Audiovox 2006 Annual Report Download - page 82

Audiovox Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
February 28, 2007
(Dollars in thousands, except share and per-share data)
Certain consolidated class actions transferred to a Multi-District Litigation Panel of the United
States District Court of the District of Maryland against the Company and other suppliers,
manufacturers and distributors of hand-held wireless telephones alleging damages relating to
exposure to radio frequency radiation from hand-held wireless telephones are still pending. No
assurances regarding the outcome of this matter can be given, as the Company is unable to assess
the degree of probability of an unfavorable outcome or estimated loss or liability, if any.
Accordingly, no estimated loss has been recorded for the aforementioned case.
During fiscal 2004, an arbitration proceeding was commenced by the Company and several of its
subsidiaries against certain Venezuelan employees and two Venezuelan companies
(‘‘Respondents’’) before the American Arbitration Association. The matter was submitted to
mediation and settled in fiscal 2005. The agreement provided for a payment (to be made upon
satisfaction of certain pre-closing conditions) from the Company to the Respondents of $1,700 in
consideration of which the Company will acquire all of Respondents’ ownership. In addition, the
Company and Respondents will release all claims. As of February 28, 2006, $250 was paid to the
Respondents and the remaining balance (which includes accrued interest), was included in
restricted cash on the accompanying consolidated balance sheet. In April 2006, all closing
conditions were satisfied and the remaining balance in restricted cash was paid to the
Respondents. This purchase of minority interest was recorded as goodwill on the accompanying
consolidated balance sheet in accordance with FASB Statement 141 ‘‘Business Combinations’’
(see Note 1k). As such, this matter has been completed and the Company has full ownership of
Audiovox Venezuela.
The products the Company sells are continually changing as a result of improved technology. As a
result, although the Company and its suppliers attempt to avoid infringing known proprietary
rights, the Company may be subject to legal proceedings and claims for alleged infringement by
its suppliers or distributors, of third party patents, trade secrets, trademarks or copyrights. Any
claims relating to the infringement of third-party proprietary rights, even if not meritorious, could
result in costly litigation, divert management’s attention and resources, or require the Company to
either enter into royalty or license agreements which are not advantageous to the Company or
pay material amounts of damages.
Under the asset purchase agreement for the sale of the Company’s Cellular business to UTSI, the
Company agreed to indemnify UTSI for any breach or violation by ACC and its representations,
warranties and covenants contained in the asset purchase agreement and for other matters,
subject to certain limitations. 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.
Simultaneous with the acquisition of Code Systems, Inc. (Code) in March 2002, the Company
entered into a purchase and supply agreement with a third party. In exchange for entering into
this agreement, the Company issued 50 warrants in its subsidiary, Code, which vest immediately.
Furthermore, the agreement calls for the issuance of additional warrants based upon the future
operating performance of Code. Based upon the contingent nature of the warrants, no
recognition was given to the Code warrants as the related contingency was not considered
probable and such warrants had not vested at February 28, 2007 or February 28, 2006.
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