Audiovox 2006 Annual Report Download - page 24

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intangible assets with the assistance of a third-party valuation firm, as necessary. These impairment
tests may result in impairment losses that could have a material adverse impact on our results of
operations.
Warranties
We offer warranties of various lengths depending upon the specific product. Our standard
warranties require us to repair or replace defective product returned by both end users and customers
during such warranty period at no cost. We record an estimate for warranty related costs, in cost of
sales, based upon actual historical return rates and repair costs at the time of sale. The estimated
liability for future warranty expense, which has been included in accrued expenses and other current
liabilities, amounted to $5,856 and $5,314 at February 28, 2007 and 2006, 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.
Stock-Based Compensation
As discussed further in ‘‘Notes to Consolidated Financial Statements — Note 1 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 year ended February 28, 2007 and in prior periods, the
stock-based compensation expense of $432 that was recorded for the year ended February 28, 2007
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
(SFAS) No. 109, ‘‘Accounting for Income Taxes’’. We record a valuation allowance to reduce our
deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. We
decrease the valuation allowance when, based on the weight of available evidence, it is more likely
than not that the amount of future tax benefit will be realized. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, there is no assurance that the valuation allowance will not need to be increased
to cover additional deferred tax assets that may not be realized. Any increase or decline in the
valuation allowance could have a material adverse impact on our income tax provision and net income
in the period in which such determination is made.
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.
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