10-K 1 form10k.htm FORM 10-K form10k.htm
 


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the fiscal year ended February 28, 2009

Commission file number 0-28839

AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
13-1964841
(IRS Employer Identification No.)
 
 
180 Marcus Blvd., Hauppauge, New York
(Address of principal executive offices)
 
11788
(Zip Code)
 
 
(631) 231-7750
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class:
 
Name of Each Exchange on which Registered
 
Class A Common Stock $.01 par value
 
The Nasdaq Stock Market LLC
 

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes   o       No   x 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes   o       No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes   x       No   o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x



 
 
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Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer  o      Accelerated filer  x       Non-accelerated filer  o      Smaller reporting company   o

Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Act).
Yes   o       No   x

The aggregate market value of the common stock held by non-affiliates of the Registrant was $180,435,697 (based upon closing price on the Nasdaq Stock Market on August 29, 2008).

The number of shares outstanding of each of the registrant's classes of common stock, as of May 14, 2009 was:

   
Class
Outstanding
   
Class A common stock $.01 par value
20,604,460
Class B common stock $.01 par value
2,260,954

DOCUMENTS INCORPORATED BY REFERENCE

Part III -  (Items 10, 11, 12, 13 and 14) Proxy Statement for Annual Meeting of Stockholders to be filed on or before June 28, 2009.




 
 
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AUDIOVOX CORPORATION
Index to Form 10-K
 
Table of Contents
     
PART I
     
Item 1
Business
4
Item 1A
Risk Factors
9
Item 1B
Unresolved Staff Comments
13
Item 2
Properties
13
Item 3
Legal Proceedings
14
Item 4
Submission of Matters to a Vote of Security Holders
14
     
PART II
     
Item 5
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
15
Item 6
Selected Consolidated Financial Data
17
Item 7
Management's Discussion and Analysis of Financial Condition and Results of Operations
18
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
33
Item 8
Consolidated Financial Statements and Supplementary Data
34
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
34
Item 9A
Controls and Procedures
34
Item 9B
Other Information
37
     
PART III
     
Item 10
Directors, Executive Officers and Corporate Governance
37
Item 11
Executive Compensation
37
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
37
Item 13
Certain Relationships and Related Transactions, and Director Independence
37
Item 14
Principal Accounting Fees and Services
37
     
PART IV
     
Item 15
Exhibits, Financial Statement Schedules
37
   
   
SIGNATURES
80


 
 
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CAUTIONARY STATEMENT RELATING TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

    This Annual Report on Form 10-K and the information incorporated by reference includes "forward-looking statements" within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  We intend those forward looking-statements to be covered by the safe harbor provisions for forward-looking statements. All statements regarding our expected financial position and operating results, our business strategy, our financing plans and the outcome of any contingencies are forward-looking statements. Any such forward-looking statements are based on current expectations, estimates, and projections about our industry and our business. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," or variations of those words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated in or implied by any forward-looking statements. Factors that could cause actual results to differ materially from forward-looking statements include, but are not limited to, matters listed in Item 1A under “Risk Factors”.

NOTE REGARDING DOLLAR AMOUNTS AND FISCAL YEAR END CHANGE

    In this annual report, all dollar amounts are expressed in thousands, except for share prices and per-share amounts. Unless specifically indicated otherwise, all amounts and percentages in our Form 10-K are exclusive of discontinued operations.

    In February 2006, the Company changed its fiscal year end from November 30th to February 28th.  The Company’s current fiscal year began March 1, 2008 and ended February 28, 2009.

PART I

Item 1-Business
 
    Audiovox Corporation (“Audiovox", “We", "Our", "Us" or “Company") is a leading international distributor and value added service provider in the accessory, mobile and consumer electronics industries. We conduct our business through seven wholly-owned subsidiaries: American Radio Corp., Audiovox Accessories Corp. (“AAC”),  Audiovox Consumer Electronics, Inc., Audiovox Electronics Corporation ("AEC"), Audiovox German Holdings GmbH  ("Audiovox Germany"), Audiovox Venezuela, C.A. and Code Systems, Inc. ("Code").  We market our products under the Audiovox® brand name and other brand names, such as Acoustic Research®, Advent®, Ambico®, Car Link®, Chapman®, Code-Alarm®, Discwasher®, Energizer®, Heco®, Incaar®, Jensen®, Mac Audio®, Magnat®, Movies2Go®, Oehlbach®, Phase Linear®, Prestige®, Pursuit®, RCA®, RCA Accessories®, Recoton®, Road Gear®, Spikemaster® and Terk®, as well as private labels through a large domestic and international distribution network.  We also function as an OEM ("Original Equipment Manufacturer") supplier to several customers and presently have one reportable segment (the "Electronics Group"), which is organized by product category.  We previously announced our intention to acquire synergistic businesses with gross profit margins higher than our core business, leverage our overhead, penetrate new markets and to expand our core business and distribution channels.
 
    Audiovox was incorporated in Delaware on April 10, 1987, as successor to a business founded in 1960 by John J. Shalam, our Chairman and controlling stockholder.  Our extensive distribution network and long-standing industry relationships have allowed us to benefit from growing market opportunities and emerging niches in the electronics business.
 
    We make available financial information, news releases and other information on our web site at www.audiovox.com. There is a direct link from the web site to the Securities and Exchange Commission's ("SEC") filings web site, where our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge as soon as reasonably practicable after we file such reports and amendments with, or furnish them to the SEC. In addition, we have adopted a code of business conduct and ethics which is available free of charge upon request. Any such request should be directed to the attention of: Chris Lis Johnson, Company Secretary, 180 Marcus Boulevard, Hauppauge, New York 11788, (631) 231-7750.

Acquisitions
 
    We have recently acquired and continue to integrate the following acquisitions, discussed below, into our existing business structure:
 
    In December 2007, the Company completed the acquisition of certain assets and liabilities of Thomson’s U.S., Canada, Mexico, China and Hong Kong consumer electronics audio/video business, as well as the rights to the RCA brand for the audio/video field of use, for a total cash purchase price of approximately $18,953, plus a net asset payment of $10,079, transaction costs of $926 and a fee related to the RCA® brand in connection with future sales for a stated period of time. The purpose of this acquisition was to control the RCA trademark for the audio video field of use and to expand our core product offerings in certain developing markets. Contemporaneous with this transaction, the Company entered into a license agreement with Multimedia Device Ltd., a Chinese manufacturer, to market certain product categories acquired in the acquisition for an upfront fee of $10,000, the purchase of certain inventory and future royalty payments.

 
 
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    In November 2007, AAC completed the acquisition of all of the outstanding stock of Technuity, Inc., an emerging leader in the battery and power products industry and the exclusive licensee of the Energizer® brand in North America for rechargeable batteries and battery packs for camcorders, cordless phones, digital cameras, DVD players and other power supply devices, for a total cash purchase price of $20,373 (net of cash acquired), plus a working capital credit of $317, transaction costs of $1,131 and a maximum contingent earn out payment of $1,000, if certain sales and gross margin targets are met. The purpose of this acquisition was to further strengthen our accessory product lines and core offerings, to be the exclusive licensee of the Energizer® brand in North America for rechargeable batteries and power supply systems, and to increase the Company’s market share in the consumer electronics accessory business.
 
    In August 2007, Audiovox Germany completed the acquisition of certain assets of Incaar Limited, a U.K. business that specializes in rear seat electronics systems, for a total purchase price of $350, plus transaction costs of $51 and a maximum contingent earn out payment of $400, if certain earnings targets are met.  The purpose of this acquisition was to add the experience, concepts and product development of an Original Equipment Manufacturer (“OEM”) business to our European operations.
 
    In March 2007, Audiovox Germany completed the stock acquisition of Oehlbach, a European market leader in the accessories business, for a total cash purchase price of $6,611, plus transaction costs of $200 and a contingent earn out payment, not to exceed 1 million euros.  The purpose of this acquisition was to add electronics accessory product lines to our European business.
 
    In January 2007, we completed the acquisition of certain assets and liabilities of Thomson’s Americas consumer electronics accessory business for a total cash purchase price of approximately $50,000, plus a working capital payment of $7,617, plus a five year fee estimated to be $4,685 related to the RCA brand in connection with future sales and approximately $2,414 of transaction costs.  The purpose of this acquisition was to expand our market presence in the accessory business. The acquisition included the rights to the RCA Accessories brand for consumer electronics accessories as well as the Recoton, Spikemaster, Ambico and Discwasher brands for use on any product category and the Jensen, Advent, Acoustic Research and Road Gear brands for consumer electronics accessories.
 
    We continue to monitor economic and industry conditions in order to evaluate potential synergistic business acquisitions that would allow us to leverage overhead, penetrate new markets and expand our core business and distribution channels.
 
    Refer to Note 3 “Business Acquisitions” of the Notes to Consolidated Financial Statements for additional information regarding the aforementioned acquisitions.

Divestitures (Discontinued Operations)
 
    On November 7, 2005, we completed the sale of our majority owned subsidiary, Audiovox Malaysia (“AVM”) to the then current minority interest shareholder due to increased competition from non-local OEM’s and deteriorating credit quality of local customers.
 
    On November 1, 2004, we completed the divestiture of our Cellular business (formerly known as "ACC", "Cellular" or "Wireless") to UTStarcom, Inc. ("UTSI").   After paying outstanding domestic obligations, taxes and other costs associated with the divestiture, we received net proceeds of approximately $144,053.  We have utilized the net proceeds to invest in strategic and complementary acquisitions and invest in our current operations.
 
    These divestitures have been presented as discontinued operations.  Refer to Note 2 “Discontinued Operations” of the Notes to Consolidated Financial Statements for additional information regarding the aforementioned divestitures.

Strategy
 
    Our objective is to grow our business by acquiring new brands, embracing new technologies, expanding product development and applying this to a continued stream of new products that should increase gross margins and improve operating income.  In addition, we plan to continue to acquire synergistic companies that would allow us to leverage our overhead, penetrate new markets and expand existing product categories through our business channels.

The key elements of our strategy are as follows:

Capitalize on the Audiovox® family of brands.  We believe the "Audiovox®" family of brands, which includes Acoustic Research®, Advent®, Ambico®, Car Link®, Chapman®, Code-Alarm®, Discwasher®, Energizer®, Heco®, Incaar®, Jensen®, Mac Audio®, Magnat®, Movies2Go®, Oehlbach®, Phase Linear®, Prestige®, Pursuit®, RCA®, RCA Accessories®, Recoton®, Road Gear®, Spikemaster® and Terk®, is one of our greatest strengths and offers us significant opportunity for increased market penetration. To further benefit from the Audiovox® family of brands, we continue to invest and introduce new products using our brand names.

 
 
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Capitalize on niche product and distribution opportunities in the electronics industry.  We intend to use our extensive distribution and supply networks to capitalize on niche product and distribution opportunities in the mobile, consumer and accessory electronics categories.

Leverage our domestic and international distribution network. We believe our distribution network which includes power retailers, mass merchandisers, distributors, car dealers and OEM’s will allow us to increase market penetration.

Grow our international presence.  We continue to expand our international presence through our companies in  Germany, Canada, Mexico and Hong Kong. We also continue to export from our domestic operations in the United States. We will pursue additional business opportunities through acquisition.

Pursue strategic and complementary acquisitions.  We continue to monitor economic and industry conditions in order to evaluate potential synergistic business acquisitions that would allow us to leverage overhead, penetrate new markets and expand our existing business distribution.

Continue to outsource manufacturing to increase operating leverage.  A key component of our business strategy is outsourcing the manufacturing of our products, which allows us to deliver the latest technological advances without the fixed costs associated with manufacturing.

Monitor operating expenses.  We maintain continuous focus on evaluating the current business structure in order to create operating efficiencies, including investments in management information systems, with the primary goal of increasing operating income.

Industry
 
    We participate in selected product categories in the mobile, consumer and accessory electronics markets. The mobile and consumer electronics and accessory industries are large and diverse and encompass a broad range of products. The significant competitors in our industries are Sony, Panasonic, JVC, Kenwood, Alpine, Directed Electronics, Phillips, Monster Cable and Delphi.  There are other companies that specialize in niche product offerings such as those we offer. The introduction of new products and technological advancements are the major growth drivers in the electronics industry.  Based on this, we continue to introduce new products across all product lines.

Products
 
    Effective March 1, 2007, the Company reported “Accessories” as a separate product group due to the Thomson Accessory, Oehlbach and Technuity acquisitions.  In addition, the Company’s former mobile and consumer product categories are now combined and recorded in the “Electronics” product group.  As such, certain reclassifications have been made to prior year amounts as the Company currently reports sales data for the following two product categories:
 
    Electronics products include:

·  
mobile multi-media video products, including in-dash, overhead, headrest and portable mobile video systems,
·  
autosound products including radios, speakers, amplifiers and CD changers,
·  
satellite radios including plug and play models and direct connect models,
·  
automotive security and remote start systems,
·  
automotive power accessories,
·  
rear observation and collision avoidance systems,
·  
Liquid Crystal Display (“LCD”) flat panel televisions,
·  
home and portable stereos,
·  
two-way radios,
·  
digital multi-media products such as personal video recorders and MP3 products,
·  
camcorders,
·  
clock-radios,
·  
digital voice recorders,
·  
home speaker systems,
·  
portable DVD players, and
·  
digital picture frames.

 
 
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    Accessories products include:

·  
High-Definition Television (“HDTV”) Antennas,
·  
Wireless Fidelity (“WiFi”) Antennas,
·  
High-Definition Multimedia Interface (“HDMI”) accessories,
·  
home electronic accessories such as cabling,
·  
other connectivity products,
·  
power cords,
·  
performance enhancing electronics,
·  
TV universal remotes,
·  
flat panel TV mounting systems,
·  
iPod specialized products,
·  
wireless headphones,
·  
rechargeable battery backups (UPS) for camcorders, cordless phones and portable video (DVD) batteries and accessories, and
·  
power supply systems.
 
    We believe our product groups have expanding market opportunities with certain levels of volatility related to domestic and international markets, new car sales, increased competition by manufacturers, private labels, technological advancements, discretionary consumer spending and general economic conditions.  Also, all of our products are subject to price fluctuations which could affect the carrying value of inventories and gross margins in the future.
 
    Net sales by product category are as follows:
 
   
Year
   
Year
   
Year
 
   
Ended
   
Ended
   
Ended
 
   
February 28,
   
February 29,
   
February 28,
 
   
2009
   
2008
   
2007
 
                   
Electronics
  $ 449,433     $ 437,018     $ 432,943  
Accessories
    153,666       154,337       23,747  
Total net sales
  $ 603,099     $ 591,355     $ 456,690  
 
    Electronics sales, which include both mobile and consumer electronics, represented approximately 74.5% of net sales in Fiscal 2009 compared to 73.9% in Fiscal 2008, and increased by 2.8% or $12,415 primarily due to increases in consumer electronics sales as a result of product sales from the Thomson acquisition and increased sales in our OEM group. These increases were partially offset by declines in sales of mobile audio, security, video and electronics.
 
    Accessories sales, which represented 25.5% of our net sales in Fiscal 2009 compared to 26.1% in Fiscal 2008, decreased approximately 0.4% or $671.
 
    Gross margins have declined due to discontinuance of certain product lines and increased inventory markdowns. We anticipate an increase in margins through the introduction of new products with technologies that take advantage of market opportunities created by the digital convergence of data, navigation and multi-media entertainment as well as future operating improvements.

Licensing and Royalties
 
    We have various license and royalty programs with manufacturers, customers and other electronic suppliers. Such agreements entitle us to receive license and royalty income for Audiovox products sold by the licensees without adding any significant costs. Depending on the terms of each agreement, income is based on either a fixed amount per unit or percentage of net sales. Current license and royalty agreements have duration periods, which range from 1 to 20 years, whereas other agreements are in perpetuity and certain agreements may be renewed at the end of termination of the agreement. Certain renewals of license and royalty agreements are dependent on negotiations with licensees as well as current Audiovox products being sold by the licensee.
 
    License and royalty income is recorded upon sale to the end-user and amounted to $4,430, $2,190 and $2,200 for the years ended February 28, 2009, February 29, 2008 and February 28, 2007, respectively.

 
 
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Distribution and Marketing
 
    We sell our products to:

·  
power retailers,
·  
mass merchants,
·  
regional chain stores,
·  
specialty and internet retailers,
·  
independent 12 volt retailers,
·  
distributors,
·  
new car dealers,
·  
vehicle equipment manufacturers (OEM), and
·  
the U.S. military
 
    We sell our products under OEM arrangements with domestic and/or international subsidiaries of automobile manufacturers such as Ford Motor Company, Daimler Chrysler, General Motors Corporation, Toyota, Kia, Mazda, Jaguar, BMW, Subaru and beginning in Fiscal 2009, Porsche. These projects require a close partnership with the customer as we develop products to meet specific requirements.  OEM projects accounted for approximately 9% of net sales for the years ended February 28, 2009 and February 29, 2008 and 11% of net sales for the year ended February 28, 2007.
 
    Our five largest customers represented 36%, 25% and 18% of net sales during the years ended February 28, 2009, February 29, 2008 and February 28, 2007, respectively.    During the year ended February 28, 2009, one customer accounted for approximately 22% of the Company’s net sales. However during the years ended February 29, 2008 and February 28, 2007, no single customer accounted for more than 10% of net sales.
 
    We also provide value-added management services, which include:

·  
product design and development,
·  
engineering and testing,
·  
sales training and customer packaging,
·  
instore display design,
·  
installation training and technical support,
·  
product repair services and warranty,
·  
nationwide installation network, and
·  
warehousing.

 
    We have flexible shipping policies designed to meet customer needs. In the absence of specific customer instructions, we ship products within 24 to 48 hours from the receipt of an order from public warehouses and leased facilities throughout the United States, Canada, Mexico, Venezuela and Germany.

Product Development, Warranty and Customer Service
 
    Our product development cycle includes:

·  
identifying consumer trends and potential demand,
·  
responding to those trends through product design and feature integration, which includes software design, electrical engineering, industrial design and pre-production testing. In the case of OEM customers, the product development cycle may also include product validation to customer quality standards, and
·  
evaluating and testing new products in our own facilities to ensure compliance with our design specifications and standards.
 
    We work closely with customers and suppliers throughout the product design, testing and development process in an effort to meet the expectations of consumer demand for technologically-advanced and high quality products.  Our Hauppauge, New York and Troy, Michigan facilities are ISO 14001:2004 and/or ISO/TS 16949:2002 certified, which requires the monitoring of quality standards in all facets of business.
 
    We are committed to providing product warranties for all our product lines, which generally range from 90 days up to the life of the vehicle for the original owner on some automobile-installed products. To support our warranties, we have independent warranty centers throughout the United States, Canada, Mexico, Europe and Venezuela.  We have a customer service group that provides product information, answers questions and serves as a technical hotline for installation help for end-users and customers.

 
 
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Suppliers
 
    We work directly with our suppliers on industrial design, feature sets, product development and testing in order to ensure that our products are manufactured to our design specifications.
 
    We purchase our products from manufacturers principally located in several Pacific Rim countries, including Japan, China, Hong Kong, Indonesia, Malaysia, Taiwan and Singapore, and the United States. In selecting our manufacturers, we consider quality, price, service and reputation. In order to provide local supervision of supplier performance such as price negotiations, delivery and quality control, we maintain buying offices or inspection offices in Malaysia, China and Hong Kong.  We consider relations with our suppliers to be good and alternative sources of supply are generally available within 120 days.  We do not have long-term contracts with our suppliers and we generally purchase our products under short-term purchase orders.  Although we believe that alternative sources of supply are currently available, an unplanned shift to a new supplier could result in product delays and increased cost, which may have a material impact on our operations.

Competition
 
    The electronics industry is highly competitive across all product categories, and we compete with a number of well-established companies that manufacture and sell similar products. Brand name, design, advancement of technology and features as well as price are the major competitive factors within the electronics industry.  Our Mobile Electronic products compete against factory-supplied products, including those provided by, among others, General Motors, Ford and Daimler Chrysler.  Our Mobile Electronic products also compete in the automotive aftermarket against major companies such as Sony, Panasonic, Kenwood, Alpine, Directed Electronics, Pioneer and Delphi. Our Accessories and Consumer Electronics product lines compete against major companies, such as JVC, Sony, Panasonic, Phillips and Monster Cable.

Financial Information About Foreign and Domestic Operations
 
    The amounts of net sales and long-lived assets, attributable to foreign and domestic operations for all periods presented are set forth in Note 14 of the Notes to Consolidated Financials Statements, included herein.

Equity Investment
 
    We have a 50% non-controlling ownership interest in Audiovox Specialized Applications, Inc. ("ASA") which acts as a distributor of televisions and other automotive sound, security and accessory products to specialized markets for specialized vehicles, such as, but not limited to, RV's, van conversions and marine vehicles.  The goal of this equity investment is to blend financial and product resources with local operations in an effort to expand our distribution and marketing capabilities.

Employees
 
    As of February 28, 2009, we employed approximately 800 people worldwide.  We consider our relations with employees to be good and no employees are covered by collective bargaining agreements.

Item 1A-Risk Factors
 
    We have identified certain risk factors that apply to us. You should carefully consider each of the following risk factors and all of the other information included or incorporated by reference in this Form 10-K. If any of these risks, or other risks not presently known to us or that we currently believe not to be significant, develop into actual events, then our business, financial condition, liquidity, or results of operations could be adversely affected. If that happens, the market price of our common stock would likely decline, and you may lose all or part of your investment.

The asset purchase agreement with UTSI exposes the Company to contingent liabilities.
 
    Under the asset purchase agreement for the sale of the Cellular business to UTSI we agreed to indemnify UTSI for any breach or violation of ACC and its representations, warranties and covenants contained in the asset purchase agreement and for other matters, subject to certain limitations. Significant indemnification claims by UTSI could have a material adverse effect on our financial condition and results of operations.

Our success will depend on a less diversified line of business.
 
    Currently, we generate substantially all of our sales from the Consumer and Mobile Electronics and Accessories businesses.  We cannot assure you that we can grow the revenues of our Electronics and Accessories businesses or maintain profitability. As a result, the Company's revenues and profitability will depend on our ability to maintain and generate additional customers and develop new products.  A reduction in demand for our existing products and services would have a material adverse effect on our business. The sustainability of current levels of our Electronics and Accessories businesses and the future growth of such revenues, if any, will depend on, among other factors:

 
 
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·  
the overall performance of the economy and discretionary consumer spending,
·  
competition within key markets,
·  
customer acceptance of newly developed products and services, and
·  
the demand for other products and services.
 
    We cannot assure you that we will maintain or increase our current level of revenues or profits from the Electronics and Accessories businesses in future periods.

The Electronics and Accessories Businesses are Highly Competitive and Face Significant Competition from Original Equipment Manufacturers (OEMs) and Direct Imports By Our Retail Customers.
 
    The market for consumer electronics and accessories is highly competitive across all product lines. We compete against many established companies who have substantially greater financial and engineering resources than we do. We compete directly with OEMs, including divisions of well-known automobile manufacturers, in the autosound, auto security, mobile video and accessories industry. We believe that OEMs have diversified and improved their product offerings and place increased sales pressure on new car dealers with whom they have close business relationships to purchase OEM-supplied equipment and accessories.  To the extent that OEMs succeed in their efforts, this success would have a material adverse effect on our sales of automotive entertainment and security products to new car dealers.  In addition, we compete with major retailers who may at any time choose to direct import products that we may currently supply.

Sales Category Dependent on Economic Success of Automotive Industry.
 
    A portion of our OEM sales are to American automobile manufacturers, specifically Chrysler, General Motors and Ford. Recently, Chrysler has announced filing for bankruptcy and General Motors is in discussions with the U.S. government for further support. If these two manufacturers are not successful in their reorganization, it could have a material adverse effect on a portion of our OEM business.

We Do Not Have Long-term Sales Contracts with Any of Our Customers.
 
    Sales of our products are made by written purchase orders and are terminable at will by either party. The unexpected loss of all or a significant portion of sales to any one of our large customers could have a material adverse effect on our performance.

We Depend on a Small Number of Key Customers for a Large Percentage of Our Sales
 
    The electronics industry is characterized by a number of key customers. Specifically 36%, 25% and 18% of our sales were to five customers in fiscal 2009, 2008 and 2007, respectively. The loss of one or more of these customers could have a material impact on our business.

Sales in Our Electronics and Accessories Businesses are Dependent on New Products, Product Development and Consumer Acceptance.
 
    Our Electronics and Accessories businesses depend, to a large extent, on the introduction and availability of innovative products and technologies. Significant sales of new products in niche markets, such as navigation, satellite radios, flat-panel TVs, mobile video systems and the acquisition of certain consumer electronic accessory businesses, has fueled the recent growth of our business. If we are not able to continually introduce new products that achieve consumer acceptance, our sales and profit margins may decline.

Since We Do Not Manufacture Our Products, We Depend on Our Suppliers to Provide Us with Adequate Quantities of High Quality Competitive Products on a Timely Basis.
 
    We do not manufacture our products, and we do not have long-term contracts with our suppliers. Most of our products are imported from suppliers under short-term purchase orders. Accordingly, we can give no assurance that:

·  
our supplier relationships will continue as presently in effect,
·  
our suppliers will not become competitors,
·  
our suppliers will be able to obtain the components necessary to produce high-quality, technologically-advanced products for us,
·  
we will be able to obtain adequate alternatives to our supply sources should they be interrupted,
·  
if obtained, alternatively sourced products of satisfactory quality would be delivered on a timely basis, competitively priced, comparably featured or acceptable to our customers, and
·  
our suppliers have sufficient financial resources to fulfill their obligations.

 
 
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    On occasion our suppliers have not been able to produce the quantities of products that we desire. Our inability to supply sufficient quantities of products that are in demand could reduce our profitability and have a material adverse effect on our relationships with our customers. If any of our supplier relationships were terminated or interrupted, we could experience an immediate or long-term supply shortage, which could have a material adverse effect on our business.

The Impact of Future Selling Prices and Technological Advancements may cause Price Erosion and Adversely Impact our Profitability and Inventory Value
 
    Since we do not make any of our own products and do not conduct our own research, we cannot assure you that we will be able to source technologically advanced products in order to remain competitive. Furthermore, the introduction or expected introduction of new products or technologies may depress sales of existing products and technologies. This may result in declining prices and inventory obsolescence. Since we maintain a substantial investment in product inventory, declining prices and inventory obsolescence could have a material adverse effect on our business and financial results.
 
    Our estimates of excess and obsolete inventory may prove to be inaccurate, in which case the provision required for excess and obsolete inventory may be understated or overstated.  Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and operating results.

Because We Purchase a Significant Amount of Our Products from Suppliers in Pacific Rim Countries, We Are Subject to the Economic Risks Associated with Changes in the Social, Political, Regulatory and Economic Conditions Inherent in These Countries.
 
    We import most of our products from suppliers in the Pacific Rim. Countries in the Pacific Rim have experienced significant social, political and economic upheaval over the past several years. Due to the large concentrations of our purchases in Pacific Rim countries, particularly China, Hong Kong, Malaysia and Taiwan, any adverse changes in the social, political, regulatory and economic conditions in these countries may materially increase the cost of the products that we buy from our foreign suppliers or delay shipments of products, which could have a material adverse effect on our business. In addition, our dependence on foreign suppliers forces us to order products further in advance than we would if our products were manufactured domestically. This increases the risk that our products will become obsolete or face selling price reductions before we can sell our inventory.

We Plan to Expand the International Marketing and Distribution of Our Products, Which Will Subject Us to Additional Business Risks.
 
    As part of our business strategy, we intend to increase our international sales, although we cannot assure you that we will be able to do so. Conducting business outside of the United States subjects us to significant additional risks, including:

·  
export and import restrictions, tax consequences and other trade barriers,
·  
currency fluctuations,
·  
greater difficulty in accounts receivable collections,
·  
economic and political instability,
·  
foreign exchange controls that prohibit payment in U.S. dollars, and
·  
increased complexity and costs of managing and staffing international operations.

Our Products Could Infringe the Intellectual Property Rights of Others and We May Be Exposed to Costly Litigation.
 
    The products we sell are continually changing as a result of improved technology.  Although we and our suppliers attempt to avoid infringing known proprietary rights of third parties in our products, we may be subject to legal proceedings and claims for alleged infringement by us, our suppliers or our distributors, of third party’s patents, trade secrets, trademarks or copyrights.
 
    Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, or require us to either enter into royalty or license agreements which are not advantageous to us or pay material amounts of damages.  In addition, parties making these claims may be able to obtain an injunction, which could prevent us from selling our products.  We may increasingly be subject to infringement claims as we expand our product offerings.
 
 
 
11

 
 
If Our Sales During the Holiday Season Fall below Our Expectations, Our Annual Results Could Also Fall below Expectations.
 
    Seasonal consumer shopping patterns significantly affect our business. We generally make a substantial amount of our sales and net income during September, October and November. We expect this trend to continue. December is also a key month for us, due largely to the increase in promotional activities by our customers during the holiday season. If the economy faltered in these periods, if our customers altered the timing or frequency of their promotional activities or if the effectiveness of these promotional activities declined, particularly around the holiday season, it could have a material adverse effect on our annual financial results.

A Decline in General Economic Conditions Could Lead to Reduced Consumer Demand for the Discretionary Products We Sell.
 
    Consumer spending patterns, especially discretionary spending for products such as mobile, consumer and accessory electronics, are affected by, among other things, prevailing economic conditions, energy costs, raw material costs, wage rates, inflation, consumer confidence and consumer perception of economic conditions. A general slowdown in the U.S. and certain international economies or an uncertain economic outlook could have a material adverse effect on our sales and operating results.

Acquisitions and Strategic Investments May Divert Our Resources and Management Attention; Results May Fall Short of Expectations.
 
    We intend to continue pursuing selected acquisitions of and investments in businesses, technologies and product lines as a key component of our growth strategy.  Any future acquisition or investment may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt and amortization expenses related to intangible assets.  Acquisitions involve numerous risks, including:

·  
difficulties in the integration and assimilation of the operations, technologies, products and personnel of an acquired business;
·  
diversion of management’s attention from other business concerns;
·  
increased expenses associated with the acquisition; and
·  
potential loss of key employees or customers of any acquired business.

    We cannot assure you that our acquisitions will be successful and will not adversely affect our business, results of operations or financial condition.

We have recorded, or may record in the future, goodwill and other intangible assets as a result of acquisitions, and changes in future business conditions could cause these investments to become impaired, requiring substantial write-downs that would reduce our operating income.
 
    Intangible assets recorded on our balance sheet as of February 28, 2009 was $88,524.  We evaluate the recoverability of recorded goodwill and other intangible asset amounts annually, or when evidence of potential impairment exists.  The annual impairment test is based on several factors requiring judgment. As of February 28, 2009, the Company recorded an impairment charge of $38,814 as a result of its impairment review (see Note 1(k)). Changes in our operating performance or business conditions, in general, could result in an impairment of goodwill, if applicable, and/or other intangible assets, which could be material to our results of operations.

We Depend Heavily on Existing Directors, Management and Key Personnel and Our Ability to Recruit and Retain Qualified Personnel.
 
    Our success depends on the continued efforts of our directors, executives and senior vice presidents, many of whom have worked with Audiovox for over two decades, as well as our other executive officers and key employees. We have no employment contracts with any of our executive officers or key employees, except our President and Chief Executive Officer. The loss or interruption of the continued full-time service of certain of our executive officers and key employees could have a material adverse effect on our business.
 
    In addition, to support our continued growth, we must effectively recruit, develop and retain additional qualified personnel both domestically and internationally. Our inability to attract and retain necessary qualified personnel could have a material adverse effect on our business.

We Are Responsible for Product Warranties and Defects.
 
    Even though we outsource manufacturing, we provide warranties for all of our products for which we have provided an estimated liability. Therefore, we are highly dependent on the quality of our supplier’s products.

Our Capital Resources May Not Be Sufficient to Meet Our Future Capital and Liquidity Requirements.
 
    We believe that we currently have sufficient resources to fund our existing operations for the foreseeable future.

 
 
12

 
 
    However, we may need additional capital to operate our business if:

·  
market conditions change,
·  
our business plans or assumptions change,
·  
we make significant acquisitions, and
·  
we need to make significant increases in capital expenditures or working capital.

Our Stock Price Could Fluctuate Significantly.
 
    The market price of our common stock could fluctuate significantly in response to various factors and events, including:

·  
operating results being below market expectations,
·  
announcements of technological innovations or new products by us or our competitors,
·  
loss of a major customer or supplier,
·  
changes in, or our failure to meet, financial estimates by securities analysts,
·  
industry developments,
·  
economic and other external factors,
·  
general downgrading of our industry sector by securities analysts,
·  
inventory write-downs, and
·  
ability to integrate acquisitions.
 
    In addition, the securities markets have experienced significant price and volume fluctuations over the past several years that have often been unrelated to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our common stock.

John J. Shalam, Our Chairman, Owns a Significant Portion of Our Common Stock and Can Exercise Control over Our Affairs.
 
    Mr. Shalam beneficially owns approximately 54% of the combined voting power of both classes of common stock. This will allow him to elect our Board of Directors and, in general, to determine the outcome of any other matter submitted to the stockholders for approval. Mr. Shalam's voting power may have the effect of delaying or preventing a change in control of the Company.
 
    We have two classes of common stock: Class A common stock is traded on the Nasdaq Stock Market under the symbol VOXX and Class B common stock, which is not publicly traded and substantially all of which is beneficially owned by Mr. Shalam. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Both classes vote together as a single class, except in certain circumstances, for the election and removal of directors and as otherwise may be required by Delaware law. Since our charter permits shareholder action by written consent, Mr. Shalam may be able to take significant corporate actions without prior notice and a shareholder meeting.

Other Risks
 
    Other risks and uncertainties include:
 
·  
changes in U.S. federal, state and local law,
·  
our ability to implement operating cost structures that align with revenue growth,
·  
trade sanctions against or for foreign countries,
·  
successful integration of business acquisitions and new brands in our distribution network,
·  
compliance with the Sarbanes-Oxley Act, and
·  
compliance with complex financial accounting and tax standards.

Item 1B-Unresolved Staff Comments
 
    As of the filing of this annual report on Form 10-K, there were no unresolved comments from the staff of the Securities and Exchange Commission.

Item 2-Properties   
 
    Our Corporate headquarters is located at 180 Marcus Blvd. in Hauppauge, New York.  In addition, as of February 28, 2009, the Company leased a total of 29 operating facilities or offices located in 14 states as well as Germany, China, Malaysia, Canada, Venezuela, Mexico, Hong Kong and England. The leases have been classified as operating leases, with the exception of one, which is recorded as a capital lease.  These facilities are located in Arkansas, California, Florida, Georgia, New York, Ohio, Tennessee, Indiana, Michigan and Massachusetts. These facilities serve as offices, warehouses, distribution centers or retail locations. Additionally, we utilize public warehouse facilities located in Virginia, Nevada, Mississippi, Illinois, Indiana, Mexico, Germany and Canada.

 
 
13

 
 
Item 3-Legal Proceedings
 
    The Company is currently, and has in the past been, a party to various routine legal proceedings incident to the ordinary course of business. If management determines, based on the underlying facts and circumstances, that it is probable a loss will result from a litigation contingency and the amount of the loss can be reasonably estimated, the estimated loss is accrued for. The Company believes its outstanding litigation matters will not have a material adverse effect on the Company's financial statements, individually or in the aggregate; however, due to the uncertain outcome of these matters, the Company disclosed these specific matters below:
 
    In November 2004, several purported double derivative, derivative and class actions were filed in the Court of Chancery of the State of Delaware, New Castle County challenging approximately $27,000 made in payments from the proceeds of the sale of the Company’s cellular business.  These actions were subsequently consolidated into a single derivative complaint (the "Complaint"), In re Audiovox Corporation Derivative Litigation.
 
    This matter was settled in May 2007 and received final Chancery court approval in June 2007.  As a result of the settlement, the Company received $6,750 in gross proceeds.  The gross proceeds were offset by $2,378 in plaintiff legal fees and $1,023 in accrued legal and administrative costs for defending all remaining ACC legal claims.  The items discussed above resulted in a pre-tax benefit of $3,349 recorded in discontinued operations for the fiscal year ended February 29, 2008.
 
    Certain consolidated class actions transferred to a Multi-District Litigation Panel of the United States District Court of the District of Maryland against the Company and other suppliers, manufacturers and distributors of hand-held wireless telephones alleging damages relating to exposure to radio frequency radiation from hand-held wireless telephones are still pending.   No assurances regarding the outcome of this matter can be given, as the Company is unable to assess the degree of probability of an unfavorable outcome or estimated loss or liability, if any.  Accordingly, no estimated loss has been recorded for the aforementioned case.
 
    The products the Company sells are continually changing as a result of improved technology.  As a result, although the Company and its suppliers attempt to avoid infringing known proprietary rights, the Company may be subject to legal proceedings and claims for alleged infringement by its suppliers or distributors, of third party patents, trade secrets, trademarks or copyrights.  Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, or require the Company to either enter into royalty or license agreements which are not advantageous to the Company or pay material amounts of damages.
 
    Under the asset purchase agreement for the sale of the Company’s Cellular business to UTSI, the Company agreed to indemnify UTSI for any breach or violation by Audiovox Communications Corporation and its representations, warranties and covenants contained in the asset purchase agreement and for other matters, subject to certain limitations.  Significant indemnification claims by UTSI could have a material adverse effect on the Company's financial condition and results of operation.  The Company is not aware of any such claim(s) for indemnification.

Item 4-Submission of Matters to a Vote of Security Holders
 
    No matters were submitted to a vote of security holders during the quarter ended February 28, 2009.


14

PART II


Item 5-Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information
 
    The Class A Common Stock of Audiovox is traded on the Nasdaq Stock Market under the symbol "VOXX".   The following table sets forth the low and high sale price of our Class A Common Stock, based on the last daily sale in each of the last eight fiscal quarters:

Year ended February 28, 2009
 
High
   
Low
 
First Quarter
  $ 11.16     $ 8.45  
Second Quarter
    11.00       7.57  
Third Quarter
    10.45       3.36  
Fourth Quarter
    6.56       2.80  
                 
Year ended February 29, 2008
 
High
   
Low
 
First Quarter
  $ 15.29     $ 12.67  
Second Quarter
    13.48       9.63  
Third Quarter
    13.04       10.02  
Fourth Quarter
    13.47       9.00  

Dividends
 
    We have not paid or declared any cash dividends on our common stock. We have retained, and currently anticipate that we will continue to retain, all of our earnings for use in developing our business. Future cash dividends, if any, will be paid at the discretion of our Board of Directors and will depend, among other things, upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and such other factors as our Board of Directors may deem relevant.

Holders
 
    There are approximately 797 holders of record of our Class A Common Stock and 4 holders of Class B Convertible Common Stock.

Issuer Purchases of Equity Securities
 
    In September 2000, we were authorized by the Board of Directors to repurchase up to 1,563,000 shares of Class A Common Stock in the open market under a share repurchase program (the “Program”).  In July 2006, the Board of Directors authorized an additional repurchase up to 2,000,000 Class A Common Stock in the open market in connection with the Program.  As of February 28, 2009, the cumulative total of acquired shares pursuant to the program was 1,819,762, with a cumulative value of $18,396 reducing the remaining authorized share repurchase balance to 1,743,238.  During the year ended February 28, 2009, the Company did not purchase any shares.  

15

Performance Graph
 
    The following table compares the annual percentage change in our cumulative total stockholder return on our common Class A common stock during a period commencing on February 29, 2004 and ending on February 28, 2009 with the cumulative total return of the Nasdaq Stock Market (US) Index and our SIC Code Index, during such period.
 

 
 
 
16

 
 

Item 6-Selected Consolidated Financial Data
 
    The following selected consolidated financial data for the last five years should be read in conjunction with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.
 
                     
Three
             
   
Year
   
Year
   
Year
   
Months
             
   
Ended
   
Ended
   
Ended
   
Ended
   
Years ended
 
   
February 28,
   
February 29,
   
February 28,
   
February 28,
   
November 30,
 
   
2009
   
2008 (5)
   
2007 (4)
   
2006
   
2005 (3)
   
2004
 
Consolidated Statement of Operations Data
                                   
                                     
Net sales (1)
  $ 603,099     $ 591,355     $ 456,690     $ 103,050     $ 539,716     $ 563,653  
Operating income (loss)  (1)
    (53,443 )     4,422       (5,077 )     (3,159 )     (27,690 )     (1,356 )
 Net income (loss) from continuing operations (1)
    (71,029 )     6,746       3,692       367       (6,687 )     64  
Net income (loss) from discontinued operations (2)
    -       1,719       (756 )     (184 )     (2,904 )     77,136  
Net income (loss)
  $ (71,029 )   $ 8,465     $ 2,936     $ 183     $ (9,591 )   $ 77,200  
                                                 
Net income (loss) per common share from continuing operations:
                                               
Basic
  $ (3.11 )   $ 0.29     $ 0.16     $ 0.02     $ (0.30 )   $ 0.00  
Diluted
  $ (3.11 )   $ 0.29     $ 0.16     $ 0.02     $ (0.30 )   $ 0.00  
Net income (loss) per common share:
                                               
Basic
  $ (3.11 )   $ 0.37     $ 0.13     $ 0.01     $ (0.43 )   $ 3.52  
Diluted
  $ (3.11 )   $ 0.37     $ 0.13     $ 0.01     $ (0.43 )   $ 3.45  
                                                 
   
As of February 28,
   
As of February 29,
   
As of February 28,
   
As of November 30,
 
   
2009
   
2008
   
2007
   
2006
   
2005
   
2004
 
Consolidated Balance Sheet Data
                                               
                                                 
Total assets
  $ 461,296     $ 533,036     $ 499,120     $ 466,012     $ 485,864     $ 543,338  
Working capital
    241,080       275,787       305,960       340,564       340,488       362,018  
Long-term obligations
    31,651       27,260       22,026       18,385       18,425       18,598  
Stockholders' equity
    340,502       423,513       404,362       400,732       401,157       404,187  
 
(1)  
Amounts exclude the financial results of discontinued operations (see Note 2 of the Notes to Consolidated Financial Statements).
(2)  
2004 amount reflects the results of the divestiture of the Cellular business and 2005 amount reflects the divestiture of Malaysia.
(3)  
2005 amounts reflect the acquisition of Terk.
(4)  
2007 amounts reflect the acquisition of Thomson Accessory business.
(5)  
2008 amounts reflect the acquisition of Oehlbach, Incaar, Technuity and Thomson A/V (see Note 3 of the Notes to Consolidated Financial  Statements).

17

Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations   ("MD&A")
 
    This section should be read in conjunction with the “Cautionary Statements” and “Risk Factors” in Item 1A of Part I, and Item 8 of Part II, “Consolidated Financial Statements and Supplementary Data.”
 
    We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations with an overview of the business, including our strategy to give the reader a summary of the goals of our business and the direction in which our business is moving.  This is followed by a discussion of the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. In the next section, we discuss our Results of Operations for the year ended February 28, 2009 compared to the years ended February 29, 2008 and February 28, 2007. We then provide an analysis of changes in our balance sheet and cash flows, and discuss our financial commitments in the sections entitled “Liquidity and Capital Resources, including Contractual and Commercial Commitments”.  We conclude this MD&A with a discussion of “Related Party Transactions” and “Recent Accounting Pronouncements”.

Segment
 
    We have determined that we operate in one reportable segment, the Electronics Group, based on review of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”).  The characteristics of our operations that are relied on in making and reviewing business decisions include the similarities in our products, the commonality of our customers, suppliers and product developers across multiple brands, our unified marketing and distribution strategy, our centralized inventory management and logistics, and the nature of the financial information used by our Executive Officers.  Management reviews the financial results of the Company based on the performance of the Electronics Group.

Outlook
 
    The Company’s domestic and international business is subject to retail industry conditions and the sales of new and used vehicles. The current worldwide economic condition has adversely impacted consumer spending and vehicle sales. If the global macroeconomic environment continues to be weak or deteriorates further, this could have a negative effect on the Company’s revenues and earnings. In an attempt to offset the current market condition, the Company has reduced its operating expenses and has been introducing new product to obtain a greater market share. The Company continues to focus on cash flow and anticipates having sufficient resources to operate during Fiscal 2010 and 2011.

Business Overview and Strategy
 
    Audiovox Corporation ("Audiovox", "We", "Our", "Us" or "Company") is a leading international distributor and value added service provider in the accessory, mobile and consumer electronics industries. We conduct our business through seven wholly-owned subsidiaries: American Radio Corp., Audiovox Electronics Corporation ("AEC"), Audiovox Consumer Electronics, Inc., Audiovox Accessories Corp. (“AAC”), Audiovox German Holdings GmbH  ("Audiovox Germany"), Audiovox Venezuela, C.A and Code Systems, Inc. ("Code").  We market our products under the Audiovox® brand name and other brand names, such as Acoustic Research®, Advent®, Ambico®, Car Link®, Chapman®, Code-Alarm®, Discwasher®, Energizer®, Heco®, Incaar®, Jensen®, Mac Audio®, Magnat®, Movies2Go®, Oehlbach®, Phase Linear®, Prestige®, Pursuit®, RCA®, RCA Accessories®, Recoton®, Road Gear®, Spikemaster® and Terk®, as well as private labels through a large domestic and international distribution network.  We also function as an OEM ("Original Equipment Manufacturer") supplier to several customers and presently have one reportable segment (the "Electronics Group"), which is organized by product category.  We previously announced our intention to acquire synergistic businesses with gross profit margins higher than our core business, leverage overhead, penetrate new markets and to expand our core business and distribution channels.

 
 
18

 

    Effective March 1, 2007, the Company reported “Accessories” as a separate product group due to the Thomson Accessory, Oehlbach and Technuity acquisitions.  In addition, the Company’s former mobile and consumer product categories are now combined and recorded in the “Electronics” product group.  As such, certain reclassifications have been made to prior year amounts as the Company currently reports sales data for the following two product categories:
 
    Electronics products include:

·  
mobile multi-media video products, including in-dash, overhead, headrest and portable mobile video systems,
·  
autosound products including radios, speakers, amplifiers and CD changers,
·  
satellite radios including plug and play models and direct connect models,
·  
automotive security and remote start systems,
·  
automotive power accessories,
·  
rear observation and collision avoidance systems,
·  
Liquid Crystal Display (“LCD”) flat panel televisions,
·  
home and portable stereos,
·  
two-way radios,
·  
digital multi-media products such as personal video recorders and MP3 products,
·  
camcorders,
·  
clock-radios,
·  
digital voice recorders,
·  
home speaker systems,
·  
portable DVD players, and
·  
digital picture frames.
 
    Accessories products include:

·  
High-Definition Television (“HDTV”) Antennas,
·  
Wireless Fidelity (“WiFi”) Antennas,
·  
High-Definition Multimedia Interface (“HDMI”) accessories,
·  
home electronic accessories such as cabling,
·  
other connectivity products,
·  
power cords,
·  
performance enhancing electronics,
·  
TV universal remotes,
·  
flat panel TV mounting systems,
·  
iPod specialized products,
·  
wireless headphones,
·  
rechargeable battery backups (UPS) for camcorders, cordless phones and portable video (DVD) batteries and accessories, and
·  
power supply systems.
 
    We believe our product groups have expanding market opportunities with certain levels of volatility related to domestic and international markets, new car sales, increased competition by manufacturers, private labels, technological advancements, discretionary consumer spending and general economic conditions.  Also, all of our products are subject to price fluctuations which could affect the carrying value of inventories and gross margins in the future.

Acquisitions
 
    We have acquired and integrated several acquisitions which are outlined in the Acquisitions section of Part I and presented in detail in Note 3.


 
 
19

 

Divestitures
 
    On November 7, 2005, we completed the sale of our majority owned subsidiary, Audiovox Malaysia (“AVM”), to the then current minority interest shareholder due to increased competition from non-local OEM’s and deteriorating credit quality of local customers.  We sold our remaining equity in AVM in exchange for a $550 promissory note and were released from all of our Malaysian liabilities, including bank obligations resulting in a loss on sale of $2,079.
 
    On November 1, 2004, we completed the divestiture of our Cellular business to UTSI. See notes 2 and 15 for select information included in the Company’s financial statements presented.

Net Sales Growth
 
    Net sales have a compound growth rate of 3.2% from $510,899 for the year ended November 30, 2003 to $603,099 for the year ended February 28, 2009.  During this period, our sales were impacted by the following items:
 
·  
acquisition of Thomson’s Americas consumer electronics accessory business,
·  
acquisition of Oehlbach’s accessory business,
·  
acquisition of Incaar’s OEM business,
·  
acquisition of Technuity’s accessory business,
·  
acquisition of Thomson’s audio/video business,
·  
acquisition of Terk Technologies,
·  
acquisition of Recoton and growth in Jensen sales,
·  
acquisition of Code-Alarm branded products,
·  
the introduction of new products and lines such as portable DVD players, satellite radio, digital antennas and mobile multi-media devices,
·  
volatility in core mobile, consumer and accessories sales due to increased competition, lower selling prices and decline in the national and global economy.
 
Strategy
 
    Our objective is to grow our business by acquiring new brands, embracing new technologies, expanding product development and applying this to a continued stream of new products that should increase gross margins and improve operating income.  In addition, we plan to continue to acquire synergistic companies that would allow us to leverage overhead, penetrate new markets and expand existing product categories through our business channels.

    The key elements of our strategy are as follows:

·  
Capitalize and increase the Audiovox® family of brands,
·  
Capitalize on niche product and distribution opportunities in the electronics industry,
·  
Leverage our distribution network,
·  
Grow our international presence,
·  
Pursue strategic and complementary acquisitions,
·  
Continue to outsource manufacturing to increase operating leverage, and
·  
Monitor operating expenses.

Critical Accounting Policies and Estimates

General
 
    Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements require us to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions can be subjective and complex and may affect the reported amounts of assets and liabilities, revenues and expenses reported in those financial statements. As a result, actual results could differ from such estimates and assumptions. The significant accounting policies and estimates which we believe are the most critical in fully understanding and evaluating the reported consolidated financial results include the following:

Revenue Recognition
 
    We recognize revenue from product sales at the time of passage of title and risk of loss to the customer either at FOB Shipping Point or FOB Destination, based upon terms established with the customer. Any customer acceptance provisions, which are related to product testing, are satisfied prior to revenue recognition. We have no further obligations subsequent to revenue recognition except for returns of product from customers. We do accept returns of products, if properly requested, authorized and approved.  We continuously monitor and track such product returns and record the provision for the estimated amount of such future returns at point of sale, based on historical experience and any notification we receive of pending returns.

 
 
20

 
 
Sales Incentives
 
    We offer sales incentives to our customers in the form of (1) co-operative advertising allowances; (2) market development funds; (3) volume incentive rebates and  (4) other trade allowances.  We account for sales incentives in accordance with EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of Vendor's Products)" (“EITF 01-9”). Except for other trade allowances, all sales incentives require the customer to purchase our products during a specified period of time. All sales incentives require customers to claim the sales incentive within a certain time period (referred to as the "claim period") and claims are settled either by the customer claiming a deduction against an outstanding account receivable or by the customer requesting a check.  All costs associated with sales incentives are classified as a reduction of net sales, and the following is a summary of the various sales incentive programs:
 
    Co-operative advertising allowances are offered to customers as a reimbursement towards their costs for print or media advertising in which our product is featured on its own or in conjunction with other companies' products. The amount offered is either a fixed amount or is based upon a fixed percentage of sales revenue or fixed amount per unit sold to the customer during a specified time period.
 
    Market development funds are offered to customers in connection with new product launches or entrance into new markets.  The amount offered for new product launches is based upon a fixed amount or fixed percentage of our sales revenue to the customer or a fixed amount per unit sold to the customer during a specified time period. We accrue the cost of co-operative advertising allowances and market development funds at the later of when the customer purchases our products or when the sales incentive is offered to the customer.
 
    Volume incentive rebates offered to customers require that minimum quantities of product be purchased during a specified period of time. The amount offered is either based upon a fixed percentage of our sales revenue to the customer or a fixed amount per unit sold to the customer.  We make an estimate of the ultimate amount of the rebate customers will earn based upon past history with the customer and other facts and circumstances. We have the ability to estimate these volume incentive rebates, as there does not exist a relatively long period of time for a particular rebate to be claimed.  Any changes in the estimated amount of volume incentive rebates are recognized immediately using a cumulative catch-up adjustment.
 
    Other trade allowances are additional sales incentives that we provide to customers subsequent to the related revenue being recognized. In accordance with EITF 01-9, we record the provision for these additional sales incentives at the later of when the sales incentive is offered or when the related revenue is recognized. Such additional sales incentives are based upon a fixed percentage of the selling price to the customer, a fixed amount per unit, or a lump-sum amount.
 
    The accrual balance for sales incentives at February 28, 2009 and February 29, 2008 was $7,917 and $10,768, respectively.  Although we make our best estimate of sales incentive liabilities, many factors, including significant unanticipated changes in the purchasing volume and the lack of claims from customers could have a significant impact on the liability for sales incentives and reported operating results.
 
    We reverse earned but unclaimed sales incentives based upon the expiration of the claim period of each program.  Unclaimed sales incentives that have no specified claim period are reversed in the quarter following one year from the end of the program.  We believe that the reversal of earned but unclaimed sales incentives upon the expiration of the claim period is a disciplined, rational, consistent and systematic method of reversing unclaimed sales incentives.
 
    For the years ended February 28, 2009, February 29, 2008 and February 28, 2007, reversals of previously established sales incentive liabilities amounted to $4,083, $4,108 and $2,460, respectively. These reversals include unearned and unclaimed sales incentives. Unearned sales incentives are volume incentive rebates where the customer did not purchase the required minimum quantities of product during the specified time. Volume incentive rebates are reversed into income in the period when the customer did not reach the required minimum purchases of product during the specified time. Reversals of unearned sales incentives for the years ended February 28, 2009, February 29, 2008 and February 28, 2007 amounted to $1,664, $1,970 and $1,148, respectively. Unclaimed sales incentives are sales incentives earned by the customer but the customer has not claimed payment within the claim period (period after program has ended). Reversals of unclaimed sales incentives for the years ended February 28, 2009, February 29, 2008 and February 28, 2007 amounted to $2,419, $2,138 and $1,312, respectively.

Accounts Receivable
 
    We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and current credit worthiness, as determined by a review of current credit information. We continuously monitor collections from our customers and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified.  We record charges for estimated credit losses against operating expenses and charges for price adjustments against net sales in the consolidated financial statements. The reserve for estimated credit losses at February 28, 2009 February 29, 2008 was $7,361 and $6,386, respectively. While such credit losses have historically been within management's expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that have been experienced in the past. Since our accounts receivable are concentrated in a relatively few number of large customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectability of accounts receivable and our results of operations.

 
 
21

 
 
Inventories
 
    We value our inventory at the lower of the actual cost to purchase (primarily on a weighted moving average basis) and/or the current estimated market value of the inventory less expected costs to sell the inventory. We regularly review inventory quantities on-hand and record a provision, in cost of sales, for excess and obsolete inventory based primarily from selling price reductions subsequent to the balance sheet date, indications from customers based upon current negotiations, and purchase orders. A significant sudden increase in the demand for our products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on-hand. In addition, our industry is characterized by rapid technological change and frequent new product introductions that could result in an increase in the amount of obsolete inventory quantities on-hand.  During the years ended February 28, 2009, February 29, 2008 and February 28, 2007, we recorded inventory write-downs of $13,818, $4,925 and $2,977, respectively.
 
    Estimates of excess and obsolete inventory may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory.  Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the carrying value of inventory and our results of operations.

Goodwill and Other Intangible Assets
 
    Goodwill and other intangible assets, which consists of the excess cost over fair value of assets acquired (goodwill) and other intangible assets (patents, contracts, trademarks and customer relationships) amounted to $88,524 at February 28, 2009 and $124,435 at February 29, 2008.  Goodwill and other intangible assets are determined in accordance with Statement of Financial Accounting Standards No. 141 “Business Combinations” (“SFAS No. 141”) and Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”), see Goodwill and Other Intangible Assets (Note 1(k)).
 
    Goodwill, which includes equity investment goodwill, is calculated as the excess of the cost of purchased businesses over the value of their underlying net assets. The Company has used the Discounted Future Cash Flow Method (DCF) as the principle method to determine the Fair Value (“FV”) of acquired businesses.  The discount rate used for our analysis was 14%. For all acquisitions, a five-year period was analyzed using a risk adjusted discount rate.
 
    The value of potential intangible assets separate from goodwill are evaluated and assigned to the respective categories using certain methodologies (see Note 1(k)).  Certain estimates and assumptions are used in applying these methodologies including projected sales, which include incremental revenue to be generated from the product markets that the Company has not been previously exposed to, disclosed future contracts and adjustments for declines in existing core sales; ongoing market demand for the relevant products; and required returns on tangible and intangible assets.  In the event that actual results or market conditions deviate from these estimates and assumptions used, the future FV may be different than that determined by management and may result in an impairment loss.
 
    The Company categorizes its intangible assets between goodwill and intangible assets.  Goodwill and other intangible assets that have an indefinite useful life are not amortized.  Intangible assets that have a definite useful life are amortized over their estimated useful life.
 
    On an annual basis, or as needed for a triggering event, we test goodwill and other indefinite lived intangible assets for impairment (see Note 1(k)). To determine the fair value of these intangible assets, there are many assumptions and estimates used that directly impact the results of the testing. We have the ability to influence the outcome and ultimate results based on the assumptions and estimates we choose. To mitigate undue influence, we set criteria that are reviewed and approved by various levels of management. Additionally, we may evaluate our recorded intangible assets with the assistance of a third-party valuation firm, as necessary.   All reports and conclusions are reviewed by management who have ultimate responsibility for their content.  For fiscal 2009, the Company’s impairment test resulted in a full goodwill impairment of $28,838 and an impairment loss of $9,976 for other intangible assets.
 
    Determining whether impairment of indefinite lived intangibles has occurred requires an analysis of each identifiable asset. If estimates used in the valuation of each identifiable asset proved to be inaccurate based on future results, there could be additional impairment charges in subsequent periods.

Warranties
 
    We offer warranties of various lengths depending upon the specific product.  Our standard warranties require us to repair or replace defective product returned by both end users and customers during such warranty period at no cost. We record an estimate for warranty related costs, in cost of sales, based upon actual historical return rates and repair costs at the time of sale. The estimated liability for future warranty expense, which has been included in accrued expenses and other current liabilities, amounted to $7,779 and $13,272 at February 28, 2009 and February 29, 2008, respectively.  While warranty costs have historically been within expectations and the provisions established, we cannot guarantee that we will continue to experience the same warranty return rates or repair costs that have been experienced in the past. A significant increase in product return rates, or a significant increase in the costs to repair products, could have a material adverse impact on our operating results.
 
 
22

 

 
Stock-Based Compensation
    
    As discussed further in “Notes to Consolidated Financial Statements – Note 1(t) Accounting for Stock-Based Compensation,” we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R) on December 1, 2005 using the modified prospective method.  Through November 30, 2005 we accounted for our stock option plans under the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25, and as a result no compensation costs had been recognized in our historical consolidated statements of operations.
 
    We have used and expect to continue to use the Black-Sholes option pricing model to compute the estimated fair value of stock-based awards.  The Black-Scholes option pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates.  The assumptions used in computing the fair value of stock-based awards reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control.  We estimate expected volatility by considering the historical volatility of our stock, the implied volatility of publicly traded stock options in our stock and our expectations of volatility for the expected term of stock-based compensation awards.  As a result, if other assumptions or estimates had been used for options granted in the current and prior periods, the stock-based compensation expense of $309 that was recorded for the year ended February 28, 2009 could have been materially different.  Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted in the future.

Income Taxes
 
    We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" and Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN No. 48").  We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.  We decrease the valuation allowance when, based on the weight of available evidence, it is more likely than not that the amount of future tax benefit will be realized.  During fiscal 2009, the Company provided a valuation allowance against substantially all of its deferred tax assets.  Any decline in the valuation allowance could have a material favorable impact on our income tax provision and net income in the period in which such determination is made.
 
    Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.  The tax benefits recognized in the financial statements from such position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. It is possible that the amount of unrecognized tax benefits could change in the next 12 months and the Company believes that it is reasonably possible that its uncertain tax positions will decrease by approximately $2,323 as a result of lapses in the statute of limitations for various jurisdictions.  Furthermore, the Company provides loss contingencies for state and international tax matters relating to potential tax examination issues, planning initiatives and compliance responsibilities. The development of these reserves requires judgments about tax issues, potential outcomes and timing, which if different, may materially impact the Company’s financial condition and results of operations.

Results of Operations
 
    In February 2006, we changed our fiscal year end from November 30th to February 28th.  Included in Item 8 of this annual report on Form 10-K are the consolidated balance sheets at February 28, 2009 and February 29, 2008 and the consolidated statements of operations, consolidated statements of stockholders’ equity and consolidated statements of cash flows for the years ended February 28, 2009, February 29, 2008 and February 28, 2007. In order to provide the reader meaningful comparison, the following analysis provides comparison of the audited year ended February 28, 2009 with the audited year ended February 29, 2008, and the audited year ended February 29, 2008 with the audited year ended February 28, 2007. We analyze and explain the differences between periods in the specific line items of the consolidated statements of operations.

Year Ended February 28, 2009 Compared to the Year Ended February 29, 2008

Continuing Operations
 
    The following table sets forth, for the periods indicated, certain Statement of Operations data for the years ended February 28, 2009 (“Fiscal 2009”) and February 29, 2008 (“Fiscal 2008”).

 
 
23

 

 
Net Sales
 
   
Fiscal
   
Fiscal
             
   
2009
   
2008
   
$ Change
   
% Change
 
                         
Electronics
  $ 449,433     $ 437,018     $ 12,415       2.8 %
Accessories
    153,666       154,337       (671 )     (0.4 )
Total net sales
  $ 603,099     $ 591,355     $ 11,744       2.0 %
 
    Electronics sales, which include both mobile and consumer electronics were $449,433 in Fiscal Year 2009, an increase of 2.8% as compared to $437,018 reported in fiscal 2008. This increase was primarily related to higher sales of consumer electronics products, particularly new product categories under the RCA brand, increases in the Company’s OEM business and, in its International operations in Venezuela and Mexico as compared to the prior year. Offsetting this increase were lower sales of mobile electronics products as a result of the local economic downturn, lower car sales and the financial difficulties of the automakers, which intensified in the fourth quarter of fiscal 2009. As a percentage of net sales, electronics represented 74.5% of sales in fiscal 2009 as compared to 73.9% in the comparable fiscal year period.
 
    Accessories sales for Fiscal 2009 were $153,666, a decrease of 0.4% as compared to $154,337 reported in Fiscal 2008. The small decline in accessories sales is primarily related to the overall economic environment. As a percentage of net sales, accessories represented 25.5% and 26.1% of net sales for the years ended February 28, 2009 and February 29, 2008, respectively.
 
    Sales incentive expense decreased $4,857 to $19,794 in Fiscal 2009, despite the increase in sales as a result of a shift in concentration to customers who do not receive or have lower sales incentive support. Sales incentive reversals decreased $25 to $4,083 during the year. The decrease in reversals was primarily due to a $306 decrease in reversals of unearned sales incentives as a result of large retail customers reaching minimum sales targets required to earn sales incentive funds. We believe the reversal of unearned and earned but unclaimed sales incentives upon the expiration of the claim period is a disciplined, rational, consistent and systematic method of reversing unearned and earned but unclaimed sales incentives. These sales incentive programs are expected to continue and will either increase or decrease based upon competition and customer demands.

Gross Profit
 
   
Fiscal
   
Fiscal
 
   
2009
   
2008
 
             
Gross profit
  $ 100,268     $ 111,328  
Gross margin percentage
    16.6 %     18.8 %
 
    Gross margins for the fiscal year ended February 28, 2009 were 16.6% compared to 18.8% in the prior fiscal year. Gross profit and gross profit margins were positively impacted by price increases instituted in the second half of fiscal 2009 as well as higher gross margins in certain consumer electronics lines. However, these increases were negatively impacted by additional charges to cost of goods sold due to inventory mark downs of i) approximately $2,900 associated with the exit of the portable navigation category in the second quarter of fiscal 2009 and ii) a charge in the fourth quarter of fiscal 2009 of approximately $2,400 related to a mark down of a product category as a result of changes in the market, general economic conditions and the impact of customer bankruptcies. Additionally, $1,500 was related to the support of product sales to a certain customer.
 
    Excluding the impact of inventory mark downs as well as charges taken in conjunction with the bankruptcies, gross profit and gross profit margin would have been approximately $107,068 and 17.8%, respectively.

Operating Expenses and Operating Income / (Loss)

   
Fiscal
   
Fiscal
             
   
2009
   
2008
   
$ Change
   
% Change
 
                         
Operating Expenses:
                       
Selling
  $ 33,505     $ 35,703     $ (2,198 )     (6.2 ) %
General and administrative
    70,870       61,220       9,650       15.8  
Goodwill and intangible asset impairment
    38,814       -       38,814    
100
 
Engineering and technical support
    10,522       9,983       539       5.4  
Total Operating Expenses
  $ 153,711     $ 106,906     $ 46,805       43.8 %
                                 
Operating income (loss)
  $ (53,443 )   $ 4,422     $ (57,865 )     (1,308.6 ) %
 

 
24

 
    Operating expenses increased $46,805 or 43.8% in Fiscal 2009 as compared to Fiscal 2008. As a result of its impairment test for fiscal 2009, operating expenses were impacted by $38,814 due to the resulting impairment charge. The remaining increase principally occurred in the general and administrative expenses as a result of increased professional fees, bad debts and depreciation and amortization and general overhead associated with the Thomson Audio/Video and Technuity Acquisitions. These increases were offset by decreases in executive compensation, sales salaries, commissions, travel and entertainment expenses and insurance.
 
    Selling expenses decreased $2,198 or 6.2% primarily due to a decrease in commissions resulting from a commission program restructuring, a reduction in trade show expenses due to decreased participation, benefits from the salary and overhead reduction program and the discontinuance of certain retail operations. These declines were partially offset by an increase in overhead from the recent acquisitions.
 
    General and administrative expenses increased $48,464 primarily due to the goodwill and other intangible asset impairment charge of $38,814. The remaining increase of $9,650 was mainly due to:

·  
An increase in professional fees of approximately $4,600 as a result of legal settlements, patent and royalty suits,  increased audit fees and the anticipated cost of a credit card breach (net of insurance) resulting from an intrusion affecting credit card information maintained by the Company.

·  
Bad debt increased approximately $1,600 as a result of general economic conditions and the bankruptcy of an automotive customer.

·  
Depreciation and amortization increased $1,500 as a result of our recent acquisitions and new IT systems which have come online this fiscal year.

·  
Salary expense increased approximately $4,100 as a result of our recent acquisitions, severance payments due to our salary and overhead reduction program and a benefit in the prior year for an employee call option.
 
    Partially offsetting the above increases were reductions in executive compensation, insurance expense and a reduction of transitional services required as a result of the integration of the prior year’s acquisitions.
 
    Engineering and technical support expenses increased approximately $500 as a result of employees acquired in recent acquisitions, severance payout related to our salary and overhead reduction program, which were partially offset by actual reduction in headcount.
 
Other Income/(Expense)

   
Fiscal
   
Fiscal
             
   
2009
   
2008
   
$ Change
   
% Change
 
                         
Interest and bank charges
  $ (1,817 )   $ (2,127 )   $ 310       14.6 %
Equity in income of equity investee
    975       3,590       (2,615 )     (72.8 )
Other, net
    (1,669 )     4,709       (6,378 )     (135.4 )
Total other income
  $ (2,511 )   $ 6,172     $ (8,683 )     (140.7 ) %
 
    Interest and bank charges decreased due to the reduction of debt in our international subsidiaries.
 
    Equity in income of equity investees decreased due to decreased equity income of Audiovox Specialized Applications, Inc. (ASA) as a result of decreased sales and gross margins related to the commercial, RV and marine industries due to the current economic conditions.
 
    Other income decreased due to a decline in interest income as a result of a decline in our short-term investment holdings  as a result of the prior year’s acquisitions, seasonality of current working capital requirements, a decline in rates experienced on the Company’s investments and the gains on the sale of a portion of our marketable equity securities during fiscal 2008.
 
    Other expenses increased approximately $1,901 primarily as a result of a charge resulting from the bankruptcy of a vendor and $863 related to the discount experienced on the sale of tax credits in our Venezuelan subsidiary.

 
 
25

 


Income Tax Provision
 
    The effective tax rate in Fiscal 2009 was a provision of 27.0% on a pre-tax loss from continuing operations of $(55,954) as compared to a provision of 36.3% on a pre-tax income of $10,595 from continuing operations in the prior year. The increase in the effective tax rate is due to impairment of non-deductible goodwill and the provision of a valuation allowance against the deferred tax assets as the Company does not believe that it will realize its deferred tax assets on a more-likely-than-not basis.
 
Income (loss) from Discontinued Operations
 
    The following is a summary of financial results included within discontinued operations :

   
Fiscal
   
Fiscal
 
   
2009
   
2008
 
             
Net sales from discontinued operations
  $ -     $ -  
                 
Income (loss) from discontinued operations before income taxes
            3,248  
Income tax (provision) benefit
    -       (1,529 )
Net income (loss) from discontinued operations
    -       1,719  
                 
Loss on sale of discontinued operations, net of tax
    -       -  
Loss from discontinued operations, net of tax
  $ -     $ 1,719  
 
    The increase in the income from discontinued operations in Fiscal 2008 is due to a derivative legal settlement which resulted in pre-tax income of $3,349, net of legal fees and other administrative costs of $3,401 (see Note 15 to the Consolidated Financial Statements). The effective tax rate from discontinued operations for Fiscal 2008 was impacted by state and local taxes and the resolution of a domestic tax audit.

Net Income
 
    The following table sets forth, for the periods indicated, selected statement of operations data beginning with operating income (loss) from continuing operations to reported net income and basic and diluted net income per common share :

   
Fiscal
   
Fiscal
 
   
2009
   
2008
 
             
Operating (loss) income
  $ (53,443 )   $ 4,422  
Other income, net
    (2,511 )     6,172  
(Loss) income from continuing operations before income taxes
    (55,954 )     10,594  
Income tax benefit (expense)
    (15,075 )     (3,848 )
Net (loss) income from continuing operations
    (71,029 )     6,746  
Net income (loss) from discontinued operations, net of tax
    -       1,719  
Net (loss) income
  $ (71,029 )   $ 8,465  
                 
Net (loss) income per common share:
               
Basic
  $ (3.11 )   $ 0.37  
Diluted
  $ (3.11 )   $ 0.37  
 
    Net (loss) income was favorably impacted by sales incentive reversals of $4,083 ($0 after taxes) and $4,108 ($2,506 after taxes) in Fiscal 2009 and 2008, respectively, and pre-tax income of $3,248 ($1,719 after taxes) recorded in discontinued operations in Fiscal 2008. During fiscal 2009, the Company was impacted by several non-standard charges related to the economy, market conditions, customers and other events. The following is a pro forma presentation of our net income detailing the above mentioned charges.
 
    Proforma information presented is considered a non-GAAP financial measure. The Company believes that this presentation of proforma results provides useful information by excluding specific items the Company believes are not indicative of core operating results.

 
 
26

 


Reconciliation of GAAP to Pro Forma Loss

   
Fiscal
 
   
2009
 
GAAP net loss
  $ (71,000 )
Adjustments:
       
Goodwill and intangible asset impairment
    38,800  
Tax impairment
    15,100  
Non-standard professional fees related to intellectual property and trademarks and credit card intrusion
    2,300  
Expenses related to customer and vendor bankruptcies
    6,400  
Expenses related to severance and overhead reduction program
    1,000  
Discontinuance of portable navigation line
    2,900  
Pro forma net loss
  $ (4,500 )
         
GAAP net loss per common share, diluted
  $ (3.11 )
Pro forma net loss per common share, diluted
  $ (0.20 )
         
Diluted weighted average number of shares (GAAP and pro forma)
    22,860,402  

Year Ended February 29, 2008 Compared to the Year Ended February 28, 2007

Continuing Operations
 
    The following table sets forth, for the periods indicated, certain Statement of Operations data for the years ended February 29, 2008 (“Fiscal 2008”) and February 28, 2007 (“Fiscal 2007”).

Net Sales
 
   
Fiscal
   
Fiscal
             
   
2008
   
2007
   
$ Change
   
% Change
 
                         
Electronics
  $ 437,018     $ 432,943     $ 4,075       0.9 %
Accessories
    154,337       23,747       130,590       549.9  
Total net sales
  $ 591,355     $ 456,690     $ 134,665       29.5 %
 
    Electronics sales, which include both mobile and consumer electronics, represented approximately 73.9% of net sales in Fiscal 2008 compared to 94.8% in Fiscal 2007, increased by 0.9% or $4,075 primarily due to an increase in mobile audio sales as a result of improved sales in the Company’s car audio and Satellite Radio product lines and increases in the electronics sales of the Company’s International operations in Germany and Venezuela. Offsetting these increases were lower consumer electronic sales as a result of lower than anticipated holiday sales and industry-wide shortages of LCD panels that adversely affected sales of LCD TV’s, portable DVD’s and digital picture frames. Electronic sales also declined in certain mobile video categories due to increased OEM programs that include the video system as “standard” on more and more vehicles and a decline in new car sales.
 
    Accessories sales, which represented 26.1% of our net sales in Fiscal 2008 compared to 5.2% in Fiscal 2007, increased approximately 549.9% or $130,590 due to the incremental sales generated from the recently acquired Thomson Accessory, Oehlbach and Technuity operations.
 
    Sales incentive expense increased $11,504 to $24,005 in Fiscal 2008, as a result of a general increase in sales, specifically an increase in accessories net sales which offer more sales incentive programs, which was partially offset by a $1,648 increase in reversals to $4,108 during the year. The increase in reversals was primarily due to a $873 increase in reversals of unearned sales incentives as a result of large retail customers not reaching minimum sales targets required to earn sales incentive funds. We believe the reversal of unearned and earned but unclaimed sales incentives upon the expiration of the claim period is a disciplined, rational, consistent and systematic method of reversing unearned and earned but unclaimed sales incentives. These sales incentive programs are expected to continue and will either increase or decrease based upon competition and customer demands.
 
27

Gross Profit
 
   
Fiscal
   
Fiscal
 
   
2008
   
2007
 
             
Gross profit
  $ 111,328     $ 79,319  
Gross margin percentage
    18.8 %     17.4 %
 
    Gross margins increased by 140 basis points to 18.8% in Fiscal 2008 as compared to 17.4% in the prior year. Gross margins were favorably impacted by higher margins generated from the recently acquired companies, improved overall margins in our core business and improved buying programs and inventory management. Gross margins were adversely impacted by increased warehouse and assembly costs as a result of incremental transition costs necessary to facilitate the newly acquired companies as well as increased warranty and repair costs, freight and shipping costs and inventory provisions as a result of increased accessories sales. In addition, reversals of sales incentive expenses favorably impacted gross margins by 0.7% during Fiscal 2008.

Operating Expenses and Operating Income / (Loss)

   
Fiscal
   
Fiscal
             
   
2008
   
2007
   
$ Change
   
% Change
 
                         
Operating Expenses:
                       
Selling
  $ 35,703     $ 28,220     $ 7,483       26.5 %
General and administrative
    61,220       48,920       12,300       25.1  
Engineering and technical support
    9,983       7,256       2,727       37.6  
Total Operating Expenses
  $ 106,906     $ 84,396     $ 22,510       26.7 %
                                 
Operating income (loss)
  $ 4,422     $ (5,077 )   $ 9,499       187.1 %
 
    Operating expenses increased $22,510 or 26.7% in Fiscal 2008 as compared to Fiscal 2007. As a percentage of net sales, operating expenses decreased to 18.1% in Fiscal 2008 from 18.5% in Fiscal 2007 as a result of higher sales and better controls over our fixed costs. The increase in total operating expenses is due to the incremental costs related to the recently acquired Thomson Accessory, Oehlbach, Incaar, Technuity and Thomson Audio/Video operations, which contributed total operating expenses of $25,097 in Fiscal 2008 and $1,180 in Fiscal 2007.
 
    The following table sets forth, for the periods indicated, total operating expenses from our core business and the incremental operating expenses related to the recently acquired Thomson Accessory, Oehlbach, Incaar, Technuity and Thomson Audio/Video businesses.
 
   
Fiscal
   
Fiscal
             
   
2008
   
2007
   
$ Change
   
% Change
 
                         
Core operating expenses
  $ 81,809     $ 83,216     $ (1,407 )     (1.69 ) %
Operating expenses from acquired businesses
    25,097       1,180       23,917       2,026.86  
Total operating expenses
  $ 106,906     $ 84,396     $ 22,510       26.67 %
 
    Selling expenses increased $7,483 or 26.5% primarily due to $10,072 of selling expenses in Fiscal 2008 related to the recently acquired Thomson Accessory, Oehlbach, Incaar, Technuity and Thomson Audio/Video operations, an increase in the cost of travel and an increase in commission expense as a result of increases in commissionable sales and salesmen salaries and related benefits. These increases were partially offset by a decline in advertising expenses due to a decline in the budgeted amounts for general and print media advertising in Fiscal 2008. Selling expenses for our core business were $25,631 in Fiscal 2008, a decrease of $2,052 or 8% over the prior year.
 
    General and administrative expenses increased $12,300 or 25.1% over the prior year due to the following:

·  
$12,149 of expenses in Fiscal 2008 for the recently acquired operations of Thomson Accessory, Oehlbach, Incaar, Technuity and Thomson Audio/Video operations,

·  
$1,392 increase in salaries and related payroll taxes and benefits due to an increase in executive bonuses and profit sharing as a result of the company meeting certain earnings targets and general fiscal wage increases,

·  
$454 increase in a non-cash stock based compensation and warrant expense due to the vesting of options to employees

 
 
28

 

·  
and outside consultants,

·  
$559 increase in depreciation and amortization due to an increase in capital expenditures and amortizable intangibles as a result of acquisitions and investments in new systems,

·  
$501 increase in communication expenses,

·  
$344 increase in software maintenance fees, and

·  
$602 increase in legal settlements from claims by a licensor.
 
    The above increases were partially offset by a $1,099 decrease in professional fees due to a reduction in audit fees, legal and consulting costs and a $289 reduction in general insurance expenses offset by a $790 benefit related to a call/put option previously granted to certain employees. The benefit recorded for the year ended February 29, 2008 was due to a reduction in the call/put liability calculation as a result of the Oehlbach and Incaar acquisitions.
 
    Engineering and technical support expenses increased $2,727 or 37.6% due to $2,253 of expenses in Fiscal 2008 related to the recently acquired Thomson Accessory, Oehlbach, Incaar, Technuity and Thomson Audio/Video operations and an increase in domestic direct labor and related payroll benefits as a result of increased product development efforts and general wage increases.
 
Other Income/(Expense)

   
Fiscal
   
Fiscal
             
   
2008
   
2007
   
$ Change
   
% Change
 
                         
Interest and bank charges
  $ (2,127 )   $ (1,955 )   $ (172 )     8.8 %
Equity in income of equity investees
    3,590       2,937       653       22.2  
Other, net
    4,709       6,253       (1,544 )     (24.7 )
Total other income
  $ 6,172     $ 7,235     $ (1,063 )     (14.7 ) %
 
    Interest and bank charges increased due to the additional debt assumed in connection with the acquisition of Oehlbach, one time bank charges related to the Euro Term loan agreement, which was repaid in full during September 2007, as well as increased working capital needs of our domestic and foreign subsidiaries. Interest and bank charges represent expenses for bank obligations of Audiovox Corporation, Audiovox Germany and Venezuela and interest payments for a capital lease.
 
    Equity in income of equity investees increased due to increased equity income of Audiovox Specialized Applications, Inc. (ASA) as a result of increased sales and gross margins in the Jensen Audio and Voyager product lines.
 
    Other income decreased due to a decline in interest income as a result of a decline in our short-term investment holdings due to cash utilized for acquisitions as well as current working capital requirements. This decrease was partially offset by realized gains on the sale of a portion of our marketable equity securities.

Income Tax Benefit
 
    The effective tax rate in Fiscal 2008 was a provision of 36.3% as compared to a benefit of 71.1% in the prior year. The increase in the effective tax rate is due to lower tax exempt interest income earned on our short-term investments and increased income from operations. The effective tax rate is greater than the Federal statutory rate due to the impact of state and local taxes and the resolution of certain domestic and foreign tax audits.
 
Income (loss) from Discontinued Operations
 
    The following is a summary of financial results included within discontinued operations :

   
Fiscal
   
Fiscal
 
   
2008
   
2007
 
             
Net sales from discontinued operations
  $ -     $ -  
                 
Income (loss) from discontinued operations before income taxes
    3,248       (1,163 )
Income tax (provision) benefit
    (1,529 )     407  
Net income (loss) from discontinued operations
  $ 1,719     $ (756 )
 
29

 
    The income (loss) from discontinued operations in Fiscal 2007 is primarily due to legal and related costs associated with contingencies pertaining to our discontinued Cellular business. The increase in the income from discontinued operations in Fiscal 2008 is due to a derivative legal settlement which resulted in pre-tax income of $3,349, net of legal fees and other administrative costs of $3,401 (see Note 16 to the Consolidated Financial Statements). The effective tax rate from discontinued operations for Fiscal 2008 was impacted by state and local taxes and the resolution of a domestic tax audit.

Net Income
 
    The following table sets forth, for the periods indicated, selected statement of operations data beginning with operating income (loss) from continuing operations to reported net income and basic and diluted net income per common share :

   
Fiscal
   
Fiscal
 
   
2008
   
2007
 
             
Operating income (loss)
  $ 4,422     $ (5,077 )
Other income, net
    6,172       7,235  
Income from continuing operations before income taxes
    10,594       2,158  
Income tax (expense) benefit
    (3,848 )     1,534  
Net income from continuing operations
    6,746       3,692  
Net income (loss) from discontinuing operations, net of tax
    1,719       (756 )
Net income
  $ 8,465     $ 2,936  
                 
Net income per common share:
               
Basic
  $ 0.37     $ 0.13  
Diluted
  $ 0.37     $ 0.13  
 
    Net income was favorably impacted by sales incentive reversals of $4,108 ($2,506 after taxes) and $2,460 ($1,501 after taxes) in Fiscal 2008 and 2007, respectively, and pre-tax income of $3,248 ($1,719 after taxes) recorded in discontinued operations in Fiscal 2008.

Liquidity and Capital Resources

Cash Flows, Commitments and Obligations

As of February 28, 2009, we had working capital of $241,080 which includes cash and short-term investments of $69,504 compared with working capital of $275,787 at February 29, 2008, which included cash and short-term investments of $39,341.  The increase in cash is primarily due to reduction in accounts receivable and inventory balances and an increase in accounts payable and accrued expenses. Though the Company reported a loss from continuing operations, the majority of this loss was due to non-cash charges. In fact, the Company had cash provided from operating activities of $30,006 versus the use of $64,691 for fiscal 2008.  We plan to utilize our current cash position as well as collections from accounts receivable, the cash generated from our operations and the income on our investments to fund the current operations of the business.  However, we may utilize all or a portion of current capital resources to pursue other business opportunities, including acquisitions.   The following table summarizes our cash flow activity for all periods presented:

   
Year
   
Year
   
Year
 
   
Ended
   
Ended
   
Ended
 
   
February 28,
   
February 29,
   
February 28,
 
   
2009
   
2008
   
2007
 
                   
Cash provided by (used in):
                 
Operating activities
  $ 30,006     $ (64,691 )   $ 43,420  
Investing activities
    (3,991 )     93,465       (40,897 )
Financing activities
    4,655       (5,241 )     (3,449 )
Effect of exchange rate changes on cash
    (507 )     335       119  
Net increase (decrease) in cash and cash equivalents
  $ 30,163     $ 23,868     $ (807 )


 
 
30

 

    Operating activities provided cash of $30,006 for Fiscal 2009 from: i) decreased inventory, accounts and vendor receivable balances due to improved inventory and accounts receivable turns;  ii) increased accounts payable and accrued expenses due to the timing and payment of invoices and expenses; iii) partially offset by a net loss generated from continuing operations of $71,029, net of non-cash charges for depreciation and amortization of $7,294, deferred income tax expense of $13,646 and a goodwill and intangible asset impairment charge of $38,709.   
 
    Investing activities used cash of $3,991 during Fiscal 2009, primarily due to capital expenditures partially offset by distributions from an equity investee.
 
    Financing activities provided cash of $4,655 during Fiscal 2009, primarily from the borrowings of bank obligations.
 
    As of February 28, 2009, we have a domestic credit line to fund the temporary short-term working capital needs of the Company.  This line expired on April 30, 2009 and allows aggregate borrowings of up to $15,000 at an interest rate of Prime (or similar designations) plus 1% or LIBOR plus 5%. The line was subsequently renewed until June 30, 2009 with aggregate borrowings of $10,000. In addition, Audiovox Germany has a 16,000 Euro accounts receivable factoring arrangement and a 6,000 Euro Asset-Based Lending (“ABL”) credit facility.
 
    Certain contractual cash obligations and other commercial commitments will impact our short and long-term liquidity.  At February 28, 2009, 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)
  $ 10,927     $ 521     $ 1,056     $ 1,147     $ 8,203  
Operating leases (2)
    32,433       4,757       6,948       4,901       15,827  
Total contractual cash obligations
  $ 43,360     $ 5,278     $ 8,004     $ 6,048     $ 24,030  
                                         
                                         
                                         
   
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)
  $ 1,467     $ 1,467     $ -     $ -     $ -  
Stand-by letters of credit (4)
    2,380       2,380       -       -       -  
Commercial letters of credit (4)
    -       -       -       -       -  
Debt (5)
    7,160       1,264       4,000       1,896       -  
Contingent earn-out payments (6)
    4,531       890       3,212       429       -  
Unconditional purchase obligations (7)
    62,845       62,845       -       -       -  
Total commercial commitments
  $ 78,383     $ 68,846     $ 7,212     $ 2,325     $ -  


1.
Represents total payments (interest and principal) due under a capital lease obligation which has a current (included in other current liabilities) and long term principal balance of $76 and $5,531, respectively at February 28, 2009.

2.
We enter into operating leases in the normal course of business.

3.
Represents amounts outstanding under the Audiovox Germany factoring agreement at February 28, 2009.

4.
Commercial letters of credit are issued during the ordinary course of business through major domestic banks as requested by certain suppliers.  We also issue standby letters of credit to secure certain bank obligations and insurance requirements.

5.
Represents amounts outstanding under term loan agreements in connection with the Oehlbach acquisition.  This amount also includes amounts due under a call-put option with certain employees of Audiovox Germany.

6.
Represents contingent payments in connection with the Thomson Accessory and Oehlbach acquisitions (see Note 3 of the Consolidated Financial Statements).
 
7.
Open purchase obligations represent inventory commitments.  These obligations are not recorded in the consolidated financial statements until commitments are fulfilled and such obligations are subject to change based on negotiations with manufacturers.

 
 
31

 
 
    We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations, available borrowings under bank lines of credit and possible future public or private debt and/or equity offerings.  At times, we evaluate possible acquisitions of, or investments in, businesses that are complementary to ours, which transactions may require the use of cash.  We believe that our cash, other liquid assets, operating cash flows, credit arrangements, access to equity capital markets, taken together, provides adequate resources to fund ongoing operating expenditures. In the event that they do not, we may require additional funds in the future to support our working capital requirements or for other purposes and may seek to raise such additional funds through the sale of public or private equity and/or debt financings as well as from other sources.  No assurance can be given that additional financing will be available in the future or that if available, such financing will be obtainable on terms favorable when required.
 
Off-Balance Sheet Arrangements
 
    We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.

Impact of Inflation and Currency Fluctuation
 
    To the extent that we expand our operations into Europe, Canada, Latin America and the Pacific Rim, the effects of inflation and currency fluctuations could impact our financial condition and results of operations.  While the prices we pay for products purchased from our suppliers are principally denominated in United States dollars, price negotiations depend in part on the foreign currency of foreign manufacturers, as well as market, trade and political factors.
 
    Recently there has been an increase in the inflationary rate in Venezuela. The country’s ability to translate bolivars to dollars and transfer funds from our Venezuelan subsidiary to Audiovox Corporation has been delayed due to lack of U.S. dollars. The Company currently has an intercompany receivable from Venezuela. Any decrease in the fixed rate of exchange could cause the Company to suffer foreign exchange losses.

Seasonality
 
    We typically experience seasonality in our operations. We generally sell a substantial amount of our products during September, October and November due to increased promotional and advertising activities during the holiday season.  Our business is also significantly impacted by the holiday season and electronic trade shows in December and January.

Related Party Transactions
 
    During 1998, we entered into a 30-year capital lease for a building with our principal stockholder and chairman, which was the headquarters of the discontinued Cellular operation.  Payments on the capital lease were based upon the construction costs of the building and the then-current interest rates.  This capital lease was refinanced in December 2006 and the lease expires on November 30, 2026.  The effective interest rate on the capital lease obligation is 8%.  On November 1, 2004, we entered into an agreement to sublease the building to UTStarcom for monthly payments of $46 until November 1, 2009.  We also lease another facility from our principal stockholder which expires on November 30, 2016.  Total lease payments required under all related party leases for the five-year period ending February 28, 2014 are $6,381.

Recent Accounting Pronouncements
 
    In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), to provide companies the option to report selected financial assets and liabilities at fair value. Upon adoption of the provisions of SFAS No. 159 on March 1, 2008, the Company did not elect the fair value option to report its financial assets and liabilities at fair value. Accordingly, the adoption of SFAS No. 159 did not have an impact on the Company's financial position or results of operations.
  
    On December 4, 2007, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141(R), Business Combinations (“Statement No. 141(R)”) and Statement No. 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“Statement No. 160”). These new standards will significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statements. Issuance of these standards is also noteworthy in that they represent the culmination of the first major collaborative convergence project between the International Accounting Standards Board and the FASB. Statement No. 141(R) is required to be adopted concurrently with Statement No. 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. Application of Statement No. 141(R) and Statement No. 160 is required to be adopted prospectively, except for certain provisions of Statement No. 160, which are required to be adopted retrospectively. Business combination transactions accounted for before adoption of Statement No. 141(R) should be accounted for in accordance with Statement No. 141 and that accounting previously completed under Statement No. 141 should not be modified as of or after the date of adoption of Statement No. 141(R). All of the Company’s recent acquisitions fall under the scope of Statement No. 141. The Company will evaluate the impact of Statement No. 141 and Statement No. 160 as they relate to any future acquisitions, as applicable.

 
 
32

 
 
    In May 2008, the FASB issued Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("Statement  No. 162"). Statement No. 162 identifies the sources of accounting  principles and the framework for selecting the principles to be used in the preparation of financial statements  presented in conformity with generally accepted accounting principles in the United States of America. Statement No. 162 will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, "The Meaning of, Present fairly in conformity with generally accepted accounting principles". The Company does not believe the implementation of Statement No. 162 will have a material impact on its consolidated financial statements.
 
    In April 2009, the FASB issued FASB Staff Position 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased in Identifying Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 provides guidance in determining fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying transactions that are not orderly. This FSP shall be effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The adoption of FSP 157-4 is not expected to have a significant impact on the Company’s financial position, results of operations or the determination of the fair value of its financial assets.
 
    In April 2009, the FASB issued FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairment” (“FSP 115-2/124-2”). FSP 115-2/124-2 amends the requirements for the recognition and measurement of other-than-temporary impairments for debt securities by modifying the pre-existing “intent and ability” indicator. Under FSP 115-2/124-2, an other-than-temporary impairment is triggered when there is intent to sell the security, it is more likely than not that the security will be required to be sold before recovery, or the security is not expected to recover the entire amortized cost basis of the security. Additionally, FSP 115-2/124-2 changes the presentation of an other-than-temporary impairment in the income statement for those impairments involving credit losses. The credit loss component will be recognized in earnings and the remainder of the impairment will be recorded in other comprehensive income.  FSP 115-2/124-2 is effective for the Company beginning in the first quarter of fiscal year 2010. Upon implementation at the beginning of the first quarter of 2010, FSP 115-2/124-2 is not expected to have a significant impact on the Company’s financial position or results of operations.
 
    On April 9, 2009, the FASB issued FASB Staff Position 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107-1 and APB 28-1”).  FSP 107-1 and APB 28-1 which will amend SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” (“FAS 107”). FSP 107-1 and APB 28-1 will require an entity to provide disclosures about the fair value of financial instruments in interim financial information. FSP 107-1 and APB 28-1 would apply to all financial instruments within the scope of SFAS No. 107 and will require entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements. FSP 107-1 and APB 28-1 will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt FSP 107-1 and APB 28-1 only if it also elects to early adopt FSP 157-4 and FSP 115-2 and 124-2. Since FSP 107-1 and APB-28-1 will require disclosures about fair values in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 is not expected to have a significant impact on the Company’s financial position or results of operations.

Item 7A-Quantitative and Qualitative Disclosures About Market Risk
 
    The market risk inherent in our market instruments and positions is the potential loss arising from adverse changes in marketable equity security prices, interest rates and foreign currency exchange rates.
 
Marketable Securities
 
    Marketable securities at February 28, 2009, which are recorded at fair value of $7,744, include an unrealized loss of $4,647 and have exposure to price fluctuations. This risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in prices quoted by stock exchanges and amounts to $774 as of February 28, 2009. Actual results may differ.
 
Interest Rate Risk
 
    Our earnings and cash flows are subject to fluctuations due to changes in interest rates on investment of available cash balances in money market funds and investment grade corporate and U.S. government securities. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. In addition, our bank loans expose us to changes in short-term interest rates since interest rates on the underlying obligations are either variable or fixed.

 
 
33

 

Foreign Exchange Risk
 
    We are subject to risk from changes in foreign exchange rates for our subsidiaries and marketable securities that use a foreign currency as their functional currency and are translated into U.S. dollars. These changes result in cumulative translation adjustments, which are included in accumulated other comprehensive income (loss).  At February 28, 2009, we had translation exposure to various foreign currencies with the most significant being the Euro, Thailand Baht, Malaysian Ringgit, Hong Kong Dollar, Mexican Peso, Venezuelan Bolivar and Canadian Dollar. The potential loss resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates, as of February 28, 2009 amounts to $2,058.  Actual results may differ.

Item 8-Consolidated Financial Statements and Supplementary Data
 
    The information required by this item begins on page F-1 of this Annual Report on Form 10-K and is incorporated herein by reference.

Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    Not Applicable

Item 9A-Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
    Audiovox Corporation and subsidiaries (the “Company”) maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act is recorded, processed, summarized, and reported within the time periods specified in accordance with the SEC’s rules and regulations, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosures.
 
    As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to the Securities and Exchange Act Rule 13a-15. Based upon this evaluation as of February 28, 2009, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective and adequately designed.
 
Management's Report on Internal Control Over Financial Reporting
 
    The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting; as such term is defined in the Securities and Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
 
·  
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·  
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

·  
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
    Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
    Management evaluated the effectiveness of the Company’s internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting as of February 28, 2009. Based on that evaluation, management concluded that the Company's internal control over financial reporting was effective as of February 28, 2009 based on the COSO criteria.

 
 
34

 
 
    The certifications of the Company’s Chief Executive Officer and Chief Financial Officer included in Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K includes, in paragraph 4 of such certifications, information concerning the Company’s disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 9A. Controls and Procedures, for a more complete understanding of the matters covered by such certifications.
 
    The effectiveness of the Company’s internal control over financial reporting as of February 28, 2009, has been audited by Grant Thornton LLP, an independent registered public accounting firm who also audited the Company’s consolidated financial statements. Grant Thornton LLP’s attestation report on the effectiveness of the Company’ s internal control over financial reporting is included below.

 
 
35

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of Directors and Stockholders
Audiovox Corporation

We have audited Audiovox Corporation (a Delaware corporation) and subsidiaries’ (the “Company”) internal control over financial reporting as of February 28, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Audiovox Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of February 28, 2009, based on criteria established in Internal Control – Integrated Framework issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Audiovox Corporation and subsidiaries as of February 28, 2009 and February 29, 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended February 28, 2009, and our report dated May 14, 2009 expressed an unqualified opinion thereon.



/s/ GRANT THORNTON LLP

Melville, New York
May 14, 2009
 
36

 
Changes in Internal Controls Over Financial Reporting
 
    There were no material changes in our internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the most recently completed fiscal fourth quarter ended February 28, 2009 covered by this report, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.


Item 9B - Other Information

    Not Applicable

PART III
 
    The information required by Item 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions, and Director Independence) and Item 14 (Principal Accounting Fees and Services) of Form 10-K, will be included in our Proxy Statement for the Annual meeting of Stockholders, which will be filed on or before June 28, 2009, and such information is incorporated herein by reference.

PART IV


Item 15-Exhibits, Financial Statement Schedules

(1 and 2)    Financial Statements and Financial Statement Schedules.  See Index to Consolidated Financial Statements attached hereto.

(3)        Exhibits.  A list of exhibits is included on page 78.



 
 
37

 


AUDIOVOX CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Financial Statements:
Page
 
   
Report of Independent Registered Public Accounting Firm
 
39
 
Consolidated Balance Sheets as of February 28, 2009 and  February 29, 2008
 
40
 
Consolidated Statements of Operations for the years ended February 28, 2009, February 29, 2008 and  February 28, 2007
 
41
 
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the years ended February 28, 2009, February 29, 2008 and  February 28, 2007
42
 
   
Consolidated Statements of Cash Flows for the years ended February 28, 2009, February 29, 2008 and  February 28, 2007
44
   
Notes to Consolidated Financial Statements
 
45
 
Financial Statement Schedule:
 
 
Schedule II - Valuation and Qualifying Accounts
 
77
 


 
 
38

 





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Stockholders
Audiovox Corporation

We have audited the accompanying consolidated balance sheets of Audiovox Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of February 28, 2009 and February 29, 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended February 28, 2009. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15.  These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Audiovox Corporation and subsidiaries as of February 28, 2009 and February 29, 2008, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 2009 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 of the notes to consolidated financial statements, on March 1, 2007 the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, Accounting for Income Taxes”.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of February 28, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated May 14, 2009 expressed an unqualified opinion thereon.



 
/s/ GRANT THORNTON LLP

Melville, New York
May 14, 2009




 

 
 
39

 
Audiovox Corporation and Subsidiaries
Consolidated Balance Sheets
February 28, 2009 and February 29, 2008
(In thousands, except share data)

   
February 28,
   
February 29,
 
   
2009
   
2008
 
Assets
           
             
Current assets:
           
Cash and cash equivalents
  $ 69,504     $ 39,341  
Accounts receivable, net
    104,896       112,688  
Inventory
    125,301       155,748  
Receivables from vendors
    12,195       29,358  
Prepaid expenses and other current assets
    17,973       13,780  
Deferred income taxes
    354       7,135  
Total current assets
    330,223       358,050  
                 
Investment securities
    7,744       15,033  
Equity investments
    13,118       13,222  
Property, plant and equipment, net
    19,903       21,550  
Goodwill
    -       23,427  
Intangible assets
    88,524       101,008  
Deferred income taxes
    221       -  
Other assets
    1,563       746  
Total assets
  $ 461,296     $ 533,036  
                 
Liabilities and Stockholders' Equity
               
                 
Current liabilities:
               
Accounts payable
  $ 41,796     $ 24,433  
Accrued expenses and other current liabilities
    32,575       38,575  
Income taxes payable
    2,665       5,335  
Accrued sales incentives
    7,917       10,768  
Deferred income taxes
    1,459       -  
Bank obligations
    1,467       3,070  
Current portion of long-term debt
    1,264       82  
Total current liabilities
    89,143       82,263  
                 
Long-term debt
    5,896       1,621  
Capital lease obligation
    5,531       5,607  
Deferred compensation
    2,559       4,406  
Other tax liabilities
    2,572       4,566  
Deferred tax liabilities
    4,657       6,057  
Other long term liabilities (see Note 3)
    10,436       5,003  
Total liabilities
    120,794       109,523  
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
Series preferred stock, $.01 par value; 1,500,000 shares authorized, no shares issued or outstanding
    -       -  
Common stock:
               
Class A, $.01 par value; 60,000,000 shares authorized, 22,424,212 and 22,414,212 shares issued,  20,604,460 and 20,593,660  shares outstanding at February 28, 2009 and  February 29 2008, respectively
    224       224  
Class B convertible, $.01 par value; 10,000,000 shares authorized, 2,260,954 shares issued and outstanding
    22       22  
Paid-in capital
    274,464       274,282  
Retained earnings
    91,513       162,542  
Accumulated other comprehensive (loss) income
    (7,325 )     4,847  
Treasury stock, at cost, 1,819,752 and 1,820,552 shares of Class A common stock at February 28, 2009 and February 29, 2008, respectively
    (18,396 )     (18,404 )
Total stockholders' equity
    340,502       423,513  
Total liabilities and stockholders' equity
  $ 461,296     $ 533,036  
See accompanying notes to consolidated financial statements.


 
40

 

Audiovox Corporation and Subsidiaries
Consolidated Statements of Operations
Years Ended February 28, 2009, February 29, 2008 and February 28, 2007
 (In thousands, except share and per share data)

   
Year
   
Year
   
Year