UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-28839
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 MARCUS BLVD., HAUPPAUGE, NEW YORK 11788
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (631) 231-7750
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer as defined in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Number of shares of each class of the issuer's common stock outstanding as of
the latest practicable date.
Class As of October 4, 2006
Class A Common Stock 19,964,194 Shares
Class B Common Stock 2,260,954 Shares
1
AUDIOVOX CORPORATION
INDEX
PART I -- FINANCIAL INFORMATION PAGE
----
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets at February 28,
2006 and August 31, 2006.................................. 3
Consolidated Statements of Operations for the
Three and Six Months Ended August 31, 2005 and 2006....... 5
Consolidated Statements of Cash Flows for the
Six Months Ended August 31, 2005 and 2006................. 6
Notes to Consolidated Financial Statements.................. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 20
ITEM 3. QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.............................................. 30
ITEM 4. CONTROLS AND PROCEDURES..................................... 31
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 32
ITEM 1A. RISK FACTORS............................................... 32
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS....................................... 32
ITEM 6. EXHIBITS.................................................... 33
SIGNATURES.......................................................... 34
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
FEBRUARY 28, AUGUST 31,
2006 2006
--------------------- -----------------------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 16,280 $ 9,014
Restricted cash ..................................... 1,488 --
Short-term investments .............................. 160,799 172,862
Accounts receivable, net ............................ 88,671 80,246
Inventory ........................................... 96,150 103,143
Receivables from vendors ............................ 9,830 5,004
Prepaid expenses and other current assets ........... 6,023 9,174
Deferred income taxes ............................... 8,218 8,217
-------- --------
Total current assets ............................... 387,459 387,660
Investment securities ................................ 14,709 11,014
Equity investments ................................... 11,834 11,917
Property, plant and equipment, net ................... 18,799 18,174
Excess cost over fair value of assets acquired ....... 16,067 17,514
Intangible assets .................................... 11,002 11,287
Deferred income taxes ................................ 3,989 5,455
Other assets ......................................... 2,153 864
-------- --------
Total assets ....................................... $466,012 $463,885
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
FEBRUARY 28, AUGUST 31,
2006 2006
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 13,776 $ 15,987
Accrued expenses and other current liabilities ..................... 17,907 17,461
Accrued sales incentives ........................................... 8,512 7,405
Income taxes payable ............................................... -- 1,368
Bank obligations ................................................... 5,329 4,343
Current portion of long-term debt .................................. 1,371 1,482
---------- ----------
Total current liabilities ......................................... 46,895 48,046
Long-term debt ...................................................... 5,924 5,703
Capital lease obligation ............................................ 5,892 5,838
Deferred compensation ............................................... 6,569 6,711
---------- -----------
Total liabilities ................................................. 65,280 66,298
Commitments and contingencies
Stockholders' equity:
Preferred stock, $50 par value; 50,000 shares authoissued and
outstanding at February 28, 2006 with liquidation preference
of $2,500. No shares issued or outstanding at August 31, 2006..... 2,500 --
Series preferred stock, $.01 par value; 1,500,000 shares authorized,
no shares issued or outstanding .................................. -- --
Common stock:
Class A, $.01 par value; 60,000,000 shares authorized, 21,520,346
and 21,640,346 shares issued, 20,131,794 and 20,058,294
shares outstanding at February 28, 2006 and August 31,
2006, respectively .............................................. 215 216
Class B, $.01 par value; convertible 10,000,000 shares
authorized, 2,260,954 shares issued and outstanding ............. 22 22
Paid-in capital .................................................... 263,008 266,861
Retained earnings .................................................. 148,427 147,994
Accumulated other comprehensive loss ............................... (608) (2,123)
Treasury stock, at cost, 1,388,552 and 1,582,052 shares of Class A
common stock at February 28, 2006 and August 31, 2006,
respectively .................................................... (12,832) (15,383)
----------- -----------
Total stockholders' equity .......................................... 400,732 397,587
----------- -----------
Total liabilities and stockholders' equity .......................... $ 466,012 $ 463,885
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED AUGUST 31, 2005 AND 2006
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------------------ ------------------------------
2005 2006 2005 2006
------------- ------------ ------------ ------------
Net sales ........................................................ $ 122,937 $ 97,424 $ 267,446 $ 208,723
Cost of sales .................................................... 110,672 81,670 232,382 172,870
------------ ------------ ------------ ------------
Gross profit ..................................................... 12,265 15,754 35,064 35,853
------------ ------------ ------------ ------------
Operating expenses:
Selling ......................................................... 7,258 6,451 15,573 13,512
General and administrative ...................................... 12,497 11,708 24,626 23,033
Engineering and technical support ............................... 1,514 1,765 3,285 3,530
------------ ------------ ------------ ------------
Total operating expenses ....................................... 21,269 19,924 43,484 40,075
------------ ------------ ------------ ------------
Operating loss ................................................... (9,004) (4,170) (8,420) (4,222)
------------ ------------ ------------ ------------
Other income (expense):
Interest and bank charges ....................................... (552) (502) (1,290) (1,062)
Equity in income of equity investees ............................ 849 816 1,592 1,764
Other, net ...................................................... 2,190 1,788 5,210 3,709
------------ ------------ ------------ ------------
Total other income, net ........................................ 2,487 2,102 5,512 4,411
------------ ------------ ------------ ------------
(Loss) income from continuing operations before income taxes ..... (6,517) (2,068) (2,908) 189
Income tax (benefit) expense ..................................... (2,926) (435) (5,079) 40
------------ ------------ ------------ ------------
Net (loss) income from continuing operations ..................... (3,591) (1,633) 2,171 149
Net loss from discontinued operations, net of tax ................ (126) (322) (261) (582)
------------ ------------ ------------ ------------
Net (loss) income ................................................ $ (3,717) $ (1,955) $ 1,910 $ (433)
============ ============ ============ ============
Net (loss) income per common share (basic):
From continuing operations ...................................... $ (0.16) $ (0.07) $ 0.10 $ 0.01
From discontinued operations .................................... (0.01) (0.02) (0.01) (0.03)
------------ ------------ ------------ ------------
Net (loss) income per common share (basic) ....................... $ (0.17) $ (0.09) $ 0.09 $ (0.02)
============ ============ ============ ============
Net (loss) income per common share (diluted):
From continuing operations ...................................... $ (0.16) $ (0.07) $ 0.10 $ 0.01
From discontinued operations .................................... (0.01) (0.02) (0.01) (0.03)
------------ ------------ ------------ ------------
Net (loss) income per common share (diluted) ..................... $ (0.17) $ (0.09) $ 0.09 $ (0.02)
============ ============ ============ ============
Weighted-average common shares outstanding (basic) ............... 22,353,876 22,430,598 22,206,064 22,399,973
============ ============ ============ ============
Weighted-average common shares outstanding (diluted) ............. 22,353,876 22,430,598 22,563,527 22,587,530
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 2005 AND 2006
(IN THOUSANDS)
(UNAUDITED)
2005 2006
----------- -----------
Cash flows from operating activities: (revised)
Net income (loss) ............................................................. $ 1,910 $ (433)
Net loss from discontinued operations ......................................... 261 582
--------- ---------
Net income from continuing operations ......................................... 2,171 149
Adjustments to reconcile net income (loss) to net cash (used in)
provided by continuing operating activities:
Depreciation and amortization ................................................. 1,688 1,897
Bad debt expense (recovery) ................................................... 469 (48)
Equity in income of equity investees .......................................... (1,592) (1,764)
Deferred income tax expense ................................................... 214 --
Non-cash compensation adjustment .............................................. 134 150
Stock based compensation expense .............................................. -- 38
Unrealized gain on trading security ........................................... (2,455) --
Tax benefit on stock options exercised ........................................ 1,344 --
Changes in operating assets and liabilities
(net of assets and liabilities acquired):
Accounts receivable ........................................................... (3,867) 9,464
Inventory ..................................................................... (5,366) (6,280)
Receivables from vendors ...................................................... (2,032) 4,848
Prepaid expenses and other .................................................... (1,647) (2,331)
Investment securities-trading ................................................. (57) (165)
Accounts payable, accrued expenses, accrued sales incentives
and other current liabilities .............................................. 1,849 313
Income taxes payable .......................................................... (9,579) 1,558
Changes in assets and liabilities of discontinued operations ................. 11 --
--------- ---------
Net cash (used in) provided by operating activities ......................... (18,715) 7,829
Cash flows from investing activities:
Purchases of property, plant and equipment .................................... (1,144) (955)
Proceeds from sale of property, plant and equipment ........................... 5 24
Proceeds from distribution from an equity investee ............................ 541 1,681
Purchase of short-term investments ............................................ (34,000) (57,405)
Proceeds from sale of short-term investments .................................. 40,472 45,375
Purchase of patents ........................................................... -- (475)
Proceeds from sale of Cellular business ....................................... 11,070 --
Escrow payment for purchase of minority interest .............................. (1,702) --
Adjustment related to purchase of acquired business ........................... (1,816) --
Cash provided by discontinued operations ...................................... 14 --
--------- ---------
Net cash provided by (used in) investing activities .......................... 13,440 (11,755)
6
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED AUGUST 31, 2005 AND 2006
(IN THOUSANDS)
(UNAUDITED)
2005 2006
----------- -----------
Cash flows from financing activities:
Repayments on bank obligations ................................................ (1,678) (1,310)
Principal payments on capital lease obligation ................................ (28) (42)
Proceeds from exercise of stock options and warrants .......................... 7,493 1,321
Principal payments on debt .................................................... (856) (836)
Repurchase of Class A common stock ............................................ -- (2,551)
Repurchase of preferred stock ................................................. -- (5)
Cash used in discontinued operations .......................................... (61) --
-------- --------
Net cash provided by (used in) financing activities .......................... 4,870 (3,423)
-------- --------
Effect of exchange rate changes on cash ........................................ (120) 83
-------- --------
Net decrease in cash and cash equivalents ...................................... (525) (7,266)
Cash and cash equivalents at beginning of period ............................... 18,624 16,280
-------- --------
Cash and cash equivalents at end of period ..................................... $18,099 $ 9,014
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
(1) Basis of Presentation
---------------------
The accompanying unaudited interim consolidated financial statements of
Audiovox Corporation and subsidiaries ("Audiovox" or the "Company") have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and in accordance with accounting principles generally
accepted in the United States of America and include all adjustments
(consisting of normal recurring adjustments), which, in the opinion of
management, are necessary to present fairly the consolidated financial
position, results of operations and cash flows for all periods presented.
The results of operations are not necessarily indicative of the results to
be expected for the full fiscal year. These consolidated financial
statements do not include all disclosures associated with consolidated
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America. Accordingly, these
statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto contained in the
Company's Form 10-K for the fiscal year ended November 30, 2005.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts of
assets, liabilities, revenues and expenses reported in those financial
statements as well as the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements. These judgments can
be subjective and complex, and consequently, actual results could differ
from those estimates and assumptions. Significant estimates made by the
Company include the allowance for doubtful accounts, inventory valuation,
recoverability of deferred tax assets, valuation of long-lived assets,
accrued sales incentives and warranty reserves. A summary of the Company's
significant accounting policies is identified in Note 1 of the Consolidated
Financial Statements of the Company's Form 10-K for the year ended November
30, 2005. There have been no changes to the Company's significant
accounting policies subsequent to November 30, 2005, except as discussed in
Note 2 below.
The Company has one reportable segment, the Electronics Group, which is
organized by product category. The Electronics Group consists of five
wholly-owned subsidiaries: Audiovox Electronics Corporation, American Radio
Corp., Code Systems, Inc., Audiovox German Holdings GmbH and Audiovox
Venezuela, C.A. The Company markets its products under the Audiovox(R) and
other brand names. Unless specifically indicated otherwise, all amounts and
percentages presented in the notes below are exclusive of discontinued
operations.
In February 2006, the Company changed its fiscal year end from November
30th to February 28th. The Company's current fiscal year began March 1,
2006 and ends on February 28, 2007. This quarterly report on Form 10-Q
supplements the transition report on Form 10-Q for the three month
transition period ended February 28, 2006 as well as our first quarterly
report on Form 10-Q for the three months ended May 31, 2006 that were
previously filed with the Securities and Exchange Commission and compares
the financial position as of August 31, 2006 to February 28, 2006 and the
results of operations for the three and six months ended August 31, 2006 of
the fiscal year ending February 28, 2007 with the results of operations for
the three and six months ended August 31, 2005 from the fiscal year ended
November 30, 2005.
For the six months ended August 31, 2005, the Company revised the
operating, investing and financing activities of cash flows attributed to
discontinued operations, to conform to the appropriate presentation,
whereas in the prior periods it was reported on a combined basis as a
single line within operating activities.
(2) Accounting for Stock-Based Compensation
---------------------------------------
The Company has various stock based compensation plans, which are more
fully described in Note 11 of the Company's Form 10-K for the fiscal year
ended November 30, 2005.
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
Prior to December 1, 2005, the Company accounted for stock-based employee
compensation under the intrinsic value method as outlined in the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25"), and related interpretations while disclosing
pro-forma net income and pro-forma net income 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 common
stock on the date of grant. No compensation expense relating to the grant
of such options was recognized in the consolidated statements of operations
through November 30, 2005.
Effective December 1, 2005, the Company adopted SFAS No. 123(R),
"Share-Based Payment" ("SFAS 123(R)"). SFAS No. 123(R) replaces SFAS No.
123 and supersedes APB No. 25. SFAS 123(R) requires that all stock-based
compensation be recognized as an expense in the financial statements and
that such costs be measured at the fair value of the award at the date of
grant and be recognized as an expense over the requisite service period.
This statement was adopted using the modified prospective method, which
requires the Company to recognize compensation expense on a prospective
basis. Therefore, prior period financial statements have not been restated.
Under this method, in addition to reflecting compensation expense for new
share-based payment awards, expense is also recognized to reflect the
remaining vesting period of awards that had been included in pro-forma
disclosures in prior periods. Since all options outstanding as of December
1, 2005 were fully vested and exercisable, there was no compensation
expense recognized for options granted prior to the adoption of SFAS 123(R)
in the consolidated statement of operations for the three and six months
ended August 31, 2006. Prior to adoptions of SFAS 123(R), the Company
presented all tax benefits related to stock-based compensation as an
operating cash inflow, which was $1,344 for the six months ended August 31,
2005. SFAS 123(R) requires that tax benefits related to stock option
exercises be reflected as financing activities instead of operating
activities on a prospective basis.
If the Company had consistently measured the compensation cost for stock
option programs under the fair value method adopted on December 1, 2005,
there would be no effect on net income for the three and six months ended
August 31, 2005 as all options were fully vested and exercisable prior to
March 1, 2005.
On November 10, 2005, the FASB issued Staff Position No. 123(R)-3,
"Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards", which provides an alternative (and simplified)
method to calculate the pool of excess income tax benefits upon the
adoption of SFAS No. 123(R). Among other things, Staff Position No.
123(R)-3 provides guidance on how to present excess tax benefits in the
statement of cash flows when the alternative pool calculation is used. This
new guidance became effective upon its issuance; however, companies can
generally make a one-time election to adopt the transition method in Staff
Position No. 123(R)-3 up to one year from the later of (i) initial adoption
of SFAS No. 123(R) or (ii) November 10, 2005. If a company elects to adopt
the alternative method after it has already issued financial statements
pursuant to the provisions of SFAS No. 123(R), such adoption would be
considered a change in accounting principle. The Company continues to
evaluate Staff Position No. 123(R)-3 and, accordingly, has not yet
determined whether the alternative method will be utilized.
9
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
(a) Stock-Based Compensation Expense
The Company uses the Black-Scholes option pricing model to estimate
the fair value of stock based compensation awards with the following
weighted-average assumptions for the three months ended August 31,
2006:
Dividend yield.................................. 0%
Expected volatility............................. 48.80%
Risk-free interest rate......................... 4.97%
Expected life of options (in years)............. 2.00
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.
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 and
expected future exercising patterns.
Information regarding the Company's stock options and warrants is
summarized below:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE REMAINING
NUMBER OF SHARES PRICE CONTRACTUAL LIFE
---------------- -------------- -----------------
Outstanding at February 28, 2006 ..................... 2,197,152 $ 12.04
Granted ............................................ 10,000 12.24
Exercised .......................................... (120,000) 11.02
Forfeited/expired .................................. (17,500) 14.34
---------- -------
Outstanding and exercisable at August 31, 2006........ 2,069,652 $ 12.08 2.06
========== ======= ======
The per share weighted-average fair value of stock options granted
during the three months ended August 31, 2006 was $3.75. Compensation
expense of $38 was included in general and administrative expenses in
the accompanying consolidated statements of operations for the three
months ended August 31, 2006. At August 31, 2006, the Company had no
unrecognized compensation cost as all stock options were fully vested.
(3) Discontinued Operations
-----------------------
On February 25, 2005, the Company entered into a plan to discontinue
ownership of Audiovox Malaysia ("AVM") due to increased competition from
non local OEM's and deteriorating credit quality of local customers. The
Company completed the sale of AVM on November 7, 2005. The net loss from
discontinued operations for the three and six months ended August 31, 2006
is primarily due to legal and related costs associated with contingencies
pertaining to the Company's discontinued Cellular business (see Note 16).
10
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
The following is a summary of financial results included within
discontinued operations:
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
--------------------- -------------------------
2005 2006 2005 2006
-------- -------- -------- --------
Net sales from discontinued operations ................. $ 1,323 $ -- $ 2,066 $ --
======== ======== ======== ========
Loss from discontinued operations before income
taxes .................................................. (254) (409) (430) (738)
Recovery of income taxes ............................... 128 87 169 156
-------- -------- -------- --------
Net loss from discontinued operations .................. $ (126) $ (322) $ (261) $ (582)
======== ======== ======== ========
(4) Net Income (Loss) Per Common Share
----------------------------------
Basic net income (loss) per common share is based upon the weighted-average
common shares outstanding during the period. Diluted net income (loss) per
common share reflects the potential dilution that would occur if securities
or other contracts to issue common stock were exercised or converted into
common stock.
There are no reconciling items which impact the numerator of basic and
diluted net income (loss) per common share. A reconciliation between the
denominator of basic and diluted net income (loss) per common share is as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------------------ -----------------------------
2005 2006 2005 2006
------------ ------------ ------------ -----------
Weighted-average common shares ............................. 22,353,876 22,430,598 22,206,064 22,399,973
outstanding (basic)
Effect of dilutive securities:
Stock options and warrants ................................ -- -- 357,463 187,557
---------- ---------- ---------- ----------
Weighted-average common shares and potential
common shares outstanding (diluted)......................... 22,353,876 22,430,598 22,563,527 22,587,530
========== ========== ========== ==========
Stock options and warrants totaling 2,222,852 and 2,098,913 for the three
months ended August 31, 2005 and 2006, respectively, and 721,400 and
1,307,952 for the six months ended August 31, 2005 and 2006, respectively,
were not included in the net income (loss) per diluted share calculation
because these options and warrants were anti-dilutive or the exercise price
of these options and warrants was greater than the average market price of
the Company's common stock during these periods.
(5) Accumulated Other Comprehensive Loss
------------------------------------
Accumulated other comprehensive loss of $608 and $2,123 at February 28,
2006 and August 31, 2006, respectively, includes the net accumulated
unrealized gain (loss) on the Company's available-for-sale investment
securities of $331 and $(2,064) at February 28, 2006 and August 31, 2006,
respectively, and foreign currency translation loss of $939 and $59 at
February 28, 2006 and August 31, 2006, respectively.
11
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
The Company's total comprehensive income (loss) was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
-------------------------- --------------------------
2005 2006 2005 2006
----------- ----------- ----------- -----------
Net income (loss) ............................................ $(3,717) $(1,955) $ 1,910 $ (433)
Other comprehensive (loss) income:
Foreign currency translation adjustments .................... 32 (88) (906) 880
Unrealized holding loss on available-for-sale
investment securities arising during the period,
net of tax ................................................. (37) (2,004) (349) (2,395)
-------- -------- ------- --------
Other comprehensive (loss) income, net of tax ................ (5) (2,092) (1,255) (1,515)
-------- -------- ------- --------
Total comprehensive income (loss) ............................ $(3,722) $(4,047) $ 655 $(1,948)
======== ======== ======== ========
The changes in the net unrealized holding loss arising during the periods
presented above are net of tax benefits of $23 and $1,228 for the three
months ended August 31, 2005 and 2006, respectively and $214 and $1,468 for
the six months ended August 31, 2005 and 2006, respectively.
(6) Supplemental Cash Flow Information/Changes in Stockholders' Equity
------------------------------------------------------------------
Supplemental Cash Flow Information
----------------------------------
SIX MONTHS ENDED
AUGUST 31,
---------------------
2005 2006
--------- --------
Cash paid during the period:
Interest (excluding bank charges) ................................ $ 472 $ 929
Income taxes (net of refunds) .................................... $3,293 $ 53
Non-Cash Transactions
---------------------
During the six months ended August 31, 2005 and 2006, the Company recorded
a non-cash compensation charge of $134 and $150, respectively, related to
the rights under call/put options previously granted to certain employees
of Audiovox German Holdings GmbH ("Audiovox Germany").
During the six months ended August 31, 2006, the Company released its
restricted cash balance for the purchase of Audiovox Venezuela's minority
interest (see Note 16).
Changes in Stockholders Equity
------------------------------
During the six months ended August 31, 2006, the Company purchased 193,500
shares of treasury stock for $2,551.
During the six months ended August 31, 2006, 120,000 shares of Class A
common stock were issued in connection with the exercise of stock warrants
resulting in proceeds of $1,321.
12
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
In August 2006, the Company repurchased all 50,000 outstanding shares of
preferred stock (the "shares") from the original shareholder for $5 and
retired the shares upon repurchase. The $2,495 difference between the
repurchase price and book value of the shares is included in paid in
capital in the accompanying consolidated balance sheet at August 31, 2006.
(7) Business Acquisition
--------------------
On January 4, 2005, the Company entered into an asset purchase agreement to
purchase certain assets of Terk Technologies Corp. ("Terk") for a total
purchase price of $15,274, as adjusted. The purchase price was subject to a
working capital adjustment based on the working capital of Terk at the time
of closing, plus contingent debentures with a maximum value of $9,280 based
on the achievement of future revenue targets. No amount has been recorded
with respect to the debentures and any amount paid under the debentures
would be recorded as additional goodwill. The results of operations of this
acquisition have been included in the consolidated financial statements
from the date of acquisition. The purpose of this acquisition is to
increase the Company's market share for satellite radio products as well as
accessories for antennas and HDTV products.
(8) Goodwill and Other Intangible Assets
------------------------------------
The change in goodwill is as follows:
Balance at February 28, 2006................................. $16,067
Purchase of Venezuela minority interest (see Note 16)........ 1,447
---------
Balance at August 31, 2006................................... $17,514
=========
At February 28, 2006, intangible assets consisted of the following:
GROSS
CARRYING ACCUMULATED TOTAL NET
VALUE AMORTIZATION BOOK VALUE
--------------- ------------------ ------------------
Patents subject to amortization ........................ $ 150 $ 18 $ 132
Trademarks/Tradenames not subject to
amortization ........................................... 10,042 -- 10,042
Contract subject to amortization ....................... 1,104 276 828
------- ------- -------
Total ................................................ $11,296 $ 294 $11,002
======= ======= =======
At August 31, 2006, intangible assets consisted of the following:
GROSS
CARRYING ACCUMULATED TOTAL NET
VALUE AMORTIZATION BOOK VALUE
--------------- ------------------ ------------------
Patents subject to amortization ........................ $ 625 $ 98 $ 527
Trademarks/Tradenames not subject to
amortization ........................................... 10,042 -- 10,042
Contract subject to amortization ....................... 1,104 386 718
------- ------- -------
Total ................................................ $11,771 $ 484 $11,287
======= ======= =======
13
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
During the six months ended August 31, 2006, the Company purchased $475 of
patents subject to amortization with estimated useful lives ranging from
twenty-four to forty-five months.
The Company recorded amortization expense of $3 and $102 for the three
months ended August 31, 2005 and 2006, respectively and $7 and $190 for the
six months ended August 31, 2005 and 2006, respectively. The estimated
aggregate amortization expense for the cumulative five years ending August
31, 2011 amounts to $1,195.
(9) Equity Investments
------------------
As of February 28, 2006 and August 31, 2006, the Company had 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 and van conversions, of televisions and
other automotive sound, security and accessory products.
The following presents summary financial information for ASA. Such summary
financial information has been provided herein based upon the individual
significance of ASA to the consolidated financial information of the
Company.
FEBRUARY 28, AUGUST 31,
2006 2006
------------ ----------
Current assets .......................... $24,007 $25,526
Non-current assets ...................... 4,339 4,464
Current liabilities ..................... 4,678 6,156
Members' equity ......................... 23,668 23,834
SIX MONTHS ENDED
AUGUST 31,
--------------------------
2005 2006
----------- ---------
Net sales ............................. $27,113 $31,109
Gross profit .......................... 8,717 9,339
Operating income ...................... 2,633 2,908
Net income ............................ $ 3,183 $ 3,528
The Company's share of income from ASA for the six months ended August 31,
2005 and 2006, was $1,592 and $1,764, respectively. In addition, the
Company received distributions from ASA totaling $1,681 during the six
months ended August 31, 2006, which was recorded as a reduction to equity
investments in the accompanying consolidated balance sheet.
(10) Bliss-tel Investment
--------------------
On December 13, 2004, Bliss-tel Public Company Limited ("Bliss-tel") issued
230,000,000 shares on the SET (Security Exchange of Thailand) for an
offering price of 6.20 baht per share. Prior to the issuance of these
shares, the Company was a 20% shareholder in Bliss-tel and, subsequent to
the offering, the Company owns 30,000,000 shares (or approximately 13%) of
Bliss-tel's outstanding stock. In addition, on July 21, 2005, the Company
received 9,000,000 warrants ("the warrants") which may be exercised
beginning on September 29, 2006, and expire on July 17, 2012. Each warrant
is ecercisable into one share of Bliss-tel common stock at an exercise
price of 8 baht per share. Beginning in the quarter ended February 28,
2005, the Company accounted for the Bliss-tel investment as a trading
security in accordance with FASB Statement No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" whereby the unrealized holding
14
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
gains and losses of Bliss-tel stock were included in earnings. As a result
of this transaction, the Company recorded a net gain of $597 and $2,455 for
the three and six months ended August 31, 2005, respectively, which is
included in other income on the accompanying consolidated statements of
operations.
The Company re-characterized the Bliss-tel investment to an
available-for-sale security on September 1, 2005, as a result of a change
in the Company's strategy regarding selling the Bliss-tel stock as the
Company was unable to find a buyer in the short term. Accordingly,
beginning on September 1, 2005, the unrealized holding gains and losses on
the Bliss-tel investment are included as a component of accumulated other
comprehensive loss in the accompanying consolidated balance sheets.
(11) Income Taxes
------------
Interim period tax provisions are generally based upon an estimated annual
effective tax rate per taxable entity, including evaluations of possible
future events and transactions, and are subject to subsequent refinement or
revision. When the Company is unable to estimate a part of its annual
income or loss, or the related tax expense or benefit, the tax expense or
benefit applicable to that item is reported in the interim period in which
the income or loss occurs. A valuation allowance is provided when it is
more likely than not that some portion, or all, of the deferred tax assets
will not be realized.
The effective tax rate for the three and six months ended August 31, 2006
was a tax benefit of 21% compared to 45% and 175% in the comparable prior
periods. The Company's effective tax rate for the three and six months
ended August 31, 2006 is less than the statutory rate as a result of tax
exempt interest income earned on short term investments. The effective tax
rate for the six months ended August 31, 2005 was favorably impacted by
$3,307 in tax accrual reductions due to the completion of certain tax
examinations for the years 1994 through 2000.
(12) Accrued Sales Incentives
------------------------
A summary of the activity with respect to the Company's sales incentives is
provided below:
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
---------------------------------- -------------------------------
2005 2006 2005 2006
------------- ------------- ------------ -----------
Opening balance ..................................... $ 5,890 $ 6,945 $ 5,450 $ 8,512
Accruals ............................................ 4,555 3,182 10,331 * 6,183
Payments and credits ................................ (2,342) (2,466) (7,015) (6,026)
Reversals for unearned sales incentive .............. (4) (72) (4) (701)
Reversals for unclaimed sales incentives ............ (180) (184) (843) (563)
--------- --------- --------- ---------
Ending balance ...................................... $ 7,919 $ 7,405 $ 7,919 $ 7,405
========= ========= ========= =========
* Includes $1,255 of accrued sales incentives acquired from Terk.
(13) Product Warranties and Product Repair Costs
-------------------------------------------
The following table provides a summary of the activity with respect to the
Company's product warranties and product repair costs:
15
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------------------ ----------------------------
2005 2006 2005 2006
--------------- ----------- ------------ ------------
Opening balance .................................... $ 11,304 $ 9,023 $ 11,394 $ 9,947
Liabilities accrued for warranties
issued during the period .......................... 1,491 1,773 2,599 3,155
Warranty claims paid during the period ............. (1,481) (2,220) (2,679) (4,526)
--------- --------- --------- ---------
Ending balance ..................................... $ 11,314 $ 8,576 $ 11,314 $ 8,576
========= ========= ========= =========
(14) Financing Arrangements
----------------------
The Company has the following financing arrangements:
FEBRUARY 28, AUGUST 31,
2006 2006
--------------- --------------
Bank Obligations
----------------
Domestic bank obligation (a) .......................................... $ -- $ --
Venezuela bank obligations (b) ........................................ 956 876
Euro Asset-Based lending obligation (c) ............................... 4,373 3,467
------- -------
Total bank obligations ................................................ $ 5,329 $ 4,343
======= =======
Debt
----
Euro term loan agreement (d) .......................................... $ 6,282 $ 6,053
Other debt (e) ........................................................ 1,013 1,132
------- -------
Total debt ............................................................ $ 7,295 $ 7,185
======= =======
(a) Domestic Bank Obligations
-------------------------
At August 31, 2006, the Company has an unsecured credit line to fund
the temporary short-term working capital needs of the domestic
operations. This line expires on November 30, 2006 and allows
aggregate borrowings of up to $25,000 at an interest rate of Prime (or
similar designations) plus 1%. As of February 28, 2006 and August 31,
2006, no direct amounts are outstanding under this agreement. At
August 31, 2006, the Company had $16,240 in commercial and standby
letters of credit outstanding, which reduces the amount available
under the unsecured credit line.
(b) Venezuela Bank Obligations
--------------------------
In October 2005, Audiovox Venezuela entered into a credit facility
borrowing arrangement which allows for principal borrowings up to
$1,000 plus accrued interest. The facility requires minimum monthly
interest payments at an annual interest rate of 13% until the
expiration of the facility on February 20, 2007. Audiovox Corporation
has secured this facility with a $1,000 standby letter of credit.
16
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
(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, 2006 and is renewable on an annual basis. Selected
accounts receivable are purchased from the Company on a non-recourse
basis at 85% of face value and payment of the remaining 15% upon
receipt from the customer of the balance of the receivable purchased.
In respect of the ABL credit facility, selected finished goods are
advanced at a 60% rate and non factored accounts receivables are
advanced at a 50% rate. The rate of interest is the three month
Euribor plus 2.5%, and the Company pays 0.4% of its gross sales as a
fee for the accounts receivable factoring arrangement. As of August
31, 2006, the amount of accounts receivable and finished goods
available for factoring exceeded the amounts outstanding under this
obligation.
(d) Euro Term Loan Agreement
------------------------
On September 2, 2003, Audiovox Germany borrowed 12 million Euros under
a new term loan agreement. This agreement was for a 5-year term loan
with a financial institution consisting of two tranches. Tranche A is
for 9 million Euros and Tranche B is for 3 million Euros. Tranche B
has been fully repaid. Payments under Tranche A are due in monthly
installments and interest accrues at 2.75% over the Euribor rate. Any
amount repaid may not be reborrowed. The term loan becomes immediately
due and payable if a change of control occurs without permission of
the financial institution. In April 2005, the maturity of the term
loan was prolonged to August 30, 2010 with a pre-payment option.
Audiovox Corporation guarantees 3 million Euros of this term loan. The
term loan is secured by the pledge of the stock of Audiovox Germany on
all brands and trademarks of Audiovox Germany. The term loan requires
the maintenance of certain yearly financial covenants that are
calculated according to German Accounting Standards. Should any of the
financial covenants not be met, the financial institution may charge a
higher interest rate on any outstanding borrowings and/or call the
loan. The short and long term amounts outstanding under this agreement
were $1,371 and $4,911, respectively, at February 28, 2006 and $1,482
and $4,571, respectively, at August 31, 2006.
(e) Other Debt
----------
This amount represents a call put/option owed to certain employees of
Audiovox Germany.
(15) Other Income
------------
Other income (loss) is comprised of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
--------------------- ---------------------
2005 2006 2005 2006
-------- -------- -------- --------
Bliss-tel (see Note 10) ........................ 597 $ -- $ 2,455 $ --
Interest income ........................... 1,063 1,696 2,077 3,284
Rental income .................................. 141 138 294 276
Miscellaneous .................................. 389 (46) 384 149
------- -------- ------- -------
Total other, net ............................... $ 2,190 $ 1,788 $ 5,210 $ 3,709
======= ======== ======= =======
17
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
(16) Commitments and Contingencies
-----------------------------
The Company is currently, and has in the past been, a party to various
routine legal proceedings incident to the ordinary course of business. If
management determines, based on the underlying facts and circumstances,
that it is probable a loss will result from a litigation contingency and
the amount of the loss can be reasonably estimated, the estimated loss is
accrued for. The Company believes its outstanding litigation matters
disclosed below will not have a material adverse effect on the Company's
financial statements, individually or in the aggregate; however, due to the
uncertain outcome of these matters, the Company disclosed these specific
matters below:
During 2005, several purported derivative and class actions were filed in
the Court of Chancery of the State of Delaware, New Castle County. The
complaint seeks (a) rescission of: agreements; amendments to long-term
incentive awards; and severance payments of $5,000 pursuant to which
Audiovox and Audiovox Communications Corp. ("ACC") executives were paid
from the net proceeds of the sale of certain assets of ACC to UTStarcom,
Inc. ("UTSI") (b) disgorgement to ACC of $16,000 paid to Philip Christopher
pursuant to a Personally Held Intangibles Purchase Agreement in connection
with the UTStarcom transaction, (c) disgorgement to Audiovox of $4,000 paid
to Philip Christopher as compensation for termination of his Employment
Agreement and Award Agreement with ACC and (d) disgorgement to ACC of
$1,916 paid to John Shalam pursuant to an Award Agreement with ACC.
Discovery for this case has commenced and trial is scheduled for December
2006. The Company understands that the individual defendants intend to
vigorously defend this matter; however, no assurances regarding the outcome
of this matter can be given at this point in the litigation. The Company
anticipates that defense costs, in excess of any applicable retention, will
be covered by the Company's insurance policies. Any damages recovered by
plaintiffs will be paid to the Company. Accordingly, no estimated loss has
been recorded for the aforementioned case.
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
sheets. 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 8). 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.
18
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
Under the asset purchase agreement for the sale of the Company's Cellular
business to UTSI, the Company agreed to indemnify UTSI for any breach or
violation by ACC and its representations, warranties and covenants
contained in the asset purchase agreement and for other matters, subject to
certain limitations. Significant indemnification claims by UTSI could have
a material adverse effect on the Company's financial condition and results
of operation. The Company is not aware of any such claim(s) for
indemnification.
In July 2006, the Company extended an existing operating lease agreement
with its principal stockholder until November 30, 2016. The lease extension
requires 125 monthly installments for an aggregate total of $7,701 in
payments.
(17) New Accounting Pronouncements
-----------------------------
In July 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48. "Accounting for Uncertainty in Income Taxes" ("FIN
48"). FIN 48 clarifies the accounting for uncertain income tax positions
that are recognized in the Company's financial statements in accordance
with the provisions of FASB Statement No. 109, "Accounting for Income
Taxes". FIN 48 also provides guidance on the derecognition of uncertain
positions, financial statement classification, accounting for interest and
penalties, accounting for interim periods and adds new disclosure
requirements. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company is currently evaluating the impact that FIN 48 will
have on its financial position and results of operations.
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 his currently evaluating the impact
that of this statement will have on the Company's results of operations or
financial position.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
We begin Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") with an overview of the business. This is
followed by a discussion of the Critical Accounting Policies and Estimates that
we believe are important to understanding the assumptions and judgments
incorporated in our reported financial results. In the next section, we discuss
our results of operations for the three and six months ended August 31, 2005
compared to the three and six months ended August 31, 2006. We then provide an
analysis of changes in our balance sheets and cash flows, and discuss our
financial commitments in the sections entitled "Liquidity and Capital
Resources." We conclude this MD&A with a discussion of "Related Party
Transactions" and "Recent Accounting Pronouncements".
In February 2006, we changed our fiscal year end from November 30th to
February 28th. Our current fiscal year began March 1, 2006 and ends on February
28, 2007. This second quarterly report on Form 10-Q for our new fiscal year
supplements our transition report on Form 10-Q for the three month transition
period ended February 28, 2006 as well as our first quarterly report on Form
10-Q for the three months ended May 31, 2006 that were previously filed with the
Securities and Exchange Commission and compares our financial position as of
August 31, 2006 to February 28, 2006 and the results of operations for the three
and six months ended August 31, 2006 of our new fiscal year ending February 28,
2007 with the results of operations for the three and six months ended August
31, 2005 from the fiscal year ended November 30, 2005.
Unless specifically indicated otherwise, all amounts and percentages
presented in our MD&A below are exclusive of our discontinued operations.
BUSINESS OVERVIEW
We operate through one reportable segment, the Electronics Group, which
consists of five wholly-owned subsidiaries: Audiovox Electronics Corporation,
American Radio Corp., Code Systems, Inc., Audiovox German Holdings GmbH and
Audiovox Venezuela, C.A. and market our products under the Audiovox(R) brand
name and other brand names, such as Jensen(R), Acoustic Research(R), Phase
Linear(R), Advent(R), Prestige(R), Pursuit(R), Code-Alarm(R), Car Link(R),
Movies 2 Go(R), Terk(R), Magnate(R), Mac Audio(R), and Heco(R), as well as
private labels through a large domestic and international distribution network.
Our products are broken down into two major categories: Mobile Electronics and
Consumer Electronics.
Mobile Electronics products include:
o mobile multi-media products, including in-dash, overhead, headrest and
portable mobile video systems,
o autosound products including radios, speakers, amplifiers and CD
changers,
o satellite radios including plug and play and direct connect models,
o automotive security and remote start systems,
o car to car portable navigation systems,
o rear observation and collision avoidance systems, and
o automotive power accessories.
Consumer Electronics products include:
o LCD and Plasma flat panel televisions,
o portable DVD players,
o Two-way radios, digital multi-media products such as personal video
recorders and MP3 products,
o home speaker systems and home theater in a box,
o home and portable stereos,
o HDTV Antennas, WiFi Antennas and HDMI accessories,
o flat panel TV mounting systems, and
o home electronic accessories such as cabling and performance enhancing
electronics.
We believe the Electronics Group has an expanding market with a certain
level of volatility related to both domestic and international new car sales,
discretionary consumer spending and general economic conditions. Also, all of
20
our products are subject to price fluctuations which could affect the carrying
value of inventories and gross margins in the future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As disclosed in our Form 10-K for the fiscal year ended November 30, 2005,
the discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in conformity with accounting principles generally accepted in the United States
of America. The preparation of these financial statements require us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgments can be subjective and complex, and consequently, actual results could
differ from those estimates. Our most critical accounting policies and estimates
relate to revenue recognition; sales incentives; accounts receivable; inventory,
goodwill and other intangible assets; warranties and income taxes. Since
November 30, 2005, there have been no changes in our critical accounting
policies or changes to the assumptions and estimates related to them, except for
the adoption of SFAS 123(R), Share-Based Payment, as discussed in note 2 in the
accompanying consolidated financial statements.
RESULTS OF OPERATIONS
As you read this discussion and analysis, refer to the accompanying
consolidated statements of operations, which present the results of our
operations for the three and six months ended August 31, 2005 and 2006. We
analyze and explain the differences between periods based on the specific line
items of the consolidated statements of operations.
THREE MONTHS ENDED AUGUST 31, 2005 COMPARED TO THE THREE MONTHS ENDED
---------------------------------------------------------------------
AUGUST 31, 2006
---------------
Continuing Operations
---------------------
The following tables set forth, for the periods indicated, certain
statement of operations data for the three months ended August 31, 2005 and
2006.
Net Sales
$ %
2005 2006 CHANGE CHANGE
---------- ----------- ------------- -----------
Mobile Electronics .................. $ 78,573 $ 67,388 $(11,185) (14.2)%
Consumer Electronics ................ 44,364 30,036 (14,328) (32.3)%
-------- -------- --------- -------
Total net sales ................... $122,937 $ 97,424 $(25,513) (20.8)%
======== ======== ========= =======
Mobile Electronics sales, which represented 69.2% of net sales in 2006,
decreased primarily due to a decline in select satellite radio sales as we no
longer sell Sirius plug and play units and the voluntary suspension of the sales
of the Audiovox XM Express product during the quarter pending the resolution of
a Federal Communications Commission ("FCC") compliance issue. Shipments of XM
Express products resumed in September 2006 upon resolution of that model with
the FCC. In addition, mobile sales were also negatively impacted by the
continued decline of SUV sales due to rising fuel costs and the insolvency of
one of the Company's vendors, which was unable to supply certain sales orders.
These declines were partially offset by an increase in Jensen mobile multi media
sales due to new product introductions.
21
Consumer Electronics sales, which represented 30.8% of net sales, decreased
as a result of price erosion for LCD TV's and portable DVD's. In addition,
during the early part of 2006, the Company elected to eliminate low margin
retail programs which resulted in reduced DVD sales volume.
Sales incentive expense decreased $1,445 to $2,926 for the three months
ended August 31, 2006 as a result of a decline in sales and increased reversals.
The increase in reversals is primarily due to a $68 increase in reversals of
unearned sales incentives as a result of large retail customers not reaching
minimum sales targets required to earn sales incentive funds. We believe the
reversal of earned but unclaimed sales incentives upon the expiration of the
claim period is a disciplined, rational, consistent and systematic method of
reversing unclaimed sales incentives. These sales incentive programs are
expected to continue and will either increase or decrease based upon competition
and customer demands.
Gross Profit
2005 2006
--------- ---------
Gross profit........................ $12,265 $15,754
Gross margins....................... 10.0% 16.2%
Gross margins increased to 16.2% for the three months ended August 31, 2006
as compared to 10.0% for the prior period. Gross margins were favorably impacted
by a $3,667 (or 3.8%) decrease in inventory write downs as a result of an
inventory adjustment of $3,789 recorded in the prior year related to satellite
radio inventory. The increase in gross margins is also due to improved margins
in mobile video products, our focus on increasing margins throughout our brands
and improved buying programs and inventory management. In addition, reversals of
sales incentive expense favorably impacted gross margins by 0.01% and 0.03%
during the three months ended August 31, 2005 and 2006, respectively.
Operating Expenses and Operating Loss
$ %
2005 2006 CHANGE CHANGE
----------- ----------- ---------- -----------
Operating Expenses:
Selling ........................................... $ 7,258 $ 6,451 $ (807) (11.1)%
General and administrative ........................ 12,497 11,708 (789) (6.3)
Engineering and technical support ................. 1,514 1,765 251 16.6
--------- --------- --------- -------
Operating expenses ............................... 21,269 19,924 (1,345) (6.3)
Operating loss .................................... $ (9,004) $ (4,170) $ (4,834) (53.7)
Operating expenses decreased $1,345, or 6.3%, for the three months ended
August 31, 2006, as compared to 2005. As a percentage of net sales, operating
expenses increased to 20.5% for the three months ended August 31, 2006, from
17.3% in 2005 due to the decline in sales during the period.
Selling expenses decreased $807 or 11.1% due to a $647 decrease in
commission expense as a result of the decline in commissionable sales. The
remaining decline in selling expenses is primarily due to reduced amounts for
consumer and print media advertisements based on changes in marketing programs.
General and administrative expenses decreased $789 or 6.3% due to the
following:
o a decline in salaries as a result of a one-time severance charge of
$393 recorded in the prior year related to staff reductions,
22
o a $392 decline in professional fees due to reduced audit fees, legal
costs and consulting costs, and
o increased MIS billings of $246 for services performed in connection
with a transition service agreement.
The above decreases were partially offset by a $306 increase in employee
benefits primarily due to increased medical costs and increased employer
contributions to the Company's 401(k) plan.
Engineering and technical support expenses increased $251 or 16.6% due to
an increase in direct labor as a result of wage increases and increased labor
costs in Germany.
As a result of increased gross margins and a decline in operating expenses,
operating loss for the three months ended August 31, 2006 decreased to $4,170 as
compared to $9,004 in 2005.
Other Income (Expense)
$ %
2005 2006 CHANGE CHANGE
----------- ----------- ----------- -----------
Interest and bank charges .......................... $ (552) $ (502) $ 50 (9.1)%
Equity in income of equity investees ............... 849 816 (33) (3.9)
Other, net ......................................... 2,190 1,788 (402) (18.4)
-------- -------- -------- ------
Total other income, net ............................ $ 2,487 $ 2,102 $ (385) (15.5)%
======== ======== ======== =======
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.
Other income declined due to a one time $597 unrealized gain recorded
during the three months ended August 31, 2005 as a result of an initial public
offering of Bliss-tel (a former equity investment). This decline was partially
offset by increased interest income as a result of increased short-term
investments and higher interest rates as compared to the prior year.
Income Taxes (Benefit)
The effective tax rate for the three months ended August 31, 2006 was a
benefit of 21% compared to 45% 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.
Loss from Discontinued Operations
The following is a summary of financial results included within
discontinued operations:
AUGUST 31,
-------------------
2005 2006
-------- --------
Net sales from discontinued operations ................... $1,323 $ --
======= =======
Loss from discontinued operations before income taxes .... (254) (409)
Recovery of income taxes ................................. 128 87
------- -------
Net loss from discontinued operations .................... $ (126) $ (322)
======= =======
23
Included in loss from discontinued operations for the three months ended
August 31, 2005 is the financial results of Audiovox Malaysia which was sold on
November 7, 2005. The loss from discontinued operations for the three months
ended August 31, 2006 is primarily due to legal and related costs associated
with contingencies pertaining to our discontinued Cellular business.
Net Loss
Net loss for the three months ended August 31, 2005 was $3,717 compared to
$1,955 in 2006. Loss per share for the three months ended August 31, 2005 was
$0.17 (diluted) as compared to $0.09 (diluted) for 2006. Net loss was favorably
impacted by sales incentive reversals of $184 ($101 after taxes) and $256 ($202
after taxes) for the three months ended August 31, 2005 and 2006, respectively.
24
SIX MONTHS ENDED AUGUST 31, 2005 AS COMPARED TO THE SIX MONTHS ENDED
---------------------------------------------------------------------
AUGUST 31,2006
--------------
Continuing Operations
---------------------
The following tables set forth, for the periods indicated, certain
statement of operations data for the six months ended August 31, 2005 and 2006.
Net Sales
$ %
2005 2006 CHANGE CHANGE
---------------- ------------- ------------- -----------
Mobile Electronics ................... $171,526 $150,445 $(21,081) (12.3)%
Consumer Electronics ................. 95,920 58,278 (37,642) (39.2)%
-------- -------- --------- -------
Total net sales .................... $267,446 $208,723 $(58,723) (22.0)%
======== ======== ========= =======
Mobile Electronics sales, which represented 72.1% of net sales, decreased
primarily due to a decline in select satellite radio sales as we no longer sell
Sirius plug and play units and the voluntary suspension of the sales of the
Audiovox XM Express product during the six month period pending the resolution
of a Federal Communications Commission ("FCC") compliance issue. Shipments of XM
Express products resumed in September upon resolution of that model with the
FCC. In addition, mobile sales were also negatively impacted by the continued
decline of SUV sales due to rising fuel costs and the insolvency of one of the
Company's vendors, which was unable to supply certain sales orders.
Consumer Electronics sales, which represented 27.9% of net sales, decreased
as a result of price erosion for LCD TV's and portable DVD's. In addition,
during the first half of 2006, the Company elected to eliminate low margin
retail programs which resulted in reduced DVD sales volume.
Sales incentive expense decreased $3,310 to $4,919 for the six months ended
August 31, 2006 as a result of a decline in sales and increased reversals. The
increase in reversals is primarily due to a $697 increase in reversals of
unearned sales incentives as a result of large retail customers not reaching
minimum sales targets required to earn sales incentive funds. We believe the
reversal of earned but unclaimed sales incentives upon the expiration of the
claim period is a disciplined, rational, consistent and systematic method of
reversing unclaimed sales incentives. These sales incentive programs are
expected to continue and will either increase or decrease based upon competition
and customer demands.
Gross Profit
2005 2006
----------- ----------
Gross profit.......................... $35,064 $35,853
Gross margins......................... 13.1% 17.2%
Gross margins increased to 17.2% for the six months ended August 31, 2006
as compared to 13.1% for the prior period. The increase in gross margins is
primarily due to improved margins in mobile video products, our focus on
increasing margins throughout our brands and improved buying programs and
inventory management. Gross margins were favorably impacted by a $4,980 (or
2.4%) decrease in inventory write downs as a result of a $3,789 inventory
adjustment recorded in the prior year related to satellite radio inventory and
improved inventory management. In addition, reversals of sales incentive expense
favorably impacted gross margins by 0.01% and 0.01% during the six months ended
August 31, 2005 and 2006, respectively.
25
Operating Expenses and Operating Loss
$ %
2005 2006 CHANGE CHANGE
---------- ----------- ---------- -----------
Operating Expenses:
Selling ........................................... $ 15,573 $ 13,512 $ (2,061) (13.2)%
General and administrative ........................ 24,626 23,033 (1,593) (6.5)
Engineering and technical support ................. 3,285 3,530 245 7.5
--------- --------- --------- -------
Operating expenses ............................... 43,484 40,075 (3,409) (7.8)
Operating loss .................................... $ (8,420) $ (4,222) $ (4,198) (49.9)
Operating expenses decreased $3,409 or 7.8%, for the six months ended
August 31, 2006, as compared to 2005. As a percentage of net sales, operating
expenses increased to 19.2% for the six months ended August 31, 2006, from 16.3%
in 2005 due to the decline in sales during the period.
Selling expenses decreased $2,061 or 13.2% primarily due to a $1,613
decrease in commission expense as a result of the decline in commissionable
sales. The remaining decline in selling expenses is primarily due to a decline
in consumer and print media advertisements.
General and administrative expenses decreased $1,593 or 6.5% due to the
following:
o $1,323 decrease in professional fees due to reduced audit fees, legal
costs and consulting costs,
o $517 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 the trend in the overall accounts
receivable,
o a decline in salaries and headcount as a result of the 2005 overhead
reduction plan which resulted in a one-time severance charge of $471
recorded in the prior year, and
o increased MIS billings of $290 for services performed in connection
with a transition service agreement.
The above decreases were partially offset by a $1,065 increase in employee
benefits due to a $400 reduction in the prior year for legal costs as a result
of a Venezuela legal claim that was withdrawn from the court, increased medical
costs and increased employer contributions to the Company's 401(k) plan.
Engineering and technical support expenses increased $245 or 7.5% due to an
increase in direct labor as a result of wage increases and increased labor costs
in Germany.
26
Other Income (Expense)
$ %
2005 2006 CHANGE CHANGE
------------ ----------- ----------- -----------
Interest and bank charges ............................... $(1,290) $(1,062) $ 228 17.7 %
Equity in income of equity investees .................... 1,592 1,764 172 10.8
Other, net .............................................. 5,210 3,709 (1,501) (28.8)
-------- -------- -------- -------
Total other income, net ................................. $ 5,512 $ 4,411 $(1,101) (20.0)%
======== ======== ======== =======
Interest and bank charges decreased due to reductions in outstanding bank
obligations and long term debt. Interest and bank charges represent expenses for
debt and bank obligations of Audiovox Germany and Venezuela and interest for a
capital lease.
Equity in income of equity investees increased due to increased equity
income of Audiovox Specialized Applications, Inc. ("ASA") as a result of
increased sales and gross margins in the Jensen Audio and Voyager product lines.
Other income declined due to a one time $2,455 unrealized gain recorded
during the six months ended August 31, 2005 in connection with the Bliss-tel
investment. This decline was partially 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 Taxes (Benefit)
The effective tax rate for the six months ended August 31, 2006, was a
provision of 21% compared to a benefit of 175% in the prior period. The interest
income earned on our short-term investments is tax exempt, which results in our
effective tax rate being less than the statutory rate. The tax benefit for 2005
was primarily due to the favorable outcome of $3,307 in tax accrual reductions
due to the completion of certain tax examinations.
Loss from Discontinued Operations
The following is a summary of financial results included within
discontinued operations:
AUGUST 31,
------------------
2005 2006
------- -------
Net sales from discontinued operations ................... $2,066 $ --
======= =======
Loss from discontinued operations before income taxes .... (430) (738)
Recovery of income taxes ................................. 169 156
------- -------
Net loss from discontinued operations .................... $ (261) $ (582)
======= =======
Included in loss from discontinued operations for the three months ended
August 31, 2005 is the financial results of Audiovox Malaysia which was sold on
November 7, 2005. The loss from discontinued operations for the three months
ended August 31, 2006 is primarily due to legal and related costs associated
with contingencies pertaining to our discontinued Cellular business.
27
Net Income (Loss)
Net income for the six months ended August 31, 2005 was $1,910 compared to
a net loss of $433 in 2006. Income per share for the six months ended August 31,
2005 was $0.09 (diluted) as compared to net loss per share of $0.02 (diluted)
for 2006. Net income was favorably impacted by sales incentive reversals of $847
($331 after taxes) and $1,264 ($999 after taxes) for the six months ended August
31, 2005 and 2006, respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash Flows, Commitments and Obligations
---------------------------------------
As of August 31, 2006, we had working capital of $339,614, which includes
cash and short-term investments of $181,876 compared with working capital of
$340,564 at February 28, 2006, which included cash and short-term investments of
$177,079. The increase in short-term investments is primarily due to the
collection of accounts receivable. We plan to utilize our current cash position
as well as collections from accounts receivable to fund the current operations
of the business. However, we may utilize all or a portion of current capital
resources to pursue other business opportunities, including acquisitions.
As of August 31, 2006, we have a credit line to fund the temporary
short-term working capital needs of the Company. This line expires on November
30, 2006 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 facility and Audiovox Venezuela has
a $1,000 credit facility borrowing arrangement with an interest rate of 13%.
Operating activities provided cash of $7,829 for the six months ended
August 31, 2006 compared to cash used of $18,715 in 2005. The increase in cash
provided by operating activities as compared to the prior year is primarily due
to the collection of accounts and vendor receivable balances and a decline in
income tax payments.
The following significant fluctuations in the balance sheet accounts impacted
cash flows from operations:
o Cash flows from operating activities for the six months ended August
31, 2006 were favorably impacted by a decrease in accounts receivable
primarily from collections as a result of lower sales and improved
collection efforts. Accounts receivable turnover approximated 4.9
during for the six months ended August 31, 2006 compared to 5.0 in the
prior year.
o Cash flows from operations was reduced by an increase in inventory due
to increased purchasing for future holiday season orders. Inventory
turnover approximated 3.5 during the six months ended August 31, 2006
compared to 3.2 in the prior year.
o In addition, cash flows from operating activities for the six months
ended August 31, 2006 was impacted by an increase in accounts payable
due to the timing of payments. The timing of payments made can
fluctuate and are often impacted by the timing of inventory purchases
and amount of inventory on hand.
Investing activities used $11,755 during the six months ended August 31,
2006, primarily due to the purchase (net of sales) of short-term investments.
The usage of cash from investing activities was partially offset by a
distribution received from an equity investee. Investing activities provided
cash of $13,440 during the six months ended August 31, 2005, primarily due to
proceeds from the sale of the cellular business and sales (net of purchase) of
short-term investments.
Financing activities used $3,423 during the six months ended August 31,
2006, primarily from the purchase of treasury stock and payment of bank
obligations and debt partially offset by proceeds received from the exercise of
stock warrants. Financing activities for the six months ended August 31, 2005
provided cash of $4,870 due to proceeds received from the exercise of stock
28
options partially offset by payments of bank obligations and debt.
Certain contractual cash obligations and other commercial commitments will
impact our short and long-term liquidity. At August 31, 2006, such obligations
and commitments are as follows:
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------------
LESS THAN 1-3 4-5 AFTER
CONTRACTUAL CASH OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
------------------------------------------ ----------- -------------- ------------ ------------ ------------
Capital lease obligation (1) ................. $ 12,159 $ 572 $ 1,145 $ 1,140 $ 9,302
Operating leases (2) ......................... 14,353 2,947 4,514 2,887 4,005
-------- -------- -------- -------- --------
Total contractual cash obligations ........... $ 26,512 $ 3,519 $ 5,659 $ 4,027 $ 13,307
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
---------------------------------------------------------------------------
TOTAL
AMOUNTS LESS THAN 1-3 4-5 AFTER
OTHER COMMERCIAL COMMITMENTS COMMITTED 1 YEAR YEARS YEARS 5 YEARS
---------------------------------------------- ---------- ------------- ------------ ----------- ------------
Bank obligations (3) ......................... $ 4,343 $ 4,343 -- -- --
Stand-by letters of credit (4) ............... 2,048 2,048 -- -- --
Commercial letters of credit (4) ............. 14,192 14,192 -- -- --
Debt (5) ..................................... 7,185 1,482 4,179 1,524
Unconditional purchase obligations (6) ....... 133,013 133,013 -- -- --
-------- -------- -------- -------- --------
Total commercial commitments ................. $160,781 $155,078 $ 4,179 $ 1,524 --
======== ======== ======== ======== ========
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 $101 and $5,838,
respectively at August 31, 2006.
2. We enter into operating leases in the normal course of business.
3. Represents amounts outstanding under the Audiovox Germany factoring
agreement and Venezuela bank obligation at August 31, 2006.
4. Commercial letters of credit are issued during the ordinary course of
business through major domestic banks as requested by certain suppliers. We
also issue standby letters of credit to secure certain bank obligations and
insurance requirements.
5. Represents amounts outstanding under a loan agreement for Audiovox Germany.
This amount also includes amounts due under a call-put option with certain
employees of Audiovox Germany.
6. Open purchase obligations represent inventory commitments. These
obligations are not recorded in the consolidated financial statements until
commitments are fulfilled and such obligations are subject to change based
on negotiations with manufacturers.
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
29
operating expenditures. In the event that they do not, we may require additional
funds in the future to support our working capital requirements or for other
purposes and may seek to raise such additional funds through the sale of public
or private equity and/or debt financings as well as from other sources. No
assurance can be given that additional financing will be available in the future
or that if available, such financing will be obtainable on terms favorable when
required.
Off-Balance Sheet Arrangements
------------------------------
We do not maintain any off-balance sheet arrangements, transactions,
obligations or other relationships with unconsolidated entities that would be
expected to have a material current or future effect upon our financial
condition or results of operations.
RELATED PARTY TRANSACTIONS
--------------------------
During 1998, we entered into a 30-year capital lease for a building with
our principal stockholder and chairman, which was the headquarters of the
discontinued Cellular operation. Payments on the capital lease were based upon
the construction costs of the building and the then-current interest rates. The
effective interest rate on the capital lease obligation is 8%. On November 1,
2004, we entered into an agreement to sublease the building to UTSI for monthly
payments of $46 until November 1, 2009. We also lease another facility from our
principal stockholder. In July 2006, the Company extended an existing operating
lease agreement with its principal stockholder until November 30, 2016. The
lease extension requires 125 monthly installments for an aggregate total of
$7,701 in payments. Total lease payments required under the leases for the
five-year period ending August 31, 2011 are $6,253.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In July 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48. "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 clarifies the accounting for uncertain income tax positions that are
recognized in the company's financial statements in accordance with the
provisions of FASB Statement No. 109, "Accounting for Income Taxes". FIN 48 also
provides guidance on the derecognition of uncertain positions, financial
statement classification, accounting for interest and penalties, accounting for
interim periods and new disclosure requirements. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company is currently evaluating the
impact that the adoption of FIN 48 will have on its financial position and the
results of operations.
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
the Company's results of operations or financial position.
FORWARD-LOOKING STATEMENTS
Certain information in this Quarterly Report on Form 10-Q would constitute
forward-looking statements, including but not limited to, information relating
to the future performance and financial condition of the Company, the plans and
objectives of the Company's management and the Company's assumptions regarding
such performance and plans that are forward-looking in nature and involve
certain risks and uncertainties. Actual results could differ materially from
such forward-looking information.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
There has been no significant change in our market risk sensitive
instruments since February 28, 2006.
30
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e)
as of the end of the period covered by this report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of the period covered by this report, these disclosure controls and
procedures are effective at a "reasonable assurance" level.
There were no material changes in our internal control over financial
reporting (as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) during the three month period ended August 31, 2006 that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
----------------------------
See Note 16 of the Notes to the Consolidated Financial Statements in Part I,
Item 1 of this Form10-Q for information regarding legal proceedings.
ITEM 1A. RISK FACTORS
----------------------
There have been no material changes from the risk factors previously
disclosed in the Company's Form 10-K for the fiscal year ended November 30,
2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
---------------------------------------------------------------------
Treasury Stock/Share Repurchase Program
---------------------------------------
In September 2000, we were authorized by the Board of Directors to
repurchase up to 1,563,000 shares of Class A Common Stock in the open market
under a share repurchase program (the "Program"). In July 2006, the Board of
Directors authorized an additional repurchase up to 2,000,000 Class A Common
Stock in the open market. As of August 31, 2006, the cumulative total of
acquired shares pursuant to the program was 1,582,052 reducing the remaining
authorized share repurchase balance to 1,980,948. During the six months ended
August 31, 2006, we purchased 193,500 shares for $2,551 as outlined in the
following table:
TOTAL NUMBER MAXIMUM
OF SHARES NUMBER OF
PURCHASED AS SHARES THAT
TOTAL PART OF MAY YET BE
NUMBER OF AVERAGE ANNOUNCED PURCHASED
SHARES PRICE PAID UNDER THE UNDER THE
PERIOD PURCHASED PER SHARE PROGRAM PROGRAM (1)
As of February 28, 2006 ............... -- $ 9.24 1,388,552 174,448
March 2006 purchases .................. 23,400 13.15 1,411,952 151,048
April 2006 ............................ -- -- -- --
May 2006 .............................. -- -- -- --
June 2006 ............................. -- -- -- --
July 2006 (2) ......................... -- -- -- 2,151,048
August 2006 purchases ................. 170,100 13.16 1,582,052 1,980,948
---------
Total purchases ....................... 193,500
(1) Prior to the purchases made during the six months ended August 31, 2006, we
had 1,388,552 shares of treasury stock purchased as part of a publicly announced
program. As of August 31, 2006, we had 1,582,052 shares of treasury stock
purchased with an average paid price per share of $9.72.
(2) In July 2006, an additional 2 million shares were authorized to be
repurchased under the program.
32
ITEM 6. EXHIBITS
Exhibit Number Description
-------------- -----------
31.1 Certification of Chief 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 Chief 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 of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUDIOVOX CORPORATION
By: /s/Patrick M. Lavelle
----------------------
Patrick M. Lavelle
President and Chief
Executive Officer
Dated: October 10, 2006
By: /s/Charles M. Stoehr
----------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
34