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January
21, 2009
Mr. Brian
Cascio
Accounting
Branch Chief
United
States Securities and
Exchange
Commission
Division
of Corporate Finances
450 Fifth
Street, N.W.
Washington,
DC 20549
Re: Audiovox
Corporation
Form 10-K for the fiscal year ended
February 29, 2008
Filed May 14, 2008
File
No. 001-09532
Dear Mr.
Cascio:
This
letter is being submitted in response to the comments set forth in the Staff of
the Division of Corporate Finance's (the “Staff”) letter dated December 11,
2008, with respect to the above-referenced filings (the “Comment
Letter”). The responses to the Comment Letter regarding the
aforementioned filings appear below.
The
following numbered paragraphs, which correspond to the number paragraphs of the
Comment Letter, set forth our responses to the Staff’s comments contained in the
Comment Letter.
Form 10-K for the Fiscal
Year Ended February 29, 2008
Management’s Discussion and
Analysis of Financial Condition and Results of Operations- Page
19
Critical Accounting Policies
and Estimates – Page 23
SEC
Comment:
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(1)
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We
refer to your response to prior comment 1. In your response you describe
certain information about how you determined the fair value of your
company as of February 28, 2008. Based on the response it is not clear how
your methods comply with SFAS 142. In that regard please respond to the
following:
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SEC
response letter 1.21.09
Mr. Brian
Cascio
United
States Securities
and
Exchange Commission
January
21, 2009
Page 2 of 5
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(a)
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With
respect to goodwill, tell us and in future filings clarify how you apply
the two-step impairment model described in paragraphs 19 through 22 of
SFAS 142. Also, identify your reporting units and explain how you
identified those reporting units under the guidance of SFAS
142.
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Response:
During
its annual impairment review, Audiovox considered its operations as one
reporting unit as defined under paragraph 30 and 31 of SFAS 142. We
have complied with paragraphs 19 through 22 in our annual impairment testing by
performing the first step. The Discounted Future Cash Flow Method
(DCF) was used to test the Fair Value (FV). A five-year period was
analyzed using a risk adjusted discount rate. The resulting DCF FV
was tested for reasonableness using the EBITDA multiple of other comparable
company acquisition transactions, and publicly traded companies in the consumer
electronics industry. This data was obtained through surveys and/or
analyses provided by investment banking and research sources. Since
the result of step one was that our fair value exceeded the carrying value, a
step 2 was unnecessary. The Company will retain specialists to review our
assumptions to be used in performing its fiscal 2009 annual
review. In future filings, we will disclose the process, methodology
and assumptions used to assess potential impairment. We have attached, for your
review, proposed language to be included in future filings.
SEC
Comment:
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(b)
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While
we see that you applied a discounted cash flow analysis and a model based
on EBITDA to determine the fair value of your business as a whole, please
tell us and disclose in future filings how you determined the fair value
of your individual reporting units under the guidance from SFAS
142.
|
Response:
As
indicated in our response to Item 1(a) above, management considered the Company
to have one reporting unit during its fiscal 2008 annual impairment
review. The Company will revisit its assumptions during its fiscal
2009 review and disclose the conclusions in its Form 10K to be filed for the
fiscal year ending February 28, 2009.
SEC
Comment:
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(c)
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As
you are a public company, please tell us whether the quoted market price
of your common stock is considered in making fair value judgments for
impairment testing purposes. If so, tell us how you utilize and prioritize
quoted market price in your evaluation. If you do not consider the quoted
market price of your common shares in making fair value judgments
for
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Mr. Brian
Cascio
United
States Securities
and
Exchange Commission
January
21, 2009
Page 3 of 5
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(d)
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impairment
testing purposes, tell us why you believe that it is appropriate under
SFAS 142 in your specific
circumstances.
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Response:
The
Company considered its quoted market price during its impairment testing for
February 29, 2008. However, based on the following factors, the
quoted market price was not the final criteria used for management’s
conclusion.
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a.
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Audiovox’s
per share market price was at a 52 week low as of February 29,
2008. Under the guidance of SFAS 142, the Company considered
and included a control premium in performing its
evaluation. The control premium was estimated using a published
market review for publicly-traded company acquisitions including average,
industry specific and categorical control premium data. The
resulting common stock value was considered undervalued as compared with
the Company’s tangible equity
value.
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b.
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Further
consideration was given to the impact of general market conditions on the
share market price of Audiovox Corporation including broad market data and
information on comparable companies. Management believes that
the effect of the decline in the Company’s share market price as of
February 29, 2008 was not representative of its then current fair
value.
|
The DCF
fair value indicated in 1(a) above was considered a more appropriate value for
Audiovox as of February 29, 2008. When compared to the Company’s
carrying value, management concluded that no impairment existed.
SEC
Comment:
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(e)
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With
respect to non-amortizing intangible assets, tell us and in future filings
disclose how you apply paragraph 17 of SFAS 142 in testing for impairment.
Please note that impairment testing should be performed on an
asset-by-asset basis.
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Response:
As
indicated in our response to prior comment three (3), Audiovox acquired five
different companies during the fiscal years ended February 28, 2007 and February
29, 2008 which added $76 million to the trademark intangible. Three
of the valuations for these acquisitions were finalized close to and before the
Company filed its Form 10K for the year ended February 29, 2008. As
such, the value assigned to the non-amortizing intangible assets was current and
included as part of the final valuation in our Form 10K. The
remaining two acquisitions occurred within 6 months of our fiscal year-end and
the value of the non-amortizing intangibles was estimated by management pending
final valuation. In the fourth quarter ending February 29, 2008,
management conducted its annual impairment review in accordance with SFAS No.
142 and determined that the Fair Value (FV) of Audiovox exceeded its carrying
value; therefore, no impairment to intangible assets, including goodwill
existed. During this impairment review, there were no additional
factors identified on an asset-specific basis that would indicate to management
that any of the non-amortizing intangibles, not including those identified with
the recent acquisitions, were at risk of being impaired. During its
evaluation of intangibles for Fiscal 2009, the Company will consider impairment
of factors specific to relevant assets during its review. In future
filings, the Company will disclose the factors used to assess its various
non-amortizing intangible assets. We have attached, for your review,
proposed language to be included in future filings.
Mr. Brian
Cascio
United
States Securities
and
Exchange Commission
January
21, 2009
Page 4 of 5
SEC
Comment:
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(f)
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Please
provide us a draft that shows us how you propose to expand the disclosure
in future filings in response to prior comment 1. In that regard, please
ensure that your proposed disclosure clearly and substantially addresses
uncertainties involved in the fair value measurements, the subjectivity of
the assumptions and the potential for variability over time. Refer to
FR-72.
|
Response:
The
Company has prepared proposed language for future filings related to its
MD&A disclosures and footnotes related to Goodwill and Other Intangible
Assets, including the methodologies used to assign and evaluate the fair values
of its respective indefinite and amortizable intangible assets. We
have included the general assumptions used in our evaluations, which will be
refined, as necessary, based on the conclusions of the Company’s annual
impairment test to be performed during its fiscal fourth quarter
2009. We have attached, for your review, proposed language to be
included in future filings.
Consolidated Financial
Statements
Note 1 – Description of
Business and Summary of Significant Accounting Policies
j) Goodwill and Other
Intangible Assets, Page F-13
SEC
Comment:
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(2)
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In
your response to comment 4 you indicate that you applied the relief from
royalty method in determining the fair value of trademarks and trade names
with indefinite lives and that you estimated royalty rates based on
comparable market-based royalty rates or profit sharing between a licensor
and licensee. Please ensure that your future disclosure is specific to
individual acquisitions, where significant. In that regard, clarify which
royalty method you utilized and the basis for your determinations. It also
appears that your methods involve significant management judgment,
including projections of future sales
of products utilizing the acquired trademarks and trade names. In future
filings and in light of the volume of recent acquisitions, please also
provide appropriate critical accounting policy disclosure regarding how
you value the indefinite lived trademarks and trade names at
acquisition.
|
Mr. Brian
Cascio
United
States Securities
and
Exchange Commission
January
21, 2009
Page 5 of 5
Response:
Trademarks
are valued at acquisition, using a royalty savings methodology called the Relief
from Royalty Method. This method is based on projected sales of
products which use the trademark, which includes incremental revenue to be
generated from the product markets that the Company has not been previously
exposed to. In addition, the sales projections include disclosed
future contracts which will add additional revenue to the
Company. These projections were tempered by declines in existing core
sales. We also determine the royalty rate either based on comparable
market based royalty rates or profit sharing between the licensor and
licensee. Each trademark or group of trademarks is analyzed
individually.
We have
determined that the acquired trademarks have an indefinite life. This
is based on management’s business intent for their use; ongoing market demand
for products and their ability to generate future cash flows; legal, regulatory
or contractual provisions on its use or subsequent renewal; and the cost to
maintain or renew the rights to the assets. We will continue to
annually monitor the legal, regulatory, contractual, competitive, economic or
other factors which might limit the useful life of the asset.
Response to SEC Comment
(3):
In
connection with your review of the Company's filing on Form 10-K for the fiscal
year ended February 29, 2008, the Company acknowledges that: it is
responsible for the adequacy and accuracy of the disclosure in its filing; staff
comments or changes to disclosure in response to staff comments do not foreclose
the Commission from taking any action with respect to the filing; and, the
Company may not assert staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the United
States.
If you
have any additional comments or should you require any supplemental information,
please do not hesitate to contact me.
Sincerely,
Charles
M. Stoehr
Senior
Vice President and
Chief
Financial Officer