Audiovox 2010 Annual Report Download - page 41

Impact of Inflation and Currency Fluctuation
To the extent that we expand our operations into Europe, Canada, Latin America and the Pacific Rim, the effects of inflation
and currency fluctuations could impact our financial condition and results of operations. While the prices we pay for products
purchased from our suppliers are principally denominated in United States dollars, price negotiations depend in part on the foreign
currency of foreign manufacturers, as well as market, trade and political factors. The Company also has exposure related to
transactions in which the currency collected from customers is different from the currency utilized to purchase the product sold in its
foreign operations. In the fourth quarter of Fiscal 2010, our German subsidiary entered into certain forward contracts to hedge the
currency exposure for its U.S. dollar denominated assets, liabilities and future commitments. The Company minimized the risk of
nonperformance on the forward contract by transacting with a major financial institution in the European market. The gains or losses
associated with these foreign exchange contracts are evaluated and recorded, as applicable, on the measurement date as the contracts
are not specifically connected to any assets, liabilities or future commitments. As of February 28, 2010, the notional amount of
foreign exchange contracts was $14,000. A transaction gain of $753 was recorded during the fourth quarter of Fiscal 2010.
On Friday, January 8, 2010, the Venezuelan government announced its intention to devalue its currency (Bolivar fuerte) and
move to a two tier exchange structure, 2.60 for essential goods and 4.30 for non-essential goods and services. Although products sold
by our Venezuelan operation are expected to be classified as non-essential, the Company has certain US dollar denominated assets and
liabilities for which the 2.60 rate has been applied. During the fourth quarter of Fiscal 2010, the Company recorded approximately a
$3 loss through other comprehensive income associated with the devaluation.
Effective January 1, 2010, according to the guidelines in ASC 830, Venezuela has been designated as a hyper-inflationary
economy. A hyper-inflationary economy designation occurs when a country has experienced cumulative inflation of approximately
100 percent or more over a 3 year period. The hyper-inflationary designation requires the local subsidiary in Venezuela to record all
transactions as if they were denominated in U.S. dollars. The Company will transition to hyper-inflationary accounting on March 1,
2010.
Seasonality
We typically experience seasonality in our operations. We generally sell a substantial amount of our products during
September, October and November due to increased promotional and advertising activities during the holiday season. Our business is
also significantly impacted by the holiday season and electronic trade shows in December and January.
Related Party Transactions
During 1998, we entered into a 30-year capital lease for a building with our principal stockholder and chairman, which was
the headquarters of the discontinued Cellular operation. 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%. On November 1, 2004, we entered into an agreement to
sublease the building to UTStarcom for monthly payments of $46 until November 1, 2009. 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 February 28, 2015 are $6,569.
Recent Accounting Pronouncements
We are required to adopt certain new accounting pronouncements. See Note 1(w) to our consolidated financial statements of
this Annual Report on Form 10-K.
Item 7A-Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our market instruments and positions is the potential loss arising from adverse changes in
marketable equity security prices, interest rates and foreign currency exchange rates.
Marketable Securities
Marketable securities at February 28, 2010, which are recorded at fair value of $5,679, include an unrealized loss of $3,541 and
have exposure to price fluctuations. 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 $668 as of February 28, 2010. Actual results may differ. As of February
28, 2010, the Company recorded a $1,000 impairment charge on its equity holding in Bliss-tel (see Note 1(f)).
Interest Rate Risk
Our earnings and cash flows are subject to fluctuations due to changes in interest rates on investment of available cash balances
in money market funds and investment grade corporate and U.S. government securities. Under our current policies, we do not use
interest rate derivative instruments to manage exposure to interest rate changes. In addition, our bank loans expose us to changes in
short-term interest rates since interest rates on the underlying obligations are either variable or fixed.
Source: AUDIOVOX CORP, 10-K, May 14, 2010 Powered by Morningstar® Document Research℠