Audiovox 1999 Annual Report Download - page 35

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AUDIOVOX
were not included in the net income per share calculation because their
effect would have been anti-dilutive. There were no anti-dilutive stock
options and stock warrants for the year ended November 30, 1999.
(18) Lease Obligations
During 1998, the Company entered into a 30-year lease for a building
with its principal stockholder and chief executive officer. A significant
portion of the lease payments, as required under the lease agreement,
consists of the debt service payments required to be made by the princi-
pal stockholder in connection with the financing of the construction of the
building. For financial reporting purposes, the lease has been classified as
a capital lease, and, accordingly, a building and the related obligation of
approximately $6,340 was recorded (Note 9). In connection with the capi-
tal lease, the Company paid certain construction costs on behalf of its
principal stockholder and chief executive officer in the amount of $1,301.
The amount is payable to the Company with 8% interest.
During 1998, the Company entered into a sale/lease back transaction
with its principal stockholder and chief executive officer for $2,100 of
equipment. No gain or loss on the transaction was recorded as the book
value of the equipment equaled the fair market value. The lease is for five
years with monthly rental payments of $34. The lease has been classified
as an operating lease.
At November 30, 1999, the Company was obligated under non-
cancelable capital and operating leases for equipment and warehouse
facilities for minimum annual rental payments as follows:
Capital Operating
Lease Leases
2000................................................................................... $ 522 $1,955
2001................................................................................... 530 1,473
2002................................................................................... 553 1,225
2003................................................................................... 554 820
2004................................................................................... 553 81
Thereafter.......................................................................... 13,099 658
Total minimum lease payments........................................ 15,811 $6,212
Less: amount representing interest .................................. 9,513
Present value of net minimum lease payments ............... 6,298
Less: current installments................................................. 19
Long-term obligation......................................................... $ 6,279
Rental expense for the above-mentioned operating lease agreements
and other leases on a month-to-month basis approximated $2,516, $2,563
and $2,552 for the years ended November 30, 1997, 1998 and 1999,
respectively.
The Company leases certain facilities and equipment from its principal
stockholder and several officers. Rentals for such leases are considered
by management of the Company to approximate prevailing market rates.
At November 30, 1999, minimum annual rental payments on these related
party leases, in addition to the capital lease payments, which are
included in the above table, are as follows:
2000................................................................................................................ $960
2001................................................................................................................ 941
2002................................................................................................................ 941
2003................................................................................................................ 667
(19) Financial Instruments
(a) Derivative Financial Instruments
(1) Forward Exchange Contracts
At November 30, 1998, the Company had contracts to exchange
foreign currencies in the form of forward exchange contracts in the
amount of $5,352. These contracts have varying maturities with none
exceeding one year as of November 30, 1998. At November 30, 1999,
the Company had no contracts to exchange foreign currencies in the
form of forward exchange contracts. For the years ended November
30, 1997, 1998 and 1999, gains and losses on foreign currency trans-
actions which were not hedged were not material. For the years
ended November 30, 1997, 1998 and 1999, there were no gains or
losses as a result of terminating hedges prior to the transaction date.
(2) Equity Collar
The Company entered into an equity collar on September 26, 1997
to hedge some of the unrealized gains associated with its investment
in CellStar (Note 8). The equity collar provided 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 col-
lar, 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 component of
equity. During 1998, the Company sold its equity collar for $1,499. The
transaction resulted in a net gain on hedge of available-for-sale secu-
rities of $929 which is reflected as a separate component of stock-
holders’ equity. The net gain on the equity collar will be reflected in the
consolidated statements of income upon sale of the CellStar shares.
The Company is exposed to credit losses in the event of nonper-
formance by the counter parties to its forward exchange contracts.
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 financial instruments, but moni-
tors the credit standing of the counter parties.
(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 letters of
credit principally to secure certain bank obligations of Audiovox
Communications Sdn. Bhd. and Audiovox Venezuela (Note 11(a)). The
Company had open commercial letters of credit of approximately $24,914
and $41,173, of which $20,576 and $28,727 were accrued for purchases
incurred as of November 30, 1998 and 1999, respectively. The terms of these
letters of credit are all less than one year. No material loss is anticipated