Audiovox 2004 Annual Report Download - page 54

Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock issued to
Employees" (APB No.25). Statement 123R requires a public entity to measure the
cost of employee services recognized in exchange for an award of equity
instruments based on the grant−date fair value of the award (with limited
exceptions). Statement 123R is effective the first interim or annual period that
begins after June 15, 2005 or the Company's fourth quarter and fiscal year ended
November 30, 2005. The adoption of Statement 123R will rescind the Company's
current accounting for stock based compensation under the intrinsic method as
outlined in APB No. 25. Under APB No. 25, the issuance of stock options to
employees generally resulted in no compensation expense to the Company. The
adoption of Statement 123R will require the Company to measure the cost of stock
options based on the grant−date fair value of the award.
In December 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 153, ("Statement 153"), "Exchanges of Non−monetary Assets−an
amendment of APB Opinion No. 29". Statement 153 amends Opinion 29 to eliminate
the exception for non−monetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of non−monetary assets that
do not have commercial substance. A non−monetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. Statement 153 is effective for fiscal
periods after June 15, 2005. The Company does not expect the adoption of
Statement 153 to have a material impact on the Company's consolidated financial
statements.
Item 7a−Quantitative and Qualitative Disclosures About Market Risk
Market Risk Sensitive Instruments
The market risk inherent in the Company's market risk sensitive instruments
and positions is the potential loss arising from adverse changes in marketable
equity security prices, foreign currency exchange rates and interest rates.
Marketable Securities
Marketable securities at November 30, 2004, which are recorded at fair
value of $5,988, include a net unrealized loss of $1,284 and have exposure to
price risk. 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 $599 as of November 30, 2004. Actual results may differ.
Interest Rate Risk
The Company's earnings and cash flows are subject to fluctuations due to
changes in interest rates from its investment of available cash balances in
money market funds and investment grade corporate and U.S. government
securities. Under its current policies, the Company does not use interest rate
derivative instruments to manage exposure to interest rate changes. In addition,
the Company's bank loans expose earnings to changes in short−term interest rates
since interest rates on the underlying obligations are either variable or fixed
for such a short period of time as to effectively become variable. The fair
values of the Company's bank loans are not significantly affected by changes in
market interest rates.
Foreign Exchange Risk
In order to reduce the risk of foreign currency exchange rate fluctuations,
the Company hedges transactions denominated in a currency other than the
functional currencies applicable to each of its various entities. The
instruments used for hedging are forward contracts with banks. The changes in
market value of such contracts have a high correlation to price changes in the
currency of the related hedged transactions. There were no hedge transactions at
November 30, 2004. Intercompany transactions with foreign subsidiaries and
equity investments are typically not hedged. Therefore, the potential loss in
fair value for a net currency position resulting from a 10% adverse change in
51