Audiovox 1997 Annual Report Download - page 31

(2) Equity Collar
The Company entered into an equity collar on September 26,
1997 to maintain some of the unrealized gains associated with its
investment in CellStar (Note 6). The equity collar provides that on
September 26, 1998, the Company can put 100,000 shares of CellStar
to the counter party to the equity collar (the bank) at $38 per share in
exchange for the bank being able to call the 100,000 shares of CellStar
at $51 per share. The Company has designated this equity collar as a
hedge of 100,000 of its shares in CellStar being that it provides the
Company with protection against the market value of CellStar shares
falling below $38. Given the high correlation of the changes in the
market value of the item being hedged to the item underlying the
equity collar, the Company applied hedge accounting for this equity
collar. The equity collar is recorded on the balance sheet at fair value
with gains and losses on the equity collar reflected as a separate com-
ponent of equity.
Subsequent to year end, the Company sold the equity collar for
$1,499 in cash.
The Company is exposed to credit losses in the event of nonper-
formance by the counter parties to its forward exchange contracts
and its equity collar. The Company anticipates, however, that
counter parties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral to support finan-
cial instruments, but monitors the credit standing of the counter par-
ties.
(b) Off-Balance Sheet Risk
Commercial letters of credit are issued by the Company during
the ordinary course of business through major domestic banks as
requested by certain suppliers. The Company also issues standby let-
ters of credit principally to secure certain bank obligations of
Audiovox Communications and AudiovoxVenezuela (Note 9(a)). The
Company had open commercial letters of credit of approximately
$19,078 and $23,785, of which $10,625 and $17,400 were accrued for
as of November 30, 1997 and 1996, respectively. The terms of these
letters of credit are all less than one year. No material loss is antici-
pated due to nonperformance by the counter parties to these agree-
ments. The fair value of these open commercial and standby letters
of credit is estimated to be the same as the contract values based on
the nature of the fee arrangements with the issuing banks.
The Company is a party to a joint and several guarantee on behalf
of G.L.M. up to the amount of $200. There is no market for this guar-
antee and it was issued without explicit cost. Therefore, it is not prac-
ticable to establish its fair value.
(c) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of trade receivables.
The Company’s customers are located principally in the United States
and Canada and consist of, among others, cellular carriers and ser-
vice providers, distributors, agents, mass merchandisers, warehouse
clubs and independent retailers.
At November 30, 1997, two customers, a cellular carrier and ser-
vice provider and a Bell Operating Company, accounted for approxi-
mately 8.7% and 5.3%, respectively, of accounts receivable. At
November 30, 1996, two customers, which included a cellular carrier
and service provider and a Bell Operating Company accounted for
approximately 11% and 10%, respectively, of accounts receivable.
During the year ended November 30, 1997, two customers, a cel-
lular carrier and service provider and a Bell Operating Company,
accounted for approximately 11.3% and 9.0%, respectively, of the
Company’s 1997 sales. During the year ended November 30, 1996,
two customers, a Bell Operating Company and a cellular carrier and
service provider, accounted for approximately 12% and 9%, respec-
tively, of the Company’s 1996 sales. During the year ended November
30, 1995, two Bell Operating Companies and a cellular carrier and
service provider accounted for approximately 6%, 7% and 7%,
respectively, of the Company’s 1995 sales.
The Company generally grants credit based upon analyses of its
customers’ financial position and previously established buying and
payment patterns. The Company establishes collateral rights in
accounts receivable and inventory and obtains personal guarantees
from certain customers based upon management’s credit evaluation.
At November 30, 1997 and 1996, 43 and 44 customers, respectively,
representing approximately 69% and 70%, of outstanding accounts
receivable, had balances owed greater than $500.
A significant portion of the Company’s customer base may be sus-
ceptible to downturns in the retail economy, particularly in the con-
sumer electronics industry. Additionally, customers specializing in
certain automotive sound, security and accessory products may be
impacted by fluctuations in automotive sales. A relatively small num-
ber of the Company’s significant customers are deemed to be highly
leveraged.
(d) Fair Value
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which it is
practicable to estimate that value. The carrying value of all financial
instruments classified as a current asset or liability is deemed to
approximate fair value, with the exception of current installments of
long-term debt, because of the short maturity of these instruments.
Investment Securities
The carrying amount represents fair value, which is based upon
quoted market prices at the reporting date (Note 6).
Equity Collar (Derivative)
The carrying amount represents fair value, which is based upon
the Black Scholes option-pricing model.
AUDIOVOX CORPORATION AND SUBSIDIARIES
N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
(continued)
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