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VOXX INTERNATIONAL CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 10, 2014

Forward-Looking Statements

Certain information in this Quarterly Report on Form 10-Q would constitute forward-looking statements, including but not limited to, information relating to the future performance and financial condition of the Company, the plans and objectives of the Company's management and the Company's assumptions regarding such performance and plans that are forward-looking in nature and involve certain risks and uncertainties. Actual results could differ materially from such forward-looking information. We begin Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") with an overview of the business. This is followed by a discussion of the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. In the next section, we discuss our results of operations for the three months ended May 31, 2014 compared to the three months ended May 31, 2013. Next, we present adjusted EBITDA and diluted adjusted EBITDA per common share for the three months ended May 31, 2014 compared to the three months ended May 31, 2013 in order to provide a useful and appropriate supplemental measure of our performance. We then provide an analysis of changes in our balance sheets and cash flows, and discuss our financial commitments in the sections entitled "Liquidity and Capital Resources." We conclude this MD&A with a discussion of "Related Party Transactions" and "Recent Accounting Pronouncements."



Unless specifically indicated otherwise, all amounts presented in our MD&A below are in thousands, except share and per share data.

Business Overview

VOXX International Corporation ("Voxx," "We," "Our," "Us" or the "Company") is a leading international manufacturer and distributor in the Automotive, Premium Audio and Consumer Accessories industries. The Company has widely diversified interests, with more than 30 global brands that it has acquired and grown throughout the years, achieving a powerful international corporate image and creating a vehicle for each of these respective brands to emerge with its own identity. We conduct our business through eighteen wholly-owned subsidiaries: Audiovox Atlanta Corp., VOXX Electronics Corporation, VOXX Accessories Corp., Audiovox Consumer Electronics, Inc. ("ACE"), Audiovox German Holdings GmbH ("Audiovox Germany"), Audiovox Venezuela, C.A., Audiovox Canada Limited, Audiovox Hong Kong Ltd., Audiovox International Corp., Audiovox Mexico, S. de R.L. de C.V. ("Audiovox Mexico"), Code Systems, Inc., Oehlbach Kabel GmbH ("Oehlbach"), Schwaiger GmbH ("Schwaiger"), Invision Automotive Systems, Inc. ("Invision"), Klipsch Holding LLC ("Klipsch"), Car Communication Holding GmbH ("Hirschmann"), Omega Research and Development, LLC ("Omega") and Audiovox Websales LLC. We market our products under the Audiovox® brand name, other brand names and licensed brands, such as 808®, AR for Her®, Acoustic Research®, Advent®, Ambico®, Car Link®, Chapman®, Code-Alarm®, Energy®, Heco®, Hirschmann Car Communication®, Incaar™, Invision®, Jamo®, Jensen®, Klipsch®, Mac Audio™, Magnat®, Mirage®, Oehlbach®, Omega®, Phase Linear®, Prestige®, Pursuit®, RCA®, RCA Accessories®, Schwaiger®, Spikemaster®, Recoton®, Road Gear®, 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. Reportable Segments The Company operates in three segments based upon our products and internal organizational structure. The operating segments consist of the Automotive, Premium Audio and Consumer Accessories segments. The Automotive segment designs, manufactures, distributes and markets rear-seat entertainment devices, satellite radio products, automotive security, remote start systems, digital TV tuners, mobile antennas, mobile multimedia devices, aftermarket/OE-styled radios, car-link smartphone telematics application, collision avoidance systems and location-based services. The Premium Audio segment designs, manufactures, distributes and markets home theater systems, high-end loudspeakers, outdoor speakers, iPod/computer speakers, business music systems, cinema speakers, flat panel speakers, bluetooth speakers, soundbars, headphones and DLNA (Digital Living Network Alliance). The Consumer Accessories segment designs and markets remote controls; rechargeable battery packs; wireless and bluetooth speakers; personal sound amplifiers; and iPod docks/iPod sound, A/V connectivity, portable/home charging, reception and digital consumer products. See Note 19 to the Company's Consolidated Financial Statements for segment information.



Products included in these segments are as follows:

Automotive products include:

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? mobile multi-media video products, including in-dash, overhead and headrest systems,



? autosound products including radios, amplifiers and CD changers,

? satellite radios including plug and play models and direct connect models,

? smart phone telematics applications,

? automotive security and remote start systems,

? automotive power accessories,

? rear observation and collision avoidance systems,

? TV tuners and antennas, and ? location based services.



Premium Audio products include:

? premium loudspeakers, ? architectural speakers, ? commercial speakers, ? outdoor speakers, ? flat panel speakers, ? wireless speakers, ? bluetooth speakers, ? home theater systems, ? business music systems, ? streaming music systems,



? on-ear and in-ear headphones,

? soundbars and sound bases, and

? DLNA (Digital Living Network Alliance).

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, ? wireless speakers, ? bluetooth speakers, ? rechargeable battery backups (UPS) for camcorders, cordless phones and portable video (DVD) batteries and accessories,



? power supply systems and charging products,

? electronic equipment cleaning products,

? personal sound amplifiers, ? set-top boxes, ? home and portable stereos, ? digital multi-media products, such as personal video recorders and MP3 products, ? camcorders, ? clock radios,



? digital voice recorders, and

? portable DVD players. We believe our segments 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. 25 -------------------------------------------------------------------------------- Our objective is to continue 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, it is our intention 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.



Critical Accounting Policies and Estimates

The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies and estimates relate to revenue recognition; sales incentives; accounts receivable reserves; inventory reserves; goodwill and other intangible assets; warranties; stock-based compensation; income taxes; and the fair value measurements of financial assets and liabilities. A summary of the Company's critical accounting policies is identified in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Form 10-K for the fiscal year ended February 28, 2014. Since February 28, 2014, there have been no changes in our critical accounting policies or changes to the assumptions and estimates related to them. Results of Operations As you read this discussion and analysis, refer to the accompanying consolidated statements of operations and comprehensive income, which present the results of our operations for the three months ended May 31, 2014 and 2013.



The following tables set forth, for the periods indicated, certain statements of operations data for the three months ended May 31, 2014 and 2013.

Net Sales May 31, 2014 2013 $ Change % Change Three Months Ended: Automotive $ 102,385$ 104,177$ (1,792 ) (1.7 )% Premium Audio 35,211 40,166 (4,955 ) (12.3 ) Consumer Accessories 49,130 48,315 815 1.7 Corporate 173 314 (141 ) (44.9 ) Total net sales $ 186,899$ 192,972$ (6,073 ) (3.1 )% Automotive sales represented 54.8% of the net sales for the three months ended May 31, 2014 compared to 54.0% in the respective prior year period. The Automotive group experienced decreases in its OEM manufacturing lines during the three months ended May 31, 2014 due to the temporary suspension of one of its programs as requested by one of the Company's customers while they address their safety issues. This is expected to be completed by the third quarter of Fiscal 2015. In addition, the Company experienced load in sales from its Bentley project in the prior year first quarter, which has leveled out in the first quarter of Fiscal 2015, as well as an end of life purchase by Toyota of all of the remaining inventory of the Company's vehicle headphone inventory in Fiscal 2014, which did not recur in Fiscal 2015. The Company also continues to experience lower sales in Venezuela due to current economic and political conditions. As an offset to these decreases, the Company saw strong sales of devices for the new Car Connection program to retailers, as product is set to launch in the second quarter, as well as continued improved tuner and antenna sales at Hirschmann. Premium Audio sales represented 18.8% of our net sales for the three months ended May 31, 2014 compared to 20.8% in the respective prior year period. Sales in Premium Audio decreased 12.3% for the three months ended May 31, 2014 primarily as a result of a curtailment in the sale of certain Klipsch speakers in anticipation of the launch of new product in the second quarter of Fiscal 2015. These decreases were offset by a slight increase in sales of cinema speaker products. Consumer Accessory sales represented 26.3% of our net sales for the three months ended May 31, 2014 compared to 25.0% in the respective prior year period. The increase in sales in the Consumer Accessories group was due primarily to the transition of our Mexican subsidiary from a distributor to a representative office, which is anticipated to be a more profitable model, and resulted in the sale of all of the Company's inventory in Mexico in the first quarter of Fiscal 2015. In addition, Consumer Accessories saw an improvement in European sales, as well as increased sales of wireless and bluetooth speakers and reception products. These 26 -------------------------------------------------------------------------------- increases were offset by the continued decrease in sales of home audio products, such as clock radios, digital voice recorders and power products, such as surge protectors as a result of competition, changes in demand and changes in technology.



Gross Profit and Gross Margin Percentage

May 31, 2014 2013 $ Change % Change Three Months Ended: Automotive $ 30,983$ 29,451$ 1,532 5.2 % 30.3 % 28.3 % Premium Audio 10,992 12,974 (1,982 ) (15.3 ) 31.2 % 32.3 %



Consumer Accessories 11,075 11,894 (819 ) (6.9 )

22.5 % 24.6 % Corporate 3 194 (191 ) (98.5 ) $ 53,053$ 54,513$ (1,460 ) (2.7 )% 28.4 % 28.2 % Gross margins in the Automotive segment increased 200 basis points for the three months ended May 31, 2014 primarily as a result of improved margins related to tuners and antennas, as well as a one time duty refund received in the first quarter of Fiscal 2015. This was offset by decreases in sales in the OEM manufacturing line due to a temporary program suspension due to a customer's safety issues, and continued decreases in sales in Venezuela as a result of economic and political conditions. Gross margins in the Premium Audio segment decreased 110 basis points for the three months ended May 31, 2014 primarily as a result of an unfavorable product mix in Europe. This was partially offset by increases in sales of certain higher margin domestic products, such as cinema speakers. Gross margins in the Consumer Accessories segment decreased 210 basis points for the three months ended May 31, 2014 primarily as a result of the sale of all of the Company's inventory in Mexico as the subsidiary moved from a distributor to a representative office during the first quarter of Fiscal 2015, yielding lower margins than those that had been realized in prior periods. This was partially offset by an increase in sales of higher margin products, such as wireless and bluetooth speakers and the continued decrease in lower margin products, such as clock radios and digital voice recorders.



Operating Expenses and Operating Income

May 31, 2014 2013 $ Change % Change Three Months Ended: Operating expenses: Selling $ 14,596$ 13,123$ 1,473 11.2 % General and administrative 29,615 28,938 677 2.3



Engineering and technical support 9,261 8,735 526

6.0 Restructuring expense - 303 (303 ) (100.0 ) Total operating expenses $ 53,472$ 51,099$ 2,373 4.6 % Operating (loss) income $ (419 )$ 3,414$ (3,833 ) (112.3 )% The increase in total operating expenses was due primarily to salary expense resulting from additional hirings of temporary and permanent employees, including several engineers, at Hirschmann. In addition, the Company had increases in expenses as a result of employee salary increases, increased advertising expenses as a result of new sponsorships and product lines and an increase in trade show expense as a result of increased spending. Offsetting these increases were decreases in sales commissions as a result of decreased net sales during the first quarter of Fiscal 2015 as compared to prior year, as well as a decrease in stock option expense. 27 --------------------------------------------------------------------------------

Other Income (Expense) May 31, 2014 2013 $ Change % Change Three Months Ended: Interest and bank charges $ (1,608 )$ (1,980 )$ 372 (18.8 )% Equity in income of equity investees 1,931 1,756 175 10.0 Other, net 653 16 637 (3,981.3 ) Total other income (expense) $ 976$ (208 )$ 1,184 569.2 % Interest and bank charges represent expenses for the Company's bank obligations, interest for capital leases and amortization of the debt discount on our credit facility. The decrease in the expense for the three months ended May 31, 2014 as compared to the comparable prior year period is attributable primarily to a decrease in the outstanding balance of the Company's Amended Facility. Equity in income of equity investees represents the Company's share of income from its 50% non-controlling ownership interest in ASA Electronics LLC and Subsidiaries. The increase in income for the three months ended May 31, 2014 is due to the improved performance of this entity, as it has continued to expand distribution in certain markets.



Other, net, during the three months ended May 31, 2014 included net foreign currency gains of approximately $200, as well as interest income of $83 and rental income of $300. For the three months ended May 31, 2013, Other, net included net foreign currency losses of approximately $200, which was offset by interest income of $142 and rental income of $309.

Income Tax Provision

The effective tax rate for the three months ended May 31, 2014 was a provision for income taxes of 12.2% compared to a provision of 33.2% in the comparable prior period. The effective tax rate for the three months ended May 31, 2014 is different than the statutory rate primarily due to state and local taxes, U.S. effects of foreign operations, various federal and state tax credits and the discrete benefit of $135. Net Income The following table sets forth, for the periods indicated, selected statement of operations data beginning with net income and basic and diluted net income per common share. Three Months Ended May 31, 2014 2013 Net income $ 489$ 2,142 Net income per common share: Basic $ 0.02$ 0.09 Diluted $ 0.02$ 0.09 Net income for the three months ended May 31, 2014 was favorably impacted by improved performance of the Company's equity investment and lower restructuring charges due to the decrease in related activities, offset by lower net sales. Net income for the three months ended May 31, 2013 was favorably impacted by improved gross margins, as well as the absence of acquisition and certain other professional fees due to a decrease in related activities as compared to previous periods, offset by restructuring charges.



Adjusted EBITDA

Adjusted EBITDA and diluted adjusted EBITDA per common share are not financial measures recognized by GAAP. Adjusted EBITDA represents net income, computed in accordance with GAAP, before interest and bank charges, taxes, depreciation and amortization, stock-based compensation expense and restructuring charges. Depreciation, amortization, and stock-based 28 --------------------------------------------------------------------------------



compensation expense are non-cash items. Diluted adjusted EBITDA per common share represents the Company's diluted earnings per common share based on adjusted EBITDA.

We present adjusted EBITDA and diluted adjusted EBITDA per common share in this Form 10-Q because we consider them to be useful and appropriate supplemental measures of our performance. Adjusted EBITDA and diluted adjusted EBITDA per common share help us to evaluate our performance without the effects of certain GAAP calculations that may not have a direct cash impact on our current operating performance. In addition, the exclusion of costs relating to our acquisitions, restructuring and litigation settlements allows for a more meaningful comparison of our results from period-to-period. These non-GAAP measures, as we define them, are not necessarily comparable to similarly entitled measures of other companies and may not be appropriate measures for performance relative to other companies. Adjusted EBITDA should not be assessed in isolation from or construed as a substitute for EBITDA prepared in accordance with GAAP. Adjusted EBITDA and diluted adjusted EBITDA per common share are not intended to represent, and should not be considered to be more meaningful measures than, or alternatives to, measures of operating performance as determined in accordance with GAAP. Reconciliation of GAAP Net Income to Adjusted EBITDA Three Months Ended May 31, 2014 2013 Net income $ 489$ 2,142 Adjustments: Interest expense and bank charges 1,608 1,980 Depreciation and amortization 3,933 4,005 Income tax expense 68 1,064 EBITDA 6,098 9,191 Stock-based compensation 75 335 Restructuring charges - 303 Adjusted EBITDA $ 6,173$ 9,829



Diluted earnings per common share $ 0.02$ 0.09 Diluted adjusted EBITDA per common share $ 0.25$ 0.41

Liquidity and Capital Resources

Cash Flows, Commitments and Obligations

As of May 31, 2014, we had working capital of $168,729 which includes cash and short-term investments of $10,926, compared with working capital of $184,233 at February 28, 2014, which included cash and short-term investments of $10,603. 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. Operating activities provided cash of $27,745 for the three months ended May 31, 2014 principally due to a decrease in accounts receivable and an increase in accounts payable.



• The Company experienced increased annual accounts receivable turnover of

6.1 during the three months ended May 31, 2014 compared to 5.8 during the

three months ended May 31, 2013.



• Annual inventory turnover increased to 3.4 during the three months ended

May 31, 2014 compared to 3.3 during the three months ended May 31, 2013.

Investing activities used cash of $9,012 during the three months ended May 31, 2014, primarily due to capital additions and the Company's investments in EyeLock, Inc. and EyeSee360, Inc.

Financing activities used cash of $18,512 during the three months ended May 31, 2014, primarily due to repayments of bank obligations.

29 -------------------------------------------------------------------------------- From March 1, 2013 through January 8, 2014, the Company had a revolving credit facility ("the Credit Facility") with an aggregated committed availability of up to $205,000. The Credit Facility provided for senior secured credit facilities consisting of a revolving credit facility of $80,000; a $50,000 multicurrency revolving facility, of which up to the equivalent of $50,000 was available only to VOXX International (Germany) GmbH in euros; and a five year term loan facility in the aggregate principal amount of $75,000. $110,000 of the U. S. revolving credit facility was available on a revolving basis for five years from the closing date. An additional $20,000 was available during the periods from September 1, 2012 through January 31, 2013 and from September 1, 2013 through November 30, 2013. The Credit Facility included a $25,000 sublimit for issuers of letters of credit for domestic borrowings and a $10,000 sublimit for Swing Loans. On January 9, 2014, the Company amended and restated its Credit Facility (the "Amended Facility"). The Amended Facility provides for senior secured credit facilities in an aggregate amount of $200,000, consisting of a revolving credit facility of $200,000, with a $30,000 multicurrency revolving credit facility sublimit, a $25,000 sublimit for Letters of Credit and a $10,000 sublimit for Swingline Loans. The Amended Facility is due on January 9, 2019, however, it is subject to acceleration upon the occurrence of an Event of Default (as defined in the Credit Agreement). Generally, the Company may designate specific borrowings under the Amended Facility as either Alternate Base Rate Loans or LIBOR Rate Loans, except that Swingline Loans may only be designated as Alternate Base Rate Loans. VOXX International (Germany) GmbH may only borrow euros, and only as LIBOR rate loans. Loans designated as LIBOR Rate Loans shall bear interest at a rate equal to the then applicable LIBOR rate plus a range of 1.00 - 2.00% based upon leverage, as defined in the agreement. Loans designated as Alternate Base Rate loans shall bear interest at a rate equal to the base rate plus an applicable margin ranging from 0.00 - 1.00% based on leverage. The Amended Facility requires compliance with financial covenants calculated as of the last day of each fiscal quarter, consisting of a Total Leverage Ratio and a Consolidated EBIT to Consolidated Interest Expense Ratio. The Amended Facility contains covenants that limit the ability of certain entities of the Company to, among other things: (i) incur additional indebtedness; (ii) incur liens; (iii) merge, consolidate or exit a substantial portion of their respective businesses; (iv) make any material change in the nature of their business; (v) prepay or otherwise acquire indebtedness; (vi) cause any Change of Control; (vii) make any Restricted Payments; (viii) change their fiscal year or method of accounting; (ix) make advances, loans or investments; (x) enter into or permit any transaction with an Affiliate of certain entities of the Company; or (xi) use proceeds for certain items. As of May 31, 2014, the Company was in compliance with all debt covenants. The Obligations under the Amended Facility are secured by valid and perfected first priority security interests in liens on all of the following: (a)(i) 100% of the Capital Stock or other membership or partnership equity ownership of profit interests of each domestic Credit Party (other than the Company), and (ii) 65% of the voting equity interests and 100% of the non-voting equity interests of all present and future first-tier foreign subsidiaries of any Credit Party (or such greater percentage as would not result in material adverse federal income tax consequences for the Company); (b) all of (i) the tangible and intangible personal property/assets of the Credit Parties and (ii) the fee-owned real property of the Company located in Hauppauge, New York; and (c) all products, profits, rents and proceeds of the foregoing.



No additional funds were borrowed on January 9, 2014 in conjunction with the amendment to the credit facility.

Certain contractual cash obligations and other commercial commitments will impact our short and long-term liquidity. At May 31, 2014, such obligations and commitments are as follows:

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Amount of Commitment Expiration per Period (9) Less than 1-3 4-5 After Contractual Cash Obligations Total 1 Year Years Years 5 Years Capital lease obligation (1) $ 9,274$ 574$ 1,176$ 2,476$ 5,048 Operating leases (2) 13,660 7,687 4,636 657 680 Total contractual cash obligations $ 22,934$ 8,261$ 5,812$ 3,133$ 5,728 Other Commitments Bank obligations (3) $ 73,895$ 4,345 $ - $ 69,550 $ - Stand-by and commercial letters of credit (4) 828 828 - - - Other (5) 22,054 2,185 7,985 8,870 3,014 Contingent earn-out payments (6) 1,807 1,807 - - - Pension obligation (7) 8,974 448 1,010 567 6,949 Unconditional purchase obligations (8) 97,302 97,302 - - - Total other commitments 204,860 106,915 8,995 78,987 9,963 Total commitments $ 227,794$ 115,176$ 14,807$ 82,120$ 15,691



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 $233 and $5,971, respectively at May 31, 2014.

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

3. Represents amounts outstanding under the Company's Amended Credit Facility,

the Audiovox Germany Euro asset-based lending facility and Hirschmann's line

of credit at May 31, 2014.



4. We issue standby and commercial letters of credit to secure certain purchases

and insurance requirements. 5. This amount includes amounts due under a call-put option with certain employees of Audiovox Germany; an assumed mortgage on a facility in connection with our Klipsch acquisition; and amounts outstanding under mortgages for facilities purchased at Schwaiger, Audiovox Germany and Klipsch.



6. Represents contingent payments in connection with the Thomson Audio/Video and

Invision acquisitions. 7. Represents the liability for an employer defined benefit pension plan covering certain eligible Hirschmann employees, as well as a retirement incentive accrual for certain Hirschmann employees.



8. Open purchase obligations represent inventory commitments. These obligations

are not recorded in the consolidated financial statements until commitments

are fulfilled given that such obligations are subject to change based on negotiations with manufacturers. 9. At May 31, 2014, the Company had an uncertain tax position liability of $10,781, including interest and penalties. A reasonable estimate of the



timing related to these liabilities is not possible, therefore, such amounts

are not reflected in this contractual obligation and commitments schedule.

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, and access to equity capital markets, taken together, provide 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

31 -------------------------------------------------------------------------------- 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. Acquisitions



There were no acquisitions during Fiscal 2015 or Fiscal 2014.

Related Party Transactions

During 1996, we entered into a 30-year capital lease for a building with our principal stockholder and chairman. 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%. The Company subleases the building to Reliance Communications LLC for monthly payments of $60 for a term of three years, which expires October 15, 2015. 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 May 31, 2019 are $5,079.

New Accounting Pronouncements

We are required to adopt certain new accounting pronouncements. See Note 21 to our consolidated financial statements included herein.

32



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