuation model (refer to the table below for assumptions used to
determine fair value). In connection with this option grant, there were also
15,000 options granted to an outside director that expire on September 9, 2009,
which have a contractual life of 2.1 years and a grant date fair value of $2.57
per share.
In
addition, the Company issued 17,500 warrants to purchase the Company’s common
stock at an exercise price of $10.90 per share as consideration for past legal
services rendered. The warrants are exercisable immediately, expire three years
from date of issuance and have a fair value on issuance date of $3.26 per
warrant determined based upon a Black-Sholes valuation model (refer to the table
below for assumptions used to determine fair value). Accordingly, the Company
recorded additional legal expense in the amount of approximately $57 during the
year ended February 29, 2008, representing the fair value of the warrants
issued. These warrants are included in the outstanding options and warrant table
below and considered exercisable at February 29, 2008.
The
Company granted 105,000 stock options during the year ended February 28, 2007,
which vested immediately, had exercise prices equal to the fair market value of
the stock on the date of grant and a contractual term of two
years. The per share fair value of stock options granted during
the year ended February 28, 2007 was $4.15 and $3.75.
The per
share weighted-average fair value of stock options granted during the years
ended February 29, 2008 and February 28, 2007 was $3.22
and $4.11, respectively on the date of grant.
The fair
value of stock options and warrants on the date of grant, and the assumptions
used to estimate the fair value of the stock options and warrants using the
Black-Sholes option valuation model granted during the year was as
follows:
|
Year
|
Year
|
|||||||
|
Ended
|
Ended
|
|||||||
|
February
29,
|
February
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Expected
dividend yield
|
0 | % | 0 | % | ||||
|
Expected
volatility
|
47.0 | % | 49.8 | % | ||||
|
Risk-free
interest rate
|
4.6 | % | 4.7 | % | ||||
|
Expected
life (years)
|
2.0 - 3.0 | 2.0 | ||||||
The
expected dividend yield is based on historical and projected dividend
yields. The Company estimates expected volatility based primarily on
historical daily price changes of the Company’s stock equal to the expected life
of the option. The risk free interest rate is based on the U.S. Treasury yield
in effect at the time of the grant. The expected option term is the number of
years the Company estimates the options will be outstanding prior to exercise
based on employment termination behavior.
F-20
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
The
Company recognized stock-based compensation expense (before deferred income tax
benefits) for awards granted under the Company’s stock option plans in the
following line items in the consolidated statement of operations for the years
ended February 29, 2008 and February 28, 2007:
|
Year
|
Year
|
|||||||
|
Ended
|
Ended
|
|||||||
|
February
29,
|
February
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Cost
of sales
|
$ | 16 | $ | 21 | ||||
|
Selling
expense
|
192 | 156 | ||||||
|
General
and administrative expenses
|
662 | 245 | ||||||
|
Engineering
and technical support
|
16 | 10 | ||||||
|
Stock-based
compensation expense before income tax benefits
|
$ | 886 | $ | 432 | ||||
Net
income from continuing operations and net income was impacted by $506 (after
tax) and $264 (after tax) in stock based compensation expense or $0.02 and
$0.01 per diluted share for the years ended February 29, 2008 and February 28,
2007, respectively.
Information
regarding the Company's stock options and warrants are summarized
below:
|
Weighted-
|
||||||||
|
Average
|
||||||||
|
Number
|
Exercise
|
|||||||
|
of
Shares
|
Price
|
|||||||
|
Outstanding
at November 30, 2004
|
2,547,700 |
$
|
11.74 | |||||
|
Granted
|
324,952 | 13.76 | ||||||
|
Exercised
|
(660,500 | ) | 11.65 | |||||
|
Forfeited/expired
|
(10,000 | ) | 15.00 | |||||
|
Outstanding
at November 30, 2005
|
2,202,152 | 12.04 | ||||||
|
Forfeited/expired
|
(5,000 | ) | 13.69 | |||||
|
Outstanding at
February 28, 2006
|
2,197,152 | 12.04 | ||||||
|
Granted
|
105,000 | 13.42 | ||||||
|
Exercised
|
(485,000 | ) | 8.72 | |||||
|
Forfeited/expired
|
(32,500 | ) | 14.39 | |||||
|
Outstanding
and exercisable at February 28, 2007
|
1,784,652 | 12.97 | ||||||
|
Granted
|
275,000 | 10.90 | ||||||
|
Exercised
|
(408,866 | ) | 7.70 | |||||
|
Forfeited/expired
|
(83,750 | ) | 13.68 | |||||
|
Outstanding
and exercisable at February 29, 2008
|
1,567,036 | $ | 13.96 | |||||
At
February 29, 2008 and February 28, 2007, the Company had no unrecognized
compensation cost as all stock options were fully vested.
F-21
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
Summarized
information about stock options outstanding as of February 29, 2008 is as
follows:
|
Outstanding
and Exercisable
|
||||||||||||||
|
Weighted-
|
Weighted-
|
|||||||||||||
|
Average
|
Average
|
|||||||||||||
|
Exercise
|
Exercise
|
Life
|
||||||||||||
|
Price
|
Number
|
Price
|
Remaining
|
|||||||||||
|
Range
|
of
Shares
|
of
Shares
|
in
Years
|
|||||||||||
| $ | 4.63 - 8.00 | 10,000 | $ | 4.63 | 0.67 | |||||||||
| $ | 8.01 - 13.01 | 283,334 | $ | 10.95 | 3.09 | |||||||||
| $ | 13.01 - 15.00 | 1,273,702 | $ | 14.70 | 1.59 | |||||||||
The
aggregate pre-tax intrinsic value (the difference between the company’s
closing stock price on the last trading day of fiscal 2008 and the exercise
price, multiplied by the number of in-the-money options) that would have been
received by the option holders had all option holders exercised their options on
February 29, 2008 was $3,043,800 This amount changes based on the
fair market value of the company’s stock. The total intrinsic value
of options exercised for the years ended February 29, 2008, February 28, 2007
and November 30, 2005 were $3,149, $2,519 and $3,570,
respectively.
t) Accumulated
Other Comprehensive Income (Loss)
Accumulated
other comprehensive income (loss) includes accumulated foreign currency
translation gains of $4,470 and $241, and unrealized gains (losses) on
investment securities classified as available-for-sale of $377and $(1,561) at
February 29, 2008 and February 28, 2007, respectively.
During
the years ended February 29, 2008 and February 28, 2007, $1,876 and
$(117) of unrealized gains (losses) on available-for-sale investment
securities were transferred into earnings as a result of the disposition of the
investment. During the year ended November 30, 2005, $1,758 of unrealized losses
on available-for-sale investment securities were transferred into earnings as a
result of an other than temporary impairment charge. The currency
translation adjustments are not adjusted for income taxes as they relate to
indefinite investments in non-U.S. subsidiaries and equity
investments.
u) New
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.
F-22
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
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.
v) Tax interest and
penalties
The
Company classifies interest and penalties associated with income taxes as a
component of income tax expense (benefit) on the consolidated statement of
operations.
On
November 7, 2005, the Company completed the sale of its majority-owned
subsidiary, Audiovox Malaysia (“AVM”), to the then current minority interest
stockholder. The Company discontinued ownership of AVM due to increased
competition from Original Equipment Manufacturers and deteriorating credit
quality of local customers. The Company sold its remaining equity in AVM in
exchange for a $550 face-value promissory note ($404 after discount) payable in
60 equal monthly installments with an effective interest rate of 6.2%. As a
result of the sale of AVM, the Company was released from all of its Malaysian
liabilities, including bank obligations, and recorded the following loss on the
sale for the year ended November 30, 2005:
|
Purchase
Price
|
$ | 404 | ||
|
Equity
(after discount) of AVM at time of sale
|
(1,418 | ) | ||
|
Non-cash
cumulative translation losses
|
(1,365 | ) | ||
|
Income
tax benefit
|
300 | |||
|
Loss
on sale of AVM, included in discounted operations
|
$ | (2,079 | ) |
F-23
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
b) Financial Presentation of
Discontinued Operations
The
following is a summary of results included within discontinued
operations:
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
Net
sales from discontinued operations
|
$ | - | $ | - | $ | - | $ | 3,404 | ||||||||
|
Income
(loss) from operations of discontinued operations before income
taxes
|
$ | 3,248 | $ | (1,163 | ) | $ | (281 | ) | $ | (1,187 | ) | |||||
|
Provision
(benefit) for income taxes
|
1,529 | (407 | ) | (97 | ) | (362 | ) | |||||||||
| 1,719 | (756 | ) | (184 | ) | (825 | ) | ||||||||||
|
Loss
on sale of business, net of tax
|
- | - | - | (2,079 | ) | |||||||||||
|
Income
(loss) from discontinued operations, net of tax
|
$ | 1,719 | $ | (756 | ) | $ | (184 | ) | $ | (2,904 | ) | |||||
The net
income (loss) from discontinued operations for the years ended February 29,
2008, February 28, 2007, the three months ended February 28, 2006 and the year
ended November 30, 2005 is primarily due to legal settlements and related legal
and administrative costs associated with contingencies pertaining to the
Company’s discontinued Cellular (see Note 16) and Malaysia
businesses.
Included
in income from discontinued operations are tax provisions (benefits) of $1,529,
$(407), $(97) and $(662) 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. The net change in the total valuation allowance
for the year ended November 30, 2005 was a decrease of
$144. Such change positively impacted the provision for income
taxes from discontinued operations for the year indicated. 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.
3) Business Acquisistions
Thomson
Accessories
On
January 29, 2007, the Company acquired certain assets and liabilities of
Thomson’s Americas consumer electronics accessory business as well as rights to
the RCA, Recoton, Spikemaster, Ambico and Discwasher brands for consumer
electronics accessories for $64,716, including a working capital payment of
$7,617, acquisition costs of $2,414 and a fee currently estimated to be
approximately $4,685 related to 0.75% of future net sales of the RCA brand
for five years from the date of acquisition. The fee related to the future net
sales of the RCA brand was recorded in connection with the final purchase price
allocation (increase to intangible assets, other current liabilities
($890) and other long-term liabilities) as the estimated fair value of the
net assets acquired exceeded the total purchase price. As the estimated fair
value of the net assets acquired exceeded the total purchase price, after
recording the estimated fee related to future net sales of the RCA brand, the
Company reduced the estimated fair value of the non-financial assets acquired on
a prorata basis to the adjusted purchase price of $64,716.
The
results of operations of this acquisition have been included in the consolidated
financial statements from the date of acquisition. The purpose of
this acquisition was to enhance the Company’s market share in the accessory
business, which includes rights to the RCA brand and other brand
names.
F-24
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
The
following summarizes the final allocation of the total purchase price to the
estimated fair value of the assets acquired and liabilities assumed at the date
of acquisition:
|
Assets
acquired:
|
||||
|
Inventory
|
$ | 31,664 | ||
|
Prepaid
expenses and other current assets
|
2,312 | |||
|
Trademarks
and other intangible assets
|
51,099 | |||
|
Total
assets acquired
|
$ | 85,075 | ||
|
Liabilities
assumed:
|
||||
|
Accounts
payable
|
$ | 17,489 | ||
|
Accrued
expenses and other liabilities
|
2,870 | |||
|
Total
liabilities assumed
|
$ | 20,359 | ||
|
Total
purchase price (includes cash paid plus estimated contingent
fees)
|
$ | 64,716 | ||
The
allocation of the purchase price to assets acquired and liabilities assumed was
based upon a valuation study performed by management and is final (see Note
1(j)). Trademarks and other intangible assets includes $2,200 of amortizable
customer relationships with an estimated life of 11 years.
Oehlbach
On March
1, 2007, Audiovox German Holdings GmbH completed the stock acquisition of
Oehlbach Kabel GmbH (“Oehlbach”), a European market leader in the accessories
field for $8,134, including acquisition costs of $200 and an estimated
contingent payment of approximately $1,322.
The
contingent payment may be due by the Company if certain earnings targets are
generated by Oehlbach for a period of three years after the acquisition date
(March 1, 2010). The earnings target calculation requires that if the
accumulated Oehlbach operating income, including or excluding certain items
exceeds 3,290 Euros over the cumulative three year period, the Company is liable
to pay the excess of the operating income amount (as defined in the purchase
agreement) over 3,290 Euros but not to exceed 1,000 Euros. The contingent
payment was recorded in connection with the final purchase price allocation
(increase to intangible assets and other long-term liabilities) as the estimated
fair value of the net assets acquired exceeded the total purchase price. As the
estimated fair value of the net assets acquired exceeded the total purchase
price, after recording the maximum contingent payment, the Company reduced the
estimated fair value of the non-financial assets acquired on a prorata basis to
the adjusted purchase price of $8,134.
The
results of operations of this acquisition have been included in the consolidated
financial statements from the date of acquisition. The purpose of
this acquisition was to expand the Company’s accessory product lines to European
Markets.
The
following summarizes the final allocation of the total purchase price to the
estimated fair value of the assets acquired and liabilities assumed at the date
of acquisition:
|
Assets
acquired:
|
||||
|
Cash
|
$ | 200 | ||
|
Accounts
receivable, net
|
2,215 | |||
|
Inventory
|
1,939 | |||
|
Prepaid
expenses and other current assets
|
60 | |||
|
Property,
plant and equipment, net
|
327 | |||
|
Trademark
and other intangible assets
|
11,661 | |||
|
Total
assets acquired
|
$ | 16,402 | ||
|
Liabilities
assumed:
|
||||
|
Accounts
payable
|
$ | 601 | ||
|
Accrued
expenses and other liabilities
|
2,383 | |||
|
Income
taxes payable
|
891 | |||
|
Long-term
debt
|
807 | |||
|
Deferred
tax liability
|
3,586 | |||
|
Total
liabilities assumed
|
$ | 8,268 | ||
|
Total
purchase price (includes cash paid plus contingent
payment)
|
$ | 8,134 | ||
The
allocation of the purchase price to assets acquired and liabilities assumed was
based upon a valuation study performed by management and is final (see Note
1(j)). Trademark and other intangible assets includes $4,315 of
amortizable customer relationships with an estimated life of 15
years.
F-25
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share
data)
Incaar
On August
14, 2007, Audiovox German Holdings GmbH completed the acquisition of certain
assets and the business of Incaar Limited (“Incaar”), an OEM business in Europe
for $801, including acquisition costs of $51 and an estimated contingent payment
of approximately $400.
The
contingent payment may be due by the Company if certain earnings targets are
generated by Incaar for a period of two years after the acquisition date (August
14, 2009). The earnings target calculation requires that if the
accumulated Incaar pre-tax income, including or excluding certain items, exceeds
1,055 Euros over the cumulative two year period, the Company is liable to pay an
additional $400, as defined in the purchase agreement. The contingent
payment was recorded in connection with the final purchase price allocation
(increase to intangible assets and other long-term liabilities) as the estimated
fair value of the net assets acquired exceeded the total purchase price. As the
estimated fair value of the net assets acquired exceeded the total purchase
price, after recording the maximum contingent payment, the Company reduced the
estimated fair value of the non-financial assets acquired on a prorata basis to
the adjusted purchase price of $801.
The
results of operations of this acquisition have been included in the consolidated
financial statements from the date of acquisition. The purpose of
this acquisition was to add the experience, concepts and product development of
an OEM business in Europe.
The
following summarizes the final allocation of the total purchase price to the
estimated fair value of the assets acquired at the date of
acquisition:
|
Assets
acquired:
|
||||
|
Trademark
and other intangible assets
|
$ | 801 | ||
|
Total
purchase price (includes cash paid plus estimated contingent
fees)
|
$ | 801 | ||
The
allocation of the purchase price to the assets acquired was based upon a
valuation study performed by management and is final (see Note 1(j)). Trademark
and other intangible assets include $346 of amortizable customer relationships
with an estimated life of 5 years.
Technuity
On
November 1, 2007, Audiovox Accessories Corporation completed the acquisition of
all of the outstanding stock of Technuity, Inc. (“Technuity”), an emerging
leader in the battery and power products industry and the exclusive licensee of
the Energizer® brand in North and Latin Americas for rechargeable batteries and
battery packs for camcorders, cordless phones, digital cameras, DVD players and
other power supply devices. As consideration for Technuity, the Company paid the
following:
|
Purchase
price (net of cash acquired)
|
$ | 20,373 | ||
|
Final
working capital credit
|
$ | (317 | ) | |
|
Acquisition
related costs
|
1,094 | |||
|
Total
purchase price
|
$ | 21,150 |
F-26
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share
data)
In
addition, a minimum working capital payment, as defined in the agreement, and a
maximum contingent payment of $1,000 may be due by the Company if certain sales
and gross margin targets are met for a period of twelve months after the
acquisition date. The sales and gross margin targets require that net sales
exceeds $26.5 million and gross margin exceeds $7.65 million, as defined in the
purchase agreement. As of February 29, 2008, no amount has been accrued for the
contingency payment as the sales and gross margin targets have not been
met.
The
results of operations of this acquisition have been included in the consolidated
financial statements from the date of acquisition. The purpose of this
acquisition was to further strengthen our accessory product lines and core
offerings, to be the exclusive licensee of the Energizer® brand in North and
Latin Americas for rechargeable batteries and power supply systems and to
increase the Company’s market share in the consumer electronics accessory
business.
The
following summarizes the preliminary allocation of the purchase price to the
fair value of the assets acquired and liabilities assumed at the date of
acquisition:
|
Assets
acquired:
|
||||
|
Accounts
receivable, net
|
$ | 3,919 | ||
|
Inventory
|
5,008 | |||
|
Prepaid
expenses and other current assets
|
137 | |||
|
Property,
plant and equipment, net
|
108 | |||
|
Other
long-term assets
|
240 | |||
|
Trademarks
and other intangible assets
|
15,650 | |||
|
Goodwill
|
5,913 | |||
|
Total
assets acquired
|
$ | 30,975 | ||
|
Liabilities
assumed:
|
||||
|
Accounts
payable
|
$ | 3,689 | ||
|
Accrued
expenses and other liabilities
|
467 | |||
|
Deferred
tax liability
|
5,637 | |||
|
Other
liabilities
|
32 | |||
|
Total
liabilities assumed
|
$ | 9,825 | ||
|
Total
purchase price
|
$ | 21,150 | ||
The
allocation of the purchase price to the assets acquired and liabilities assumed
is preliminary (see Note 1(j)).
Thomson
Audio/Video
On
December 31, 2007, the Company completed the acquisition of certain assets and
liabilities of Thomson’s U.S., Canada, Mexico, China and Hong Kong consumer
electronics audio/video business as well as the rights to the RCA brand for the
audio/video field of use. As consideration for Thomson’s audio/video business,
the Company paid the following:
|
Purchase
price
|
$ | 13,188 | ||
|
Net
asset payment
|
11,093 | |||
|
Acquisition
related costs
|
560 | |||
| 24,841 | ||||
|
Less:
Multimedia license fee
|
(10,000 | ) | ||
|
Total
net purchase price
|
$ | 14,841 |
In
addition, the Company agreed to pay Thomson a 1% fee related to future net sales
of the RCA brand for the audio/video field of use for five years (beginning in
2010 through 2014).
F-27
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
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, which amounted to approximately $4,700, plus a 1%
royalty payment on future net RCA sales beginning in 2008 and continuing in
perpetuity. Beginning in 2010 through 2014, this royalty fee increases to 2% of
future net sales. Accordingly, the upfront license fee of $10,000 will reduce
the Company’s cost of the transaction (refer to purchase price
above).
The
results of operations of this acquisition have been included in the consolidated
financial statements from the date of acquisition. The purpose of this
acquisition was to control the RCA trademark for the audio/video field of use
and to expand our core product offerings into certain developing
markets.
The
following summarizes the preliminary allocation of the purchase price to the
fair value of the assets acquired and liabilities assumed at the date of
acquisition:
|
Assets
acquired:
|
||||
|
Inventory
|
$ | 22,062 | ||
|
Tooling
|
150 | |||
|
Tradename
(less license fee)
|
11,785 | |||
|
Total
assets acquired
|
$ | 33,997 | ||
|
Liabilities
assumed:
|
||||
|
Warranty
accrual
|
$ | 12,848 | ||
|
Other
liabilities acquired
|
6,308 | |||
|
Total
liabilities assumed
|
$ | 19,156 | ||
|
Total
purchase price
|
$ | 14,841 | ||
The
allocation of the purchase price to assets acquired and liabilities assumed is
preliminary (see Note 1(j)).
Terk
On
January 4, 2005, the Company signed an asset purchase agreement to purchase
certain assets of Terk Technologies Corp. ("Terk"). The purchase price was
subject to a working capital adjustment based on the working capital of Terk at
the time of closing, plus contingent debentures with a maximum value of $9,280
based on the achievement of future revenue targets. The total purchase price,
which included a working capital adjustment of $1,730 and acquisition costs of
$514, approximated $15,274, as adjusted. No amount has been recorded with
respect to the debentures and any amount paid under the debentures to date would
be recorded as additional goodwill.
The
results of operations of this acquisition have been included in the consolidated
financial statements from the date of acquisition. The purpose of this
acquisition is to increase the Company's market share for satellite radio
products as well as accessories such as antennas for HDTV
products.
The
following summarizes the final allocation of the purchase price to the fair
value of the assets acquired and liabilities assumed at the date of
acquisition:
|
Assets
acquired:
|
||||
|
Accounts
receivable
|
$ | 10,916 | ||
|
Inventory
|
9,349 | |||
|
Prepaid
expenses and other current assets
|
293 | |||
|
Property,
plant and equipment
|
1,210 | |||
|
Goodwill
|
8,798 | |||
|
Customer
contract (5 years)
|
1,104 | |||
|
Tradename
|
1,999 | |||
|
Total
assets acquired
|
$ | 33,669 | ||
|
Liabilities
assumed:
|
||||
|
Accounts
payable accrued expenses and other liabilities
|
14,296 | |||
|
Bank
obligations
|
4,099 | |||
|
Total
liabilities assumed
|
$ | 18,395 | ||
|
Total
purchase price
|
$ | 15,274 | ||
The
allocation of the purchase price to assets and liabilities acquired was based
upon an independent valuation study and is final (see Note
1(j)).
F-28
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share
data)
The
following unaudited pro-forma financial information for the years ended February
29, 2008, February 28, 2007, the three months ended February 28, 2006 and the
year ended November 30, 2005 represents the combined results of the Company's
operations as if the Thomson Accessory, Oehlbach, Incaar, Technuity, Thomson A/V
and Terk acquisitions had occurred at December 1, 2004. The unaudited pro-forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company constituted a single entity during such
periods.
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
(unaudited)
|
||||||||||||||||
|
Net
sales
|
$ | 948,031 | $ | 1,156,582 | $ | 277,847 | $ | 862,579 | ||||||||
|
Net
loss
|
(1,972 | ) | (26,681 | ) | (7,209 | ) | (17,591 | ) | ||||||||
|
Net
loss per share-diluted
|
$ | (0.09 | ) | $ | (1.18 | ) | $ | (0.32 | ) | $ | (0.80 | ) | ||||
4) Receivables from Vendors
The
Company has recorded receivables from vendors in the amount of $29,358 and
$13,935 as of February 29, 2008 and February 28, 2007, respectively. Receivables
from vendors represent prepayments on product shipments and product
reimbursements.
5) Equity Investment
The
Company has 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 RV’s, van conversions and marine vehicles, of
televisions and other automotive sound, security and accessory
products. ASA’s fiscal year end is November 30, 2007, however, the
proportionate results of ASA as of and until February 29, 2008 have been
recorded in the consolidated financial statements.
The
following represents summary information of transactions between the Company and
ASA:
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
(unaudited)
|
||||||||||||||||
|
Net
sales
|
$ | 1,517 | $ | 742 | $ | 184 | $ | 1,404 | ||||||||
|
Purchases
|
139 | 212 | 43 | 573 | ||||||||||||
|
Royalty
expense
|
899 | 656 | 200 | 871 | ||||||||||||
|
February
29,
|
February
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Accounts
Receivable
|
$ | 310 | $ | 369 | ||||
The
following presents summary financial information for ASA. Such summary financial
information has been provided herein based upon the individual significance of
this unconsolidated equity investment to the consolidated financial information
of the Company.
|
February
29,
|
February
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Current
assets
|
$ | 26,344 | $ | 23,409 | ||||
|
Non-current
assets
|
4,710 | 4,716 | ||||||
|
Current
liabilities
|
4,611 | 5,420 | ||||||
|
Members'
equity
|
26,443 | 22,705 | ||||||
F-29
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
(unaudited)
|
||||||||||||||||
|
Net
sales
|
$ | 71,726 | $ | 60,414 | $ | 11,421 | $ | 49,795 | ||||||||
|
Gross
profit
|
20,869 | 17,764 | 3,709 | 11,877 | ||||||||||||
|
Operating
income
|
6,158 | 4,980 | 778 | 4,512 | ||||||||||||
|
Net
income
|
7,178 | 5,875 | 948 | 4,716 | ||||||||||||
The
Company's share of income from ASA for the years ended February 29, 2008,
February 28, 2007, the three months ended February 28, 2006 and the year ended
November 30, 2005 was $3,590, $2,937, $474 and $2,342,
respectively. In addition, the Company received cash
distributions from ASA totaling $1,720, $3,419, $713 and $1,147 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.
6) Accrued Expenses and Other Current
Liabilities
Accrued
expenses and other current liabilities consist of the
following:
|
February
29,
|
February
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Commissions
|
$ | 1,032 | $ | 457 | ||||
|
Employee
compensation
|
4,697 | 3,104 | ||||||
|
Professional
fees and accrued settlements
|
1,888 | 1,951 | ||||||
|
Future
warranty
|
13,272 | 5,856 | ||||||
|
Freight
and duty
|
1,231 | 1,872 | ||||||
|
Other
taxes payable
|
- | 909 | ||||||
|
Royalties,
advertising and other
|
16,455 | 12,415 | ||||||
|
Total
accrued assets and other current liabilities
|
$ | 38,575 | $ | 26,564 | ||||
F-30
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
7) Financing
Arrangements
The Company has the following financing
arrangements:
|
February
29,
|
February
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Bank Obligations
|
||||||||
|
Domestic
bank obligations (a)
|
$ | - | $ | - | ||||
|
Venezuela
bank obligations (b)
|
- | - | ||||||
|
Euro
asset-based lending obligation (c)
|
3,070 | 2,890 | ||||||
|
Total
bank obligations
|
$ | 3,070 | $ | 2,890 | ||||
|
Debt
|
||||||||
|
Euro
term loan agreement (d)
|
$ | - | $ | 5,461 | ||||
|
Oehlbach
(e)
|
850 | - | ||||||
|
Other
(f)
|
853 | 1,493 | ||||||
|
Total
debt
|
$ | 1,703 | $ | 6,954 | ||||
a) Domestic
Bank Obligations
At
February 29, 2008, the Company has an unsecured credit line to fund the
temporary short-term working capital needs of the domestic
operations. 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%. As of February 29, 2008 and February 28, 2007,
no direct amounts are outstanding under this agreement. At
February 29, 2008, the Company had $6,202 in commercial and standby letters of
credit outstanding, which reduces the amount available under the unsecured
credit line.
b) Venezuela
Bank Obligations
In
October 2005, Audiovox Venezuela entered into a credit facility borrowing
arrangement which allows for principal borrowings up to $1,000 plus accrued
interest. The facility requires minimum monthly interest payments at
an annual interest rate of 13% until the expiration of the facility on February
14, 2008. Audiovox Corporation had secured this facility with a
$1,200 standby letter of credit. As of February 28, 2007, no amounts
were outstanding under this agreement.
c) Euro
Asset-Based Lending Obligation
The
Company has a 16,000 Euro accounts receivable factoring arrangement and a 6,000
Euro Asset-Based Lending ("ABL") (finished goods inventory and non factored
accounts receivable) credit facility for the Company's subsidiary, Audiovox
Germany, which expires on October 25, 2008 and is renewable on an annual
basis. Selected accounts receivable are purchased from the Company on
a non-recourse basis at 85% of face value and payment of the remaining 15% upon
receipt from the customer of the balance of the receivable purchased. The
activity under this ABL is accounted for as a sale of accounts receivable in
accordance with Statement of Financial Accounting Standards No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" ("SFAS No. 140"), as such transfers met the critera in SFAS
No. 140. In respect of the ABL credit facility, selected finished goods
are advanced at a 60% rate and non factored accounts receivables are advanced at
a 50% rate. The rate of interest is the three month Euribor plus
2.5%, and the Company pays 0.4% of its gross sales as a fee for the accounts
receivable factoring arrangement. As of February 29, 2008, the amount of
accounts receivable and finished goods available for factoring exceeded the
amounts outstanding under this obligation.
F-31
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
d) Euro
Term Loan Agreement
On
September 2, 2003, Audiovox Germany borrowed 12 million Euros under a new term
loan agreement. This agreement was for a 5-year term loan with a financial
institution consisting of two tranches. Tranche A is for 9 million
Euros and Tranche B is for 3 million Euros, which was fully repaid in prior
years. During September 2007, the Company repaid in full the amount outstanding
under the Tranche A term loan using the Company's available cash on hand at the
time. Accordingly, the Company has been released from its 3 million Euro
guarantee under this loan as well as the pledge of stock, brands and trademarks
of Audiovox Germany.
e) Oehlbach
In
connection with the Oehlbach acquisition (see Note 3), the Company acquired
short and long term debt payable to various third parties. The
interest rate on the debt ranges from 4.2% to 6.1% and is payable from May 2008
to March 2011.
f) Other
Debt
On
August 29, 2003, the Company entered into a call/put option agreement with
certain employees of Audiovox Germany, whereby these employees can acquire up to
a maximum of 20% of the Company's stated share capital in Audiovox Germany at a
call price equal to the same proportion of the actual price paid by the Company
for Audiovox Germany. The put options cannot be exercised until the later of
(i) November 30, 2008 or (ii) the full repayment (including
interest) of an inter-company loan granted to Audiovox Germany in the amount of
5.3 million Euros. Notwithstanding the lapse of these time periods, the put
options become immediately exercisable upon (i) the sale of Audiovox
Germany or (ii) the termination of employment or death of the employee. The
put price to be paid to the employee upon exercise will be the then net asset
value per share of Audiovox Germany. Accordingly, the Company recognizes
compensation expense based on 20% of the increase in Audiovox Germany's net
assets, subject to certain adjustments as defined in the
agreement, representing the incremental change of the put price over the
call option price. Compensation (benefit) expense for these options amounted to
$(790), $353, $(115) and $408 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. 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.
The
following is a maturity table for debt and bank obligations outstanding at
February 29, 2008:
|
Total
|
||||||||||||||||||||||||
|
Amounts
|
||||||||||||||||||||||||
|
Committed
|
2009
|
2010
|
2011
|
2012
|
2013
|
|||||||||||||||||||
|
Bank
Obligations
|
$ | 3,070 | $ | 3,070 | $ | - | $ | - | $ | - | $ | - | ||||||||||||
|
Debt
|
1,703 | 82 | 265 | 265 | 238 | 853 | ||||||||||||||||||
|
Total
|
$ | 4,773 | $ | 3,152 | $ | 265 | $ | 265 | $ | 238 | $ | 853 | ||||||||||||
g) Subsequent
Events
On March 30, 2008, Audiovox
Germany entered into a 5 million Euro term loan agreement. This agreement is for
a five-year term with a financial institution and is to be used to repay the
Audiovox Germany intercompany debt to Audiovox Corporation. Payments under
the term loan are to be made in two semi-annual installments of 500,000 Euros
beginning on September 30, 2008 and ending on March 30, 2013. Interest accrues
at a fixed rate of 4.82%. Any amount repaid can not be reborrowed. The term loan
is secured by a pledge of the stock of Audiovox Germany and the Magnat brand
name, prohibits the distribution of dividends and takes precedence to all other
intercompany loans with Audiovox Corporation.
F-32
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
8) Income Taxes
The components of income (loss) from continuing operations before the provision for income taxes are as follows:
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
Domestic
Operations
|
$ | (1,262 | ) | $ | (1,140 | ) | $ | (359 | ) | $ | (20,448 | ) | ||||
|
Foreign
Operations
|
11,856 | 3,298 | (1,117 | ) | 2,352 | |||||||||||
| $ | 10,594 | $ | 2,158 | $ | (1,476 | ) | $ | (18,096 | ) | |||||||
The
(benefit) provision for income taxes is comprised of the
following:
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
Current
provision (benefit)
|
||||||||||||||||
|
Federal
|
$ | 314 | $ | (2,751 | ) | $ | (4,191 | ) | $ | (8,599 | ) | |||||
|
State
|
450 | 285 | 77 | (542 | ) | |||||||||||
|
Foreign
|
4,282 | 326 | (688 | ) | 836 | |||||||||||
|
Total
current provision (benefit)
|
$ | 5,046 | $ | (2,140 | ) | $ | (4,802 | ) | $ | (8,305 | ) | |||||
|
Deferred (benefit)
provision
|
||||||||||||||||
|
Federal
|
$ | (1,303 | ) | $ | 122 | $ | 2,946 | $ | (3,385 | ) | ||||||
|
State
|
121 | (63 | ) | 13 | 306 | |||||||||||
|
Foreign
|
(16 | ) | 547 | - | (25 | ) | ||||||||||
|
Total
deferred (benefit) provision
|
$ | (1,198 | ) | $ | 606 | $ | 2,959 | $ | (3,104 | ) | ||||||
|
Total
provision (benefit)
|
||||||||||||||||
|
Federal
|
$ | (989 | ) | $ | (2,629 | ) | $ | (1,245 | ) | $ | (11,984 | ) | ||||
|
State
|
571 | 222 | 90 | (236 | ) | |||||||||||
|
Foreign
|
4,266 | 873 | (688 | ) | 811 | |||||||||||
|
Total
provision (benefit)
|
$ | 3,848 | $ | (1,534 | ) | $ | (1,843 | ) | $ | (11,409 | ) | |||||
F-33
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
The
effective tax rate before income taxes varies from the current statutory U.S.
federal income tax rate as follows:
|
Three
|
||||||||||||||||||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||||||||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||||||||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||||
|
Tax
provision at Federal statutory rates
|
$ | 3,708 | 35.0 | % | $ | 755 | 35.0 | % | $ | (517 | ) | (35.0 | ) % | $ | (6,333 | ) | (35.0 | ) % | ||||||||||||||
|
Tax
exempt interest
|
(999 | ) | (9.4 | ) | (2,146 | ) | (99.4 | ) | (384 | ) | (26.0 | ) | (1,174 | ) | (6.5 | ) | ||||||||||||||||
|
State
income taxes, net of Federal benefit
|
17 | 0.2 | 23 | 1.1 | 40 | 2.8 | (352 | ) | (1.9 | ) | ||||||||||||||||||||||
|
Increase
in valuation allowance
|
95 | 0.9 | 6 | 0.3 | 18 | 1.2 | 1,338 | 7.4 | ||||||||||||||||||||||||
|
Change
in tax reserves
|
369 | 3.5 | 61 | 2.8 | (706 | ) | (47.8 | ) | (1,524 | ) | (8.4 | ) | ||||||||||||||||||||
|
US
effects of foreign operations
|
167 | 1.6 | - | - | (297 | ) | (20.1 | ) | (2,273 | ) | (12.6 | ) | ||||||||||||||||||||
|
Benefit
for prior year refunds
|
- | - | (378 | ) | (17.5 | ) | - | - | - | - | ||||||||||||||||||||||
|
Permanent
differences and other
|
491 | 4.5 | 145 | 6.7 | 3 | - | (1,091 | ) | (6.0 | ) | ||||||||||||||||||||||
|
Effective
tax rate
|
$ | 3,848 | 36.3 | % | $ | (1,534 | ) | (71.0 | ) % | $ | (1,843 | ) | (124.9 | ) % | $ | (11,409 | ) | (63.0 | ) % | |||||||||||||
The U.S.
effects of foreign operations include differences in the statutory tax rate of
the foreign countries as compared to the statutory tax rate in the U.S., foreign
operating losses for which no tax benefit has been provided and the effects of
the settlement of the German tax audit in the amount of $936.
Other is
a combination of various factors, including changes in the taxable income or
loss between various tax entities with differing effective tax rates, changes in
the allocation and apportionment factors between taxable jurisdictions with
differing tax rates of each tax entity, changes in tax rates and other
legislation in the various jurisdictions and other items.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and tax
purposes. Significant components of the Company’s deferred tax assets and
liabilities are as follows:
|
February
29,
|
February
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Accounts
receivable
|
$ | 282 | $ | 380 | ||||
|
Inventory
|
1,664 | 1,075 | ||||||
|
Property,
plant and equipment
|
895 | 829 | ||||||
|
Accruals
and reserves
|
7,798 | 1,825 | ||||||
|
Net
operating losses
|
6,020 | 2,062 | ||||||
|
Foreign
tax credits
|
3,307 | 3,092 | ||||||
|
Deferred
tax assets before valuation allowance
|
19,966 | 9,263 | ||||||
|
Less:
valuation allowance
|
(2,684 | ) | (1,095 | ) | ||||
|
Total
deferred tax assets
|
17,282 | 8,168 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Intangible
assets
|
(12,727 | ) | (1,697 | ) | ||||
|
Prepaid
expenses
|
(1,362 | ) | (1,079 | ) | ||||
|
Unrealized
gain on investment securities
|
(2,115 | ) | (1,042 | ) | ||||
|
Total
deferred tax liabilities
|
(16,204 | ) | (3,818 | ) | ||||
|
Net
deferred tax asset
|
$ | 1,078 | $ | 4,350 | ||||
In
assessing the realizability of deferred tax assets, Management considers whether
it is more-likely-than-not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income. The deferred tax asset
valuation allowance of $2,684 as of February 29, 2008 relates to: (i)
net operating loss carryforwards related to excess share-based compensation
expense deductions of $1,739 and net operating loss carryforwards of $212
related to subsidiaries not included in Audiovox’s consolidated tax group, (ii)
state net operating loss carryforwards of $595, and (iii) foreign net operating
loss carryforwards of $139. If the remaining valuation allowance were
to be reversed, approximately $1,739 would be allocated to stockholders’ equity
as such amounts are attributable to the tax effects of excess compensation
deductions from exercises of employee and non-employee stock options. The
remainder of the valuation allowance of approximately $945 would reduce income
tax expense.
F-34
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share
data)
As of
February 29, 2008, the Company had approximately $13,532 of U.S. federal net
operating loss carryforwards, which are available to offset future taxable
income. These carryforwards expire in the tax years between 2027 and 2028, if
not utilized. In addition, the Company has approximately $3,342
of foreign tax credits that expire in 2012 through 2016 if not utilized. In
addition, the Company has various state net operating loss carryforwards that
expire in varying amounts through fiscal year 2028.
The
Company has not provided for U.S. federal and foreign withholding taxes on its
foreign subsidiaries undistributed earnings in Germany and Venezuela as of
February 29, 2008, because such earnings are intended to be indefinitely
reinvested overseas. The amount of unrecognized deferred tax
liabilities for temporary differences related to investments in undistributed
earnings is not practicable to determine at this time.
The
Company adopted the provisions of FIN No. 48 on March 1, 2007. Upon
adoption of FIN No. 48, the Company reduced its uncertain tax positions by
$2,714 which was accounted for as an increase to the Company's opening retained
earnings balance as of March 1, 2007. A reconciliation of the
beginning and ending amount of unrecognized tax benefits, excluding interest and
penalties, is as follows:
|
Balance
at March 1, 2007
|
$ | 3,491 | ||
|
Additions
based on tax positions taken in the current and prior
years
|
507 | |||
|
Settlements
|
(108 | ) | ||
|
Lapse
in statute of limitations
|
(25 | ) | ||
|
Balance
at February 29, 2008
|
$ | 3,865 |
The
entire amount of unrecognized tax benefits if recognized would reduce our annual
effective tax rate. As of March 1, 2007, the Company had approximately $556 of
accrued interest and penalties and $701 as of February 29, 2008. The Company
records both accrued interest and penalties related to income tax matters in the
provision for income taxes in the accompanying consolidated statement of
operations. The Company does not expect its unrecognized tax benefits to change
significantly over the next 12 months.
The
Company files its tax returns in the U.S. and certain state and foreign income
tax jurisdictions with varying statutes of limitations. The earliest
years’ tax returns filed by the Company that are still subject to examination by
the tax authorities in the major jurisdictions are as
follows:
|
Jurisdiction
|
Tax
Year
|
|
|
U.S.
|
2004
|
|
|
Germany
|
2005
|
|
|
Canada
|
2004
|
|
|
Indiana
|
2003
|
The
Company is in the process of concluding an IRS examination for the tax year
ended February 28, 2005 and the preliminary results of the examination did not
have a material impact on the Company’s consolidated statement of operations
from continuing operations.
F-35
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share
data)
9) Capital
Structure
The
Company's capital structure is as follows:
|
Shares
Authorized
|
Shares
Outstanding
|
Voting
|
||||||||||||
|
Par
|
February
29,
|
February
28,
|
February
29,
|
February
28,
|
Rights
per
|
Liquidation
|
||||||||
|
Security
|
Value
|
2008
|
2007
|
2008
|
2007
|
Share
|
Rights
|
|||||||
|
Preferred
Stock
|
$50.00
|
50,000
|
50,000
|
-
|
-
|
-
|
$50
per share
|
|||||||
|
Series
Preferred Stock
|
$0.01
|
1,500,000
|
1,500,000
|
-
|
-
|
-
|
-
|
|||||||
|
Class
A Common Stock
|
$0.01
|
60,000,000
|
60,000,000
|
20,593,660
|
20,312,299
|
One
|
Ratably
with Class B
|
|||||||
|
Class
B Common Stock
|
$0.01
|
10,000,000
|
10,000,000
|
2,260,954
|
2,260,954
|
Ten
|
Ratably
with Class A
|
|||||||
During
the year ended February 28, 2007, the Company repurchased all 50,000 outstanding
shares of preferred stock from the original shareholder for $5 and retired the
shares upon repurchase. The $2,495 difference between the repurchase price and
book value of the shares is included in paid in capital in the accompanying
consolidated balance sheet at February 28, 2007.
The
holders of Class A and Class B common stock are entitled to receive
cash or property dividends declared by the Board of Directors. The Board of
Directors can declare cash dividends for Class A common stock in amounts
equal to or greater than the cash dividends for Class B common stock.
Dividends other than cash must be declared equally for both classes. Each share
of Class B common stock may, at any time, be converted into one share of
Class A common stock.
As of
February 29, 2008, 1,742,448 shares of the Company's Class A common stock
are authorized to be repurchased in the open market. As of February 29, 2008 and
February 28, 2007, 1,820,552 and 1,693,047 shares were repurchased for an
aggregate amount of $18,404 and $16,979, respectively.
Undistributed
earnings from equity investments included in retained earnings amounted to
$7,896 and $6,027 at February 29, 2008 and February 28, 2007,
respectively.
10) Other Stock and Retirement
Plans
a) Restricted
Stock Plan
The
Company has restricted stock plans under which key employees and directors may
be awarded restricted stock. Awards under the restricted stock plan may be
performance-accelerated shares or performance-restricted shares. No
performance accelerated shares or performance-restricted shares were granted or
outstanding during the years ended February 29, 2008, February 28, 2007, the
three months ended February 28, 2006 and the year ended November 30,
2005.
As of
February 29, 2008, 1,228,750 shares of the Company's Class A common stock
are reserved for issuance under the Company's Restricted and Stock Option Plan.
b) Employee
Stock Purchase Plan
In
April 2000, the stockholders approved the 2000 Employee Stock Purchase Plan
of up to 1,000,000 shares. The stock purchase plan provides eligible employees
an opportunity to purchase shares of the Company's Class A common stock
through payroll deductions at a minimum of 2% and a maximum of 15% of base
salary compensation. Amounts withheld are used to purchase Class A common
stock on the open market. The cost to the employee for the shares is equal to
85% of the fair market value of the shares on or about the quarterly purchase
date (December 31, March 31, June 30 or September 30). The
Company bears the cost of the remaining 15% of the fair market value of the
shares as well as any broker fees. Effective March 1, 2008, the Employee Stock
Purchase Plan was terminated.
F-36
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
The
Company's employee stock purchase plan is a non-compensatory plan, and the
related expense is recorded in general and administrative expenses in the
consolidated statements of operations.
c) Profit
Sharing Plans/ 401(k) Plan
The
Company has established two non-contributory employee profit sharing plans for
the benefit of its eligible employees in the United States and Canada. The plans
are administered by trustees appointed by the Company. No contributions were
made during the years ended February 29, 2008, February 28, 2007, the three
months ended February 28, 2006 and the year ended November 30, 2005.
Contributions required by law to be made for eligible employees in Canada were
not material for all periods presented.
The
Company also has a 401(k) plan for eligible employees. The Company matches a
portion of the participant's contributions after three months of service under a
predetermined formula based on the participant's contribution level. The
Company's contributions were $749, $486, $92 and $139 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. Shares of the Company's
Common Stock are not an investment option in the Savings Plan and the Company
does not use such shares to match participants'
contributions.
d) Cash
Bonus Profit Sharing Plan
During
fiscal 2008, the Board of Directors authorized a Cash Bonus Profit
Sharing Plan that allows the Company to make profit sharing contributions for
the benefit of eligible employees, for any fiscal year based on a
pre-determined formula on the Company's pre-tax profits. The size of the
contribution is dependent upon the performance of the Company. A participant’s
share of the contribution is determined pursuant to the participant’s eligible
wages for the fiscal year as a percentage of total eligible wages for all
participants. During the year ended February 29, 2008, the Company made a cash
bonus profit sharing contribution in the amount of $480 as a result of the
Company achieving pre-tax profits in excess of the Cash Bonus Profit Sharing
Plan limits.
e) Deferred
Compensation Plan
Effective
December 1, 1999, the Company adopted a Deferred Compensation Plan (the
Plan) for a select group of management. The Plan is intended to provide certain
executives with supplemental retirement benefits as well as to permit the
deferral of more of their compensation than they are permitted to defer under
the Profit Sharing and 401(k) Plan. The Plan provides for a matching
contribution equal to 25% of the employee deferrals up to $20. The Plan is not
intended to be a qualified plan under the provisions of the Internal Revenue
Code. All compensation deferred under the Plan is held by the Company in an
investment trust which is considered an asset of the Company. The
Company has the option of amending or terminating the Plan at any
time.
The
investments, which amounted to $4,406 and $7,573 at February 29, 2008 and
February 28, 2007, respectively, have been classified as trading securities
(long-term) and are included in investment securities on the accompanying
consolidated balance sheets as of February 29, 2008 and February 28,
2007. The corresponding deferred compensation liability is reflected
as a long-term liability on the accompanying consolidated balance sheets as of
February 29, 2008 and February 28, 2007.
F-37
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share
data)
11) Lease
Obligations
During
1998, the Company entered into a 30-year capital lease for a building with its
principal stockholder and current chairman, which was the headquarters of the
discontinued Cellular operation. Payments on the capital lease were based upon
the construction costs of the building and the then-current interest rates. The
effective interest rate on the capital lease obligation is 8%. This
lease was refinanced in December 2006, which resulted in a $161 reduction to the
capital lease obligation and corresponding asset, and the lease expires on
November 30, 2026. On November 1, 2004 and in connection with the
sale of the Cellular business, the Company entered into an agreement to
sub-lease the building to UTStarcom ("UTSI") for monthly payments of $46
through October 31, 2009.
At
February 29, 2008, the Company was obligated under non-cancelable capital and
operating leases for equipment and warehouse facilities for minimum annual
rental payments as follows:
|
Capital
|
Operating
|
|||||||
|
Lease
|
Leases
|
|||||||
|
2009
|
$ | 522 | $ | 4,205 | ||||
|
2010
|
521 | 3,385 | ||||||
|
2011
|
521 | 2,763 | ||||||
|
2012
|
535 | 2,535 | ||||||
|
2013
|
574 | 2,095 | ||||||
|
Thereafter
|
8,777 | 8,267 | ||||||
|
Total
minimum lease payments
|
11,450 | $ | 23,250 | |||||
|
Less: minimum
sublease income
|
920 | |||||||
|
Net
|
10,530 | |||||||
|
Less: amount
representing interest
|
4,853 | |||||||
|
Present
value of net minimum lease payments
|
5,677 | |||||||
|
Less:
current installments included in accrued expenses and other current
liabilities
|
70 | |||||||
|
Long-term
capital obligation
|
$ | 5,607 | ||||||
Rental
expense for the above-mentioned operating lease agreements and other leases on a
month-to-month basis approximated $3,138, $2,319, $536 and $2,097 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.
The
Company leases certain facilities and equipment from its principal stockholder
and several officers. At February 29, 2008, minimum annual rental payments on
these related party leases, in addition to the capital lease payments, which are
included in the above table, are as follows:
|
2009
|
$ | 673 | ||
|
2010
|
693 | |||
|
2011
|
714 | |||
|
2012
|
735 | |||
|
2013
|
758 | |||
|
Thereafter
|
3,048 | |||
|
Total
|
$ | 6,621 |
F-38
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share
data)
12) Financial
Instruments
a) Off-Balance
Sheet Risk
Commercial
letters of credit are issued by the Company during the ordinary course of
business through major domestic banks as requested by certain suppliers. The
Company also issues standby letters of credit principally to secure certain bank
obligations and insurance policies. The Company had open commercial letters of
credit of $3,803 and $6,056 and standby letters of credit of $2,399 and $3,252
at February 29, 2008 and February 28, 2007, respectively. The terms
of these letters of credit are all less than one year. No material loss is
anticipated due to nonperformance by the counter parties to these agreements.
The fair value of these open commercial and standby letters of credit is
estimated to be the same as the contract values based on the short-term nature
of the fee arrangements with the issuing banks.
At
February 29, 2008, the Company had unconditional purchase obligations for
inventory commitments of $71,546. 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.
b) Concentrations
of Credit Risk
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of trade receivables. The Company's customers are
located principally in the United States, Canada and Germany and consist of,
among others, distributors, mass merchandisers, warehouse clubs and independent
retailers. The Company generally grants credit based upon analyses of
customers' financial condition and previously established buying and payment
patterns. For certain customers, the Company establishes collateral rights in
accounts receivable and inventory and obtains personal guarantees from certain
customers based upon management's credit evaluation.
At
February 29, 2008, two customers accounted for approximately 28% of accounts
receivable, while at February 28, 2007, one customer accounted for 18% of
accounts receivable. 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.
A portion
of the Company's customer base may be susceptible to downturns in the retail
economy, particularly in the consumer electronics industry. Additionally,
customers specializing in certain automotive sound, security and accessory
products may be impacted by fluctuations in automotive sales.
c) Fair
Value
The
carrying value of all financial instruments is deemed to approximate fair value
because of the short-term nature of these instruments. The estimated fair value
of the Company's financial instruments is as
follows:
|
February
29, 2008
|
February
28, 2007
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
|
Short-term
investments
|
$ | - | $ | - | $ | 140,872 | $ | 140,872 | ||||||||
|
Investment
securities (long-term)
|
15,033 | 15,033 | 13,179 | 13,179 | ||||||||||||
|
Bank
obligations
|
3,070 | 3,070 | 2,890 | 2,890 | ||||||||||||
F-39
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:
Short-Term
Investment/Investment Securities
The
carrying amount represents fair value, which is based upon quoted market prices
at the reporting date (see Note 1(e)).
Bank
Obligations
The
carrying amount of the Company's foreign debt approximates fair value because
the interest rate on the debt is reset every quarter to reflect current market
rates.
Limitations
Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
13) Bliss-tel
Investment
On
December 13, 2004, one of the Company's former equity investments, Bliss-tel
Public Company Limited ("Bliss-tel"), issued 2,300,000,000 shares on the SET
(Security Exchange of Thailand) for an offering price of 6.20 baht per share.
Prior to the issuance of these shares, the Company was a 20% shareholder in
Bliss-tel and, subsequent to the offering, the Company owned 300,000,000 shares
(or approximately 13%) of Bliss-tel's outstanding stock. In addition, on July
21, 2005, the Company received 90,000,000 warrants ("the warrants") which may be
exercised beginning on September 29, 2006, and expire on July 17, 2012. Each
warrant is exercisable into one share of Bliss-tel common stock at an exercise
price of 8 baht per share. Beginning on September 1, 2005, the Company accounted
for the Bliss-tel investment as an available-for-sale security in accordance
with Financial Accounting Standards Board Statement No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" whereby the unrealized holding
gains and losses on Bliss-tel stock and warrants are included as a component of
accumulated other comprehensive income (loss) (see Note 1(e)). The
Company reclassified the Bliss-tel investment to an available-for-sale security
from a trading security, on September 1, 2005, as a result of a change in the
Company’s strategy regarding selling the Bliss-tel stock as the Company was
unable to find a buyer in the short term.
Prior to
September 1, 2005 and following Bliss-tel’s offering, the Company accounted for
this investment as a trading security. Accordingly, the Company
recorded a net gain of $4,971 for the year ended November 30, 2005, which is
included in other income on the accompanying consolidated statements of
operations. This gain represents the initial value of the Bliss-tel warrants and
the change in value of the underlying stock and warrant during the period, when
the investment was classified as a trading security.
During
the years ended February 29, 2008 and February 28, 2007, the Company sold
131,594,000 and 2,340,600 shares of Bliss-tel stock resulting in a gain of
$1,533 and a loss of $178, respectively, which is included in other income
(loss) on the accompanying consolidated statements of operations. As
of February 29, 2008 the Company owns 145,000,000 shares and 90,000,000 warrants
in Bliss-tel with an aggregate fair value of $4,966.
In February 2008, Bliss-tel stock split 10:1. Accordingly, all
share data has been retroactively restated for the stock split at February 29,
2008.
F-40
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share
data)
14) Financial and Product
Information About Foreign and Domestic Operations
Net sales
and long-lived assets by location were as follows:
|
Net
Sales
|
||||||||||||||||
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
North
America
|
$ | 501,952 | $ | 391,154 | $ | 88,255 | $ | 466,512 | ||||||||
|
Latin
America
|
13,666 | 8,517 | 2,005 | 8,224 | ||||||||||||
|
Germany
|
61,746 | 46,291 | 8,999 | 52,039 | ||||||||||||
|
Other
foreign countries
|
13,991 | 10,728 | 3,791 | 12,941 | ||||||||||||
|
Total
net sales
|
$ | 591,355 | $ | 456,690 | $ | 103,050 | $ | 539,716 | ||||||||
The basis of
attributing net sales from external customers to individual countries is based
on where the sale originates from.
|
Long-Lived
Assets
|
||||||||
|
As
of
|
As
of
|
|||||||
|
February
29,
|
February
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
North
America
|
$ |
159,436
|
$ | 118,457 | ||||
|
Latin
America
|
496 | 359 | ||||||
|
Asia
|
414 | - | ||||||
|
Germany
|
14,640 | 1,612 | ||||||
|
Total
long-lived assets
|
$ | 174,986 | $ | 120,428 | ||||
Net sales
by product categories for the years ended February 29, 2008, February 28, 2007,
the three months ended February 28, 2006 and the year ended November 30, 2005
were as follows:
|
Three
|
||||||||||||||||
|
Year
|
Year
|
Months
|
Year
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
February
29,
|
February
28,
|
February
28,
|
November
30,
|
|||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
Electronics
|
$ | 437,018 | $ | 432,943 | $ | 99,566 | $ | 530,408 | ||||||||
|
Accessories
|
154,337 | 23,747 | 3,484 | 9,308 | ||||||||||||
|
Total
net sales
|
$ | 591,355 | $ | 456,690 | $ | 103,050 | $ | 539,716 | ||||||||
15) Related Party
Transactions
The
Company leases facilities from its principal stockholder (see Note 11), conducts
transactions with ASA (see Note 5) and UTSI (see Note
11).
16) Contingencies
The
Company is currently, and has in the past been, a party to various routine legal
proceedings incident to the ordinary course of business. If
management determines, based on the underlying facts and circumstances, that it
is probable a loss will result from a litigation contingency and the amount of
the loss can be reasonably estimated, the estimated loss is accrued
for. The Company believes its outstanding litigation matters
disclosed below will not have a material adverse effect on the Company's
financial statements, individually or in the aggregate; however, due to the
uncertain outcome of these matters, the Company disclosed these specific matters
below:
F-41
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share
data)
Certain
consolidated class actions transferred to a Multi-District Litigation Panel of
the United States District Court of the District of Maryland against the Company
and other suppliers, manufacturers and distributors of hand-held wireless
telephones alleging damages relating to exposure to radio frequency radiation
from hand-held wireless telephones are still pending. No
assurances regarding the outcome of this matter can be given, as the Company is
unable to assess the degree of probability of an unfavorable outcome or
estimated loss or liability, if any. Accordingly, no estimated loss
has been recorded for the aforementioned case.
During
fiscal 2004, an arbitration proceeding was commenced by the Company and several
of its subsidiaries against certain Venezuelan employees and two Venezuelan
companies ("Respondents") before the American Arbitration
Association. The matter was submitted to mediation and settled in
fiscal 2005. The agreement provided for a payment (to be made upon
satisfaction of certain pre-closing conditions) from the Company to the
Respondents of $1,700 in consideration of which the Company will acquire all of
Respondents' ownership. In addition, the Company and Respondents will release
all claims. As of February 28, 2006, $250 was paid to the Respondents
and the remaining balance (which includes accrued interest), was included in
restricted cash on the accompanying consolidated balance sheet. In
April 2006, all closing conditions were satisfied and the remaining balance in
restricted cash was paid to the Respondents. This purchase of
minority interest was recorded as goodwill on the accompanying consolidated
balance sheet in accordance with FASB Statement 141 “Business Combinations” (see
Note 1(j)). As such, this matter has been completed and the Company
has full ownership of Audiovox Venezuela.
The
products the Company sells are continually changing as a result of improved
technology. As a result, although the Company and its suppliers
attempt to avoid infringing known proprietary rights, the Company may be subject
to legal proceedings and claims for alleged infringement by its suppliers or
distributors, of third party patents, trade secrets, trademarks or
copyrights. Any claims relating to the infringement of third-party
proprietary rights, even if not meritorious, could result in costly litigation,
divert management’s attention and resources, or require the Company to either
enter into royalty or license agreements which are not advantageous to the
Company or pay material amounts of damages.
Under the
asset purchase agreement for the sale of the Company’s Cellular business to
UTSI, the Company agreed to indemnify UTSI for any breach or violation by ACC
and its representations, warranties and covenants contained in the asset
purchase agreement and for other matters, subject to certain limitations, for a
period of five years. Significant indemnification claims by UTSI
could have a material adverse effect on the Company's financial condition and
results of operation. The Company is not aware of any such claim(s)
for indemnification.
Derivative
Settlement
In
November 2004, several purported double derivative, derivative and class actions
were filed in the Court of Chancery of the State of Delaware, New
Castle County challenging approximately $27,000 made in payments from the
proceeds of the sale of the Company’s cellular business. These
actions were subsequently consolidated into a single derivative complaint (the
"Complaint"), In re Audiovox
Corporation Derivative Litigation.
This
matter was settled in May 2007 and received final Chancery court approval in
June 2007. As a result of the settlement, the Company received $6,750
in gross proceeds. The gross proceeds were offset by $2,378 in
plaintiff legal fees and $1,023 in accrued legal and administrative costs for
defending all remaining ACC legal claims. The items discussed above
resulted in a pre-tax benefit of $3,349 recorded in discontinued operations for
the year ended February 29, 2008.
F-42
Audiovox
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements, continued
February
29, 2008
(Dollars
in thousands, except share and per share data)
Simultaneous
with the acquisition of Code Systems, Inc. (Code) in March 2002, the Company
entered into a purchase and supply agreement with a third party. In
exchange for entering into this agreement, the Company issued 50 warrants in its
subsidiary, Code, which vest immediately. Furthermore, the agreement
calls for the issuance of additional warrants based upon the future operating
performance of Code. Based upon the contingent nature of the
warrants, no recognition was given to the Code warrants as the related
contingency was not considered probable and such warrants had not vested at
February 29, 2008 or February 28, 2007.
17) Unaudited Quarterly
Financial Data
Selected
unaudited, quarterly financial data of the Company for the years ended February
29, 2008 and February 28, 2007 appear below:
|
Quarters
Ended
|
||||||||||||||||
|
Feb.
29, 2008
|
Nov.
30, 2007
|
Aug.
31, 2007
|
May
31, 2007
|
|||||||||||||
|
2008
|
||||||||||||||||
|
Net
sales
|
$ | 131,269 | $ | 183,563 | $ | 148,269 | $ | 128,254 | ||||||||
|
Gross
profit
|
24,674 | 34,991 | 28,474 | 23,189 | ||||||||||||
|
Net
(loss) income from continuing operations
|
(1,785 | ) | 4,680 | 3,730 | 121 | |||||||||||
|
Net
(loss) income from discontinued operations
|
(392 | ) | - | - | 2,111 | |||||||||||
|
Net
(loss) income
|
$ | (2,177 | ) | $ | 4,680 | $ | 3,730 | $ | 2,232 | |||||||
|
Net
(loss) income per common share (basic):
|
||||||||||||||||
|
From
continuing operations
|
$ | (0.08 | ) | $ | 0.20 | $ | 0.16 | $ | 0.01 | |||||||
|
From
discontinued operations
|
$ | (0.02 | ) | - | - | $ | 0.09 | |||||||||
|
Net
(loss) income per common share (basic)
|
$ | (0.10 | ) | $ | 0.20 | $ | 0.16 | $ | 0.10 | |||||||
|
Net
(loss) income per common share (diluted):
|
||||||||||||||||
|
From
continuing operations
|
$ | (0.08 | ) | $ | 0.20 | $ | 0.16 | $ | 0.01 | |||||||
|
From
discontinued operations
|
$ | (0.02 | ) | - | - | $ | 0.09 | |||||||||
|
Net
(loss) income per common share (diluted)
|
$ | (0.10 | ) | $ | 0.20 | $ | 0.16 | $ | 0.10 | |||||||
|
Quarters
Ended
|
||||||||||||||||
|
Feb.
28, 2007
|
Nov.
30, 2006
|
Aug.
31, 2006
|
May
31, 2006
|
|||||||||||||
|
2007
|
||||||||||||||||
|
Net
sales
|
$ | 96,134 | $ | 151,833 | $ | 97,424 | $ | 111,299 | ||||||||
|
Gross
profit
|
18,095 | 25,371 | 15,754 | 20,099 | ||||||||||||
|
Net
(loss) income from continuing operations
|
(305 | ) | 3,848 | (1,633 | ) | 1,782 | ||||||||||
|
Net
(loss) income from discontinued operations
|
(180 | ) | 6 | (322 | ) | (260 | ) | |||||||||
|
Net
(loss) income
|
$ | (485 | ) | $ | 3,854 | $ | (1,955 | ) | $ | 1,522 | ||||||
|
Net
(loss) income per common share (basic):
|
||||||||||||||||
|
From
continuing operations
|
$ | (0.01 | ) | $ | 0.17 | $ | (0.07 | ) | $ | 0.08 | ||||||
|
From
discontinued operations
|
$ | (0.01 | ) | - | $ | (0.02 | ) | $ | (0.01 | ) | ||||||
|
Net
(loss) income per common share (basic)
|
$ | (0.02 | ) | $ | 0.17 | $ | (0.09 | ) | $ | 0.07 | ||||||
|
Net
(loss) income per common share (diluted):
|
||||||||||||||||
|
From
continuing operations
|
$ | (0.01 | ) | $ | 0.17 | $ | (0.07 | ) | $ | 0.08 | ||||||
|
From
discontinued operations
|
$ | (0.01 | ) | - | $ | (0.02 | ) | $ | (0.01 | ) | ||||||
|
Net
(loss) income per common share (diluted)
|
$ | (0.02 | ) | $ | 0.17 | $ | (0.09 | ) | $ | 0.07 | ||||||
Earnings per share are computed
separately for each quarter. Therefore, the sum of such quarterly per share
amounts may differ from the total for the years.
F-43
SCHEDULE
II
Valuation
and Qualifying Accounts
Years
ended February 29, 2008, February 28, 2007,
the
Three Months Ended February 28, 2006, and the Year Ended November 30, 2005
(In
thousands)
|
Column
A
|
Column
B
|
Column
C
|
Column
D
|
Column
E
|
||||||||||||||||
|
Gross
|
||||||||||||||||||||
|
Amount
|
Reversals
of
|
|||||||||||||||||||
|
Balance
at
|
Charged
to
|
Previously
|
Balance
|
|||||||||||||||||
|
Beginning
|
Costs
and
|
Established
|
at
End
|
|||||||||||||||||
|
Description
|
of
Year
|
Expenses
|
Accruals
|
Deductions
(b)
|
of
Year
|
|||||||||||||||
|
Year
ended November 30, 2005 (a)
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 6,271 | $ | 1,105 | $ | - | $ | 879 | $ | 6,497 | ||||||||||
|
Cash
discount allowances
|
503 | 1,925 | - | 2,001 | 427 | |||||||||||||||
|
Accrued
sales incentives (c)
|
7,584 | 20,609 | (2,836 | ) | 15,531 | 9,826 | ||||||||||||||
|
Reserve
for warranties and product repair costs
|
11,794 | 6,063 | - | 7,528 | 10,329 | |||||||||||||||
| $ | 26,152 | $ | 29,702 | $ | (2,836 | ) | $ | 25,939 | $ | 27,079 | ||||||||||
|
Three
months ended February 28, 2006
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 6,497 | $ | (595 | ) | $ | - | $ | (234 | ) | $ | 6,136 | ||||||||
|
Cash
discount allowances
|
427 | 393 | - | 495 | 325 | |||||||||||||||
|
Accrued
sales incentives
|
9,826 | 3,526 | (480 | ) | 4,360 | 8,512 | ||||||||||||||
|
Reserve
for warranties and product repair costs
|
10,329 | 477 | - | 859 | 9,947 | |||||||||||||||
| $ | 27,079 | $ | 3,801 | $ | (480 | ) | $ | 5,480 | $ | 24,920 | ||||||||||
|
Year
ended February 28, 2007
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 6,136 | $ | (23 | ) | $ | - | $ | 1,051 | $ | 5,062 | |||||||||
|
Cash
discount allowances
|
325 | 1,483 | - | 1,543 | 265 | |||||||||||||||
|
Accrued
sales incentives
|
8,512 | 14,961 | (2,460 | ) | 13,603 | 7,410 | ||||||||||||||
|
Reserve
for warranties and product repair costs (c)
|
9,947 | 9,752 | - | 10,113 | 9,586 | |||||||||||||||
| $ | 24,920 | $ | 26,173 | $ | (2,460 | ) | $ | 26,310 | $ | 22,323 | ||||||||||
|
Year
ended February 29, 2008
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 5,062 | $ | (297 | ) | $ | - | $ | (1,621 | ) | $ | 6,386 | ||||||||
|
Cash
discount allowances
|
265 | 3,377 | - | 3,367 | 275 | |||||||||||||||
|
Accrued
sales incentives
|
7,410 | 29,084 | (4,108 | ) | 21,618 | 10,768 | ||||||||||||||
|
Reserve
for warranties and product repair costs (c)
|
9,586 | 22,249 | - | 14,516 | 17,319 | |||||||||||||||
| $ | 22,323 | $ | 54,413 | $ | (4,108 | ) | $ | 37,880 | $ | 34,748 | ||||||||||
(a) The
Valuation and Qualification Accounts of the Company's discontinued operations
are not included in the above amounts (see Note 2 of the Notes to Consolidated
Financial Statements).
(b) For the
allowance for doubtful accounts, cash discount allowances and accrued sales
incentives, deductions represent currency effects, chargebacks and payments made
or credits issued to customers. For the reserve for warranties and
product repair costs, deductions represent currency effects and payments for
labor and parts made to service centers and vendors for the repair of units
returned under warranty.
(c) Column C includes
$1,255, $1,705, $325, $646 and $12,848 of liabilities acquired during the
Terk, Thomson Accessory, Oehlbach, Technuity and Thomson Audio/Video
acquisitions, respectively (see Note 3 of the Consolidated Financial
Statements).
S-1
SUBSIDIARIES
OF REGISTRANT
|
Subsidiaries
|
Jurisdiction
of Incorporation
|
|
Audiovox
Accessories Corp.
|
Delaware
|
|
Audiovox
Consumer Electronics, Inc.
|
Delaware
|
|
Audiovox
Electronics Corporation
|
Delaware
|
|
American
Radio Corp.
|
Georgia
|
|
Audiovox
Venezuela C.A.
|
Venezuela
|
|
Audiovox
German Holdings GmbH
|
Germany
|
|
Code
Systems, Inc.
|
Delaware
|
EXHIBIT
23
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have
issued our reports dated May 14, 2008 with respect to the consolidated financial
statements, financial statement schedule and internal control over financial
reporting included in the Annual Report of Audiovox Corporation and subsidiaries
on Form 10-K for the year ended February 29, 2008. We hereby consent
to the incorporation by reference of said reports in the Registration Statements
of Audiovox Corporation on Forms S-8 (File No. 333-138000, effective October 13,
2006; File No. 333-131911, effective February 17, 2006; File No. 333-36762,
effective May 11, 2000 and File No. 333-82073, effective July 1,
1999).
GRANT
THORNTON LLP
Melville,
New York
May 14,
2008
CERTIFICATION
PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a)
OF THE
SECURITIES EXCHANGE ACT OF 1934
I,
Patrick M. Lavelle, President and Chief Executive Officer of Audiovox
Corporation, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K of Audiovox Corporation (the
“Company”);
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
b)
|
Designed
such internal controls over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
|
|
c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materiality affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
May 14,
2008
/s/Patrick M.
Lavelle
Patrick
M. Lavelle
President
and Chief Executive Officer
Exhibit
31.1
CERTIFICATION
PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a)
OF THE
SECURITIES EXCHANGE ACT OF 1934
I, C.
Michael Stoehr, Senior Vice President and Chief Financial Officer of Audiovox
Corporation, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K of Audiovox Corporation (the
“Company”);
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
b)
|
Designed
such internal controls over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
|
|
c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual
report)
that has materiality affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting;
and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
May 14,
2008
/s/C. Michael
Stoehr
C.
Michael Stoehr
Senor
Vice President and Chief Financial Officer
Exhibit 31.2
CERTIFICATION
PURSUANT TO
18 U.S.C.
SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report of Audiovox Corporation (the “Company”) on
Form 10-K for the period ended February 29, 2008 (the “Report”) as filed with
the Securities and Exchange Commission on the date hereof, I, Patick M. Lavelle,
President and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
|
(1)
|
The
Report fully complies with Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
|
|
(2)
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
May 14,
2008
/s/Patrick M.
Lavelle____________
Patrick
M. Lavelle
President
and Chief Executive Officer
EXHIBIT
32.1
CERTIFICATION
PURSUANT TO
18 U.S.C.
SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report of Audiovox Corporation (the “Company”) on
Form 10-K for the period ended February 29, 2008 (the “Report”) as filed with
the Securities and Exchange Commission on the date hereof, I, C. Michael Stoehr,
Senior Vice President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
|
(1)
|
The
Report fully complies with Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
|
|
(2)
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
May 14,
2008
/s/ C. Michael
Stoehr_______________
C.
Michael Stoehr
Senior
Vice President and Chief Financial Officer
EXHIBIT
32.2
Audiovox
Specialized Applications,
LLC
And Subsidiary
(A
Limited Liability Company)
Consolidated
Financial Report
11.30.2007
McGladrey
& Pullen
Certified
Public Accountants
McGladrey
& Pullen, LLP is a member firm of RSM International
-- an
affiliation of separate and independent legal entities.
Contents
|
Report
of Independent Registered Public Accounting Firm
|
1
|
|
Consolidated
Financial Statements
|
|
|
Consolidated
balance sheets
|
2
|
|
Consolidated
statements of income
|
3
|
|
Consolidated
statements of members' equity
|
4
|
|
Consolidated
statements of cash flows
|
5
|
|
Notes
to financial statements
|
6-14
|
Report
of Independent Registered Public Accounting Firm
To the
Members
Audiovox
Specialized Applications, LLC and Subsidiary
Elkhart,
Indiana
We have
audited the consolidated balance sheets of Audiovox Specialized Applications,
LLC and Subsidiary as of November 30, 2007 and 2006, and the related
consolidated statements of income, members' equity, and cash flows for each of
the three years in the period ended November 30, 2007. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with 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
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provided a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Audiovox Specialized Applications,
LLC and Subsidiary as of November 30, 2007 and 2006 and the results of
their operations and their cash flows for each of the three years in the period
ended November 30, 2007, in conformity with U.S. generally accepted accounting
principles.
/s/ McGladrey & Pullen,
LLP
Elkhart,
Indiana
March 31,
2008
1
|
Audiovox
Specialized Applications, LLC and Subsidiary
|
||||||||
|
(A
Limited Liability Company)
|
||||||||
|
Consolidated
Balance Sheets
|
||||||||
|
November
30, 2007 and 2006
|
||||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,267,393 | $ | 1,017,540 | ||||
|
Available-for-sale
securities
|
4,900,000 | 3,570,000 | ||||||
|
Trade
receivables
|
5,411,975 | 4,849,471 | ||||||
|
Inventories
|
15,181,445 | 15,018,215 | ||||||
|
Prepaid
expenses
|
135,982 | 115,530 | ||||||
|
Total
current assets
|
26,896,795 | 24,570,756 | ||||||
|
Leasehold
Improvements and Equipment at depreciated cost
|
2,122,580 | 1,850,088 | ||||||
|
Intangible
Assets, trademark rights
|
2,647,623 | 2,647,623 | ||||||
| $ | 31,666,998 | $ | 29,068,467 | |||||
|
LIABILITIES
AND MEMBERS' EQUITY
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts
payable
|
$ | 1,541,118 | $ | 2,078,898 | ||||
|
Accrued
expenses:
|
||||||||
|
Payroll
and related taxes
|
1,457,057 | 1,214,604 | ||||||
|
Warranty
|
2,457,000 | 2,307,000 | ||||||
|
Other
|
83,165 | 131,117 | ||||||
|
Total
current liabilities
|
5,538,340 | 5,731,619 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Members'
Equity
|
26,128,658 | 23,336,848 | ||||||
| $ | 31,666,998 | $ | 29,068,467 | |||||
|
See
Notes to Financial Statements
|
||||||||
2
|
Audiovox
Specialized Applications, LLC and Subsidiary
|
||||||||||||
|
(A
Limited Liability Company)
|
||||||||||||
|
Consolidated
Statements of Income
|
||||||||||||
|
November
30, 2007, 2006 and 2005
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
sales
|
$ | 71,368,141 | $ | 57,142,023 | $ | 49,794,847 | ||||||
|
Cost
of goods sold
|
56,006,751 | 43,814,678 | 37,917,202 | |||||||||
|
Gross
profit
|
15,361,390 | 13,327,345 | 11,877,645 | |||||||||
|
Selling,
general and administrative expenses
|
8,583,032 | 7,824,861 | 7,365,886 | |||||||||
|
Operating
income
|
6,778,358 | 5,502,484 | 4,511,759 | |||||||||
|
Nonoperating
income (expense):
|
||||||||||||
|
Investment
income
|
103,449 | 292,623 | 204,707 | |||||||||
|
Interest
expense
|
(574 | ) | - | (70 | ) | |||||||
| 102,875 | 292,623 | 204,637 | ||||||||||
|
Net
income
|
$ | 6,881,233 | $ | 5,795,107 | $ | 4,716,396 | ||||||
|
See
Notes to Financial Statements
|
||||||||||||
3
|
Audiovox
Specialized Applications, LLC and Subsidiary
|
||||||||||||
|
(A
Limited Liability Company)
|
||||||||||||
|
Consolidated
Statements of Members' Equity
|
||||||||||||
|
November
30, 2007, 2006 and 2005
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Balance,
beginning
|
$ | 23,336,848 | $ | 24,145,549 | $ | 21,723,411 | ||||||
|
Net
income
|
6,881,233 | 5,795,107 | 4,716,396 | |||||||||
|
Member
distributions
|
(4,089,423 | ) | (6,603,808 | ) | (2,294,258 | ) | ||||||
|
Balance,
ending
|
$ | 26,128,658 | $ | 23,336,848 | $ | 24,145,549 | ||||||
|
See
Notes to Financial Statements
|
||||||||||||
4
|
Audiovox
Specialized Applications, LLC and Subsidiary
|
||||||||||||
|
(A
Limited Liability Company)
|
||||||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||||||
|
November
30, 2007, 2006 and 2005
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
Flows From Operating Activities
|
||||||||||||
|
Net
income
|
$ | 6,881,233 | $ | 5,795,107 | $ | 4,716,396 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
|
813,970 | 669,795 | 555,143 | |||||||||
|
Loss
on sale of equipment
|
234,282 | 25,203 | 28,967 | |||||||||
|
Change
in assets and liabilities:
|
||||||||||||
|
Decrease
(increase) in:
|
||||||||||||
|
Trade
receivables
|
(562,504 | ) | (914,946 | ) | 872,117 | |||||||
|
Inventories
|
(163,230 | ) | (5,905,969 | ) | 835,546 | |||||||
|
Prepaid
expenses
|
(20,452 | ) | (5,415 | ) | 29,417 | |||||||
|
Increase
(decrease) in:
|
||||||||||||
|
Accounts
payable
|
(537,780 | ) | 556,328 | (53,693 | ) | |||||||
|
Accrued
expenses
|
344,501 | 436,482 | 82,514 | |||||||||
|
Net
cash provided by operating activities
|
6,990,020 | 656,585 | 7,066,407 | |||||||||
|
Cash
Flows From Investing Activities
|
||||||||||||
|
Proceeds
on sale of equipment
|
6,660 | 3,813 | 12,111 | |||||||||
|
Purchase
of leasehold improvements and equipment
|
(1,327,404 | ) | (838,513 | ) | (529,177 | ) | ||||||
|
Proceeds
from sale of available-for-sale securities
|
10,870,000 | 19,529,850 | 5,435,000 | |||||||||
|
Purchase
of available-for-sale securities
|
(12,200,000 | ) | (12,849,850 | ) | (10,250,000 | ) | ||||||
|
Net
cash provided by (used in) investing activities
|
(2,650,744 | ) | 5,845,300 | (5,332,066 | ) | |||||||
|
Cash
Flows From Financing Activities
|
||||||||||||
|
Member
distributions
|
(4,089,423 | ) | (6,603,808 | ) | (2,294,258 | ) | ||||||
|
Increase
(decrease) in cash and cash equivalents
|
249,853 | (101,923 | ) | (559,917 | ) | |||||||
|
Cash
and cash equivalents, beginning
|
1,017,540 | 1,119,463 | 1,679,380 | |||||||||
|
Cash
and cash equivalents, ending
|
$ | 1,267,393 | $ | 1,017,540 | $ | 1,119,463 | ||||||
|
See
Notes to Financial Statements
|
||||||||||||
5
Audiovox
Specialized Applications, LLC And Subsidiary
(A
Limited Liability Company)
Notes
To Financial Statements
|
Note
1.
|
Nature
of Business and Significant Accounting
Policies
|
Nature
of business:
Audiovox
Specialized Applications (the “Company”) "The Mobile Electronics Company" is an
international supplier of mobile electronics in certain niche markets in the
Automotive Industry including: Recreational Vehicle, Van/SUV Conversion,
Commercial Vehicle, Heavy Duty Truck, Agricultural, Construction, Bus,
Limousine, and Marine industries. Its proprietary line of products
include: Flexvision LCD
Entertainment Systems, including DVD and video cassette players; Voyager Rear
Observation and Bus Monitor/PA Systems and radios; Nextgen Modular
Chassis Systems; Aquatronics Marine
Radios, Speakers, and Housings; Jensen Marine Radios,
Speakers and Housings and other Audio/Video Products; and Heavy Duty Systems,
Radios and other Audio Products. These products are sold to customers
throughout the world, generally on 30-day terms. ASA is headquartered
in Elkhart, Indiana and has a public distribution center in
California.
Significant
accounting policies:
Use
of estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles
of consolidation:
The
consolidated financial statements include the accounts of the Company and
CruiseTV, LLC ("CruiseTV") a wholly-owned subsidiary. All significant
intercompany accounts have been eliminated in consolidation.
Revenue
recognition:
The
Company recognizes revenue from product sales at the time of passage of title
and risk of loss to the customer either at F.O.B. Shipping Point or F.O.B.
Destination, based upon terms established with the customer. The
Company's selling price is fixed and determined at the time of shipment and
collectibility is reasonably assured and not contingent upon the customer's
resale of the product. The customers are generally not given rights
of return. In the event customers are granted rights of return, the
Company estimates and records an allowance for future returns. At
November 30, 2007 and 2006 no such allowance was deemed
necessary. The product sale is not subject to acceptance or
installation by Company or customer personnel.
The
Company recognizes shipping costs in selling, general and administrative in the
accompanying statements of income. Shipping costs for the years ended
November 30, 2007, 2006 and 2005 were approximately $487,000; $518,000 and
$403,000, respectively.
The
Company recognizes royalty revenue at the time the related product is purchased
by Audiovox Corporation ("Audiovox"), a member of ASA. Total royalty
revenue under this agreement for the years ended November 30, 2007, 2006, and
2005 was approximately $831,000, $649,000 and $871,000,
respectively.
6
Audiovox
Specialized Applications, LLC And Subsidiary
(A
Limited Liability Company)
Notes
To Financial Statements
All sales
transactions are denominated in U.S. dollars.
Sales
incentives:
The
Company offers sales incentives to its customers primarily in the form of
co-operative advertising allowances and rebates. The Company accounts
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). All significant sales incentives require the customer to
purchase the Company’s products during a specified period of
time. Claims are settled either by the customer claiming a deduction
against an outstanding account receivable or by the customer requesting a
check. Rebates and co-op advertising allowances offered to customers
require that product be purchased during a specified period of
time. The amount offered is generally based upon a fixed percentage
of sales revenue to the customer. Since the rebate percentage is
generally fixed, the Company records the related rebate at the time of
sale.
Members'
equity:
In
accordance with the generally accepted method of presenting limited liability
company financial statements, the accompanying financial statements do not
include other corporate assets and liabilities of the members, including their
obligation for income taxes on the net income of the limited liability company
nor any provision for income tax expense.
It is the
Company's intent to distribute funds to members to cover their income tax
liabilities. No provision has been made for any material
distributions which may be made subsequent to the balance sheet
date.
Subsequent
to November 30, 2007, the Company paid approximately $1,010,000 of member
distributions.
The LLC
operating agreement does not provide for separate classes of
ownership. The members share equally in all LLC events and the
related member accounts are considered equal on a fair value basis.
Cash
and cash equivalents:
For
purposes of the statement of cash flows, the Company considers investments in
various repurchase agreements with its bank, money market accounts and highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. Cash equivalents amounted to approximately $979,000
and $888,000 for the years ended November 30, 2007 and 2006
respectively.
The
Company maintains its cash accounts in amounts which, at times, may be in excess
of insurance limits provided by the Federal Deposit Insurance
Corporation.
Available-for-sale
securities:
Available-for-sale
securities consist of investments in marketable debt securities. Debt
securities consist primarily of obligations of municipalities.
7
Audiovox
Specialized Applications, LLC And Subsidiary
(A
Limited Liability Company)
Notes
To Financial Statements
The
Company accounts for these investments in accordance with Financial Accounting
Standards Board (“FASB”) Statement No. 115. Management determines the
appropriate classification of securities at the date individual investment
securities are acquired and the appropriateness of such classification is
reassessed at each balance sheet date. Since the Company neither buys
investment securities in anticipation of short-term fluctuation in market prices
nor commits to holding debt securities to their maturities, the investments in
debt securities have been classified as available-for-sale in accordance with
Statement No. 115. Available-for-sale securities are stated at fair
value, and unrealized holding gains and losses, if any, are reported as a
separate component of members' equity.
The
amount classified as current assets on the accompanying balance sheets
represents the amount of marketable debt securities expected to be sold during
the next year.
A decline
in the market value of any available-for-sale security below cost that is deemed
other-than-temporary results in a reduction in carrying amount to fair
value. The impairment is charged to earnings and a new cost basis for
the security is established. The Company considers numerous factors,
on a case by case basis, in evaluating whether the decline in market value of an
available-for-sale security below cost is other-than-temporary. Such
factors include, but are not limited to, (i) the length of time and the extent
to which the market value has been less than cost; (ii) the financial condition
and the near-term prospects of the issuer or the investment; and (iii) whether
the Company’s intent to retain the investment for the period of time is
sufficient to allow for any anticipated recovery in market value.
Trade
receivables:
Trade
receivables are carried at original invoice amount less an estimate made for
doubtful receivables based on a review of all outstanding amounts on a monthly
basis. Trade receivables in the accompanying balance sheets at
November 30, 2007and 2006 are stated net of an allowance for doubtful accounts
of approximately $166,000 and $50,000 respectively. Management
determines the allowance for doubtful accounts by identifying troubled accounts
and by using historical experience applied to an aging of
accounts. Trade receivables are written off when deemed
uncollectible. Recoveries of trade receivables previously written off
are recorded when received. Generally, a trade receivable is
considered to be past due if any portion of the receivable balance is
outstanding for more than 30 days.
Inventories:
The
Company values its 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. The Company regularly reviews inventory quantities on-hand
and records a provision for excess and obsolete inventory based primarily from
selling prices, indications from customers based upon current price negotiations
and purchase orders. The Company’s 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.
8
Audiovox
Specialized Applications, LLC And Subsidiary
(A
Limited Liability Company)
Notes
To Financial Statements
Depreciation:
Depreciation
of leasehold improvements is computed over the lesser of the underlying lease
term or the estimated useful lives and equipment is computed principally by the
straight-line method over the following estimated useful lives:
|
Years
|
||
|
Leasehold
improvements
|
5-9
|
|
|
Machinery
and equipment
|
5-10
|
|
|
Tooling
and molding
|
3
|
|
|
Transportation
equipment
|
5
|
|
|
Office
furniture and fixtures
|
10
|
|
|
Computer
equipment
|
3-5
|
|
|
Booth
displays
|
7
|
Warranties:
The
Company provides a limited warranty primarily for a period of up to three years
for its products. The Company’s standard warranties require the
Company, the original equipment manufacturer or its dealers to repair or replace
defective products during such warranty periods at no cost to the
consumer. The Company estimates the costs that may be incurred under
its basic limited warranty and records a liability in the amount of such costs
at the time product revenue is recognized. The related expense is
recorded as cost of goods sold in the accompanying statements of
income. Factors that affect the Company’s warranty liability include
the number of units sold, historical and anticipated rates of warranty claims,
the historical lag time between product sales and product claims, and cost per
claim. The Company periodically assesses the adequacy of its recorded
warranty liabilities and adjusts the amounts as necessary. The
Company utilizes historical trends and analytical tools to assist in determining
the appropriate loss reserve levels.
Changes
in the Company’s warranty liability during the years ended November 30, 2007,
2006, and 2005 are as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Balance,
beginning
|
$ | 2,307,000 | $ | 2,390,000 | $ | 2,182,000 | ||||||
|
Accruals
for products sold
|
2,497,155 | 1,671,385 | 1,627,396 | |||||||||
|
Payments
made
|
(2,347,155 | ) | (1,754,385 | ) | (1,419,396 | ) | ||||||
|
Balance,
ending
|
$ | 2,457,000 | $ | 2,307,000 | $ | 2,390,000 | ||||||
Income
taxes:
As a
limited liability Company, the Company’s taxable income is allocated to members
in accordance with their respective percentage ownership. Therefore,
no provision or liability for income taxes has been included in the financial
statements.
9
Audiovox
Specialized Applications, LLC And Subsidiary
(A
Limited Liability Company)
Notes
To Financial Statements
Advertising
costs:
The
Company expenses the cost of advertising (including trade shows), as
incurred. Advertising costs in the accompanying statements of income
were approximately $629,000, $576,000 and $819,000, for the years ended November
30, 2007, 2006, and 2005 respectively.
Long-lived
assets, goodwill and other intangible assets:
In July
2001, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No.
141, “Business
Combinations”, and SFAS No. 142. SFAS No. 141 requires that the purchase
method of accounting be used for all future business combinations and specifies
criteria intangible assets acquired in a business combination must meet to be
recognized and reported apart from goodwill.
SFAS No.
142, “Goodwill and Other
Intangible Assets”, requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually or more frequently if an event occurs or
circumstances change that could more likely than not reduce the fair value of a
reporting unit below its carrying amount.
As a
result of adopting the provisions of SFAS No. 142, the Company did not record
amortization expense relating to its goodwill or its trademark rights. For
intangible assets with indefinite lives, including goodwill, the Company
performed its annual impairment test. There was no impairment on the
trademark rights for the years ended November 30, 2007, 2006 and
2005.
In
accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, the Company reviews its long-lived assets
periodically to determine potential impairment by comparing the carrying value
of the long-lived assets with the estimated future net undiscounted cash flows
expected to result from the use of the assets, including cash flows from
disposition. Should the sum of the expected future net cash flows be
less than the carrying value, the Company would recognize an impairment loss at
that date. An impairment loss would be measured by comparing the
amount by which the carrying value exceeds the fair value of the long-lived
assets. There was no impairment of long-lived assets for the years
ended November 30, 2007, 2006 and 2005.
New
accounting pronouncements:
In June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48 (FIN 48), “Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement 109”. FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”.
FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting
and disclosing in the financial statements tax positions taken or expected to be
taken on a tax return. If there are changes in net assets as a result of
application of FIN 48 these will be accounted for as an adjustment to the
opening balance of retained earnings. Additional disclosures about the amounts
of such liabilities will be required also. In February 2008, the FASB delayed
the effective date of FIN 48 for certain nonpublic enterprises to annual
financial statements for fiscal years beginning after December 15, 2007. The
Company will be required to adopt FIN 48 in its 2008 annual financial
statements. Management is currently assessing the impact of FIN 48 on its
consolidated financial position and results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”. This statement clarifies the definition of fair
value, establishes a framework for measuring fair value and expands the
disclosures on fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact that this statement will have on its financial
position or results of operations.
10
Audiovox
Specialized Applications, LLC And Subsidiary
(A
Limited Liability Company)
Notes
To Financial Statements
|
Note
2.
|
Available-For-Sale
Securities
|
The
following is a summary of the Company's investment securities as of November 30,
2007 and 2006:
|
2007
|
||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
Government
bonds
|
$ | 4,900,000 | $ | - | $ | - | $ | 4,900,000 | ||||||||
|
2005
|
||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
Government
bonds
|
$ | 3,570,000 | $ | - | $ | - | $ | 3,570,000 | ||||||||
The cost
and fair value of debt securities by contractual maturities as of November 30,
2007 are as follows:
|
Fair
|
||||||||
|
Cost
|
Value
|
|||||||
|
Due
after three years
|
$ | 4,900,000 | $ | 4,900,000 | ||||
Expected
maturities may differ from contractual maturities because the issuers of certain
debt securities have the right to prepay their obligations without
penalty. The investments consist of variable rate municipal bonds
containing put options of 7 days or less. The put option and variable
rate allow the bonds to trade at face value.
A summary
of proceeds from the sale of available-for-sale securities and investment
earnings for the years ended November 30, 2007, 2006, and 2005 is as
follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Proceeds
from the sale of available-for-sale
securities
|
$ | 10,870,000 | $ | 19,529,850 | $ | 5,435,000 | ||||||
|
Interest
earned
|
103,449 | 292,623 | 204,707 | |||||||||
11
Audiovox
Specialized Applications, LLC And Subsidiary
(A
Limited Liability Company)
Notes
To Financial Statements
|
Note
3.
|
Leasehold
Improvements and Equipment
|
The cost
of leasehold improvements and equipment and the related accumulated depreciation
at November 30, 2007 and 2006 are as follows:
|
2007
|
2006
|
|||||||
|
Leasehold
improvements
|
$ | 1,012,313 | $ | 798,267 | ||||
|
Machinery
and equipment
|
1,219,853 | 978,244 | ||||||
|
Tooling
and molding
|
847,807 | 754,954 | ||||||
|
Transportation
equipment
|
402,707 | 342,155 | ||||||
|
Office
furniture and fixtures
|
374,282 | 359,377 | ||||||
|
Computer
equipment
|
871,681 | 761,106 | ||||||
|
Booth
displays
|
215,965 | 226,307 | ||||||
|
Construction
in progress
|
154,309 | 74,290 | ||||||
| 5,098,917 | 4,294,700 | |||||||
|
Less
accumulated depreciation
|
2,976,337 | 2,444,612 | ||||||
| $ | 2,122,580 | $ | 1,850,088 | |||||
|
Note
4.
|
Pledged
Assets and Notes Payable
|
The terms
of a loan agreement with a bank permit the Company to borrow a maximum of
$17,000,000, subject to a borrowing base determined by eligible accounts
receivable and inventories as defined by the agreement. At November
30, 2007, no amount was outstanding under this agreement. Borrowings
under the agreement bear interest at prime minus 1.25% or LIBOR plus an
applicable margin, at the Company's option, are collateralized by accounts
receivable, inventories, and equipment, and are due on demand.
|
Note
5.
|
Major
Vendors
|
For the
years ended November 30, 2007, 2006, and 2005, the Company purchased
approximately 65%, 56% and 56% respectively of its products for resale from five
vendors, two of which were the same in all three years.
|
Note
6.
|
Transactions
with Related Parties and Lease
Commitments
|
The
Company is affiliated with various entities through common ownership by
Audiovox. Transactions with Audiovox and related entities for the
years ended November 30, 2007, 2006, and 2005 are approximately as
follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Net
product sales
|
$ | 144,000 | $ | 210,000 | $ | 573,000 | ||||||
|
Royalty
revenue
|
831,000 | 649,000 | 871,000 | |||||||||
|
Purchases
|
879,000 | 1,248,000 | 1,404,000 | |||||||||
12
Audiovox
Specialized Applications, LLC And Subsidiary
(A
Limited Liability Company)
Notes
To Financial Statements
The
Company has a royalty agreement with Audiovox whereby the Company earns a 3%
royalty on the member's purchases of certain mobile video product from a third
party. The related revenue has been included in net sales on the
income statement.
At
November 30, 2007 and 2006, amounts included in trade receivables and accounts
payable resulting from the above transactions are as follows:
|
2007
|
2006
|
|||||||
|
Trade
receivables
|
$ | 143,490 | $ | 108,136 | ||||
|
Accounts
payable
|
359,376 | 541,559 | ||||||
At
November 30, 2007, the Company leases warehouse, manufacturing, and office
facilities from Irions Investments, LLC, an entity related through common
ownership, for approximately $41,000 per month, plus the payment of property
taxes, normal maintenance, and insurance on the property under an agreement
which expires August 2016, with two five-year options to extend, at the
Company's discretion.
The
Company leases certain equipment and buildings from unrelated parties under
agreements that require monthly payments totaling approximately $2,300 and
expire through October 2010.
The total
rental expense included in the income statements for the years ended November
30, 2007, 2006, and 2005 is approximately $522,000, $507,000 and $576,000,
respectively, of which approximately $484,000, $476,000 and $521,000,
respectively was paid to Irions Investments, LLC.
The total
approximate minimum rental commitment at November 30, 2007 under the leases is
due as follows:
|
Related
Party
|
Other
|
Total
|
||||||||||
|
During
the year ending November 30,
|
||||||||||||
|
2008
|
$ | 494,000 | $ | 28,000 | $ | 522,000 | ||||||
|
2009
|
494,000 | 19,000 | 513,000 | |||||||||
|
2010
|
494,000 | 8,000 | 502,000 | |||||||||
|
2011
|
494,000 | - | 494,000 | |||||||||
|
2012
|
494,000 | - | 494,000 | |||||||||
|
Thereafter
|
1,852,000 | - | 1,852,000 | |||||||||
| $ | 4,322,000 | $ | 55,000 | $ | 4,377,000 | |||||||
|
Note
7.
|
Employee
Benefit Plans
|
The
Company has a profit-sharing and 401(k) plan for the benefit of all eligible
employees. The Company's contributions are discretionary and are
limited to amounts deductible for federal income tax
purposes. Discretionary contributions were approximately $352,000,
$290,000 and $204,000, for the years ended November 30, 2007, 2006 and 2005
respectively.
The
Company also maintains a discretionary employee bonus plan for the benefit of
its key executive, operating officers, managers and select
salespersons. The Company has paid or accrued bonuses of
approximately $1,622,000, $1,386,000 and $884,000, during the years ended
November 30, 2007, 2006 and 2005, respectively.
13
Audiovox
Specialized Applications, LLC And Subsidiary
(A
Limited Liability Company)
Notes
To Financial Statements
The
Company has a health plan for its employees, which is self-insured for medical
and pharmaceutical claims up to $35,000 per participant and approximately
$423,000 annually in aggregate. The excess loss portion of the
employees' coverage has been reinsured with a commercial carrier.
|
Note
8.
|
Litigation
|
The
Company has pending legal proceedings. These proceedings are, in the
opinion of management, ordinary routine matters incidental to the normal
business conducted by the Company. In the opinion of management, the
ultimate disposition of such proceedings are not expected to have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
|
Note
9.
|
Major
Customer
|
Net sales
to a customer comprising 10% or more of total net sales for the year ended
November 30, 2007 total approximately $9,004,000. The related trade
receivables balances due from that customer at November 30, 2007 were
approximately $442,000. There were no major customers for the years
ended November 30, 2006 and 2005.
14
Consent
of Independent Registered Public Accounting Firm
We
consent to the incorporation by reference in the Registration Statements of
Audiovox Corporation on Forms S-8 (Registration Nos. 333-36762 and 333-82073) of
our report, dated March 31, 2008, on the consolidated financial statements of
Audiovox Specialized Applications, LLC for the year ended November 30, 2007
which is included in the Annual Report of Audiovox Corporation and subsidiaries
on Form 10-K for the year ended February 29, 2008.
/s/
MCGLADREY & PULLEN, LLP
MCGLADREY
& PULLEN, LLP
Elkhart,
Indiana
May 14,
2008