Audiovox 1999 Annual Report Download - page 36

AUDIOVOX
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due to nonperformance by the counter parties to these agreements. The
fair value of these open commercial and standby letters of credit is esti-
mated 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 joint and several guarantees on behalf of
G.L.M. and Quintex West which aggregate $475. There is no market for
these guarantees and they were issued without explicit cost. Therefore, it
is not practicable to establish its fair value.
(c) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to con-
centrations 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 service
providers, distributors, agents, mass merchandisers, warehouse clubs and
independent retailers.
At November 30, 1998, three customers, which included two cellular
carrier and service providers and a Bell Operating Company accounted
for approximately 18.0%, 13.8% and 13.5%, respectively, of accounts
receivable. At November 30, 1999, three customers, which included two
cellular carrier and service providers and a Bell Operating Company
accounted for approximately 15.8%, 15.5% and 11.1%, respectively, of
accounts receivable.
During the year ended November 30, 1997, two customers accounted
for approximately 11.3% and 9.0%, respectively, of the Company’s 1997
sales. During the year ended November 30, 1998, two customers
accounted for approximately 18.3% and 14.9%, respectively, of the
Company’s 1998 sales. During the year ended November 30, 1999, three
customers accounted for approximately 19.6%, 14.9% and 12.7%,
respectively, of the Company’s 1999 sales.
The Company generally grants credit based upon analyses of its cus-
tomers’ financial position and previously established buying and payment
patterns. The Company establishes collateral rights in accounts receiv-
able and inventory and obtains personal guarantees from certain cus-
tomers based upon management’s credit evaluation.
A portion of the Company’s customer base may be susceptible to
downturns in the retail economy, particularly in the consumer electronics
industry. Additionally, customers specializing in certain automotive sound,
security and accessory products may be impacted by fluctuations in auto-
motive sales. A relatively small number of the Company’s significant cus-
tomers are deemed to be highly leveraged.
(d) Fair Value
The carrying value of all financial instruments classified as a current
asset or liability is deemed to approximate fair value because of the short
maturity of these instruments. The estimated fair value of the Company’s
financial instruments are as follows:
November 30, 1998 November 30, 1999
Carrying Fair Carrying Fair
Amount Value Amount Value
Investment securities ............ $17,089 $17,089 $ 30,401 $ 30,401
Long-term obligations ........... $23,831 $24,202 $107,939 $109,261
Forward exchange contract
obligation (derivative)........ — $ 5,352 — —
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:
Investment Securities
The carrying amount represents fair value, which is based upon
quoted market prices and conversion features at the reporting date
(Note 8).
Long-Term Obligations
The carrying amount of bank debt under the Company’s revolving
credit agreement approximates fair value because the interest rate on
the bank debt is reset every quarter to reflect current market rates.
With respect to the subordinated debentures, fair values are based on
quoted market price.
Forward Exchange Contracts (Derivative)
The fair value of the forward exchange contracts are based upon
exchange rates at November 30, 1999 and 1998 as the contracts are
short term.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, can-
not be determined with precision. Changes in assumptions could sig-
nificantly affect the estimates.
(20) Segment Information
The Company has two reportable segments which are organized by
products: Wireless and Electronics. The Wireless segment markets wire-
less handsets and accessories through domestic and international wire-
less carriers and their agents, independent distributors and retailers. The
Electronics segment sells autosound, mobile electronics and consumer
electronics, primarily to mass merchants, power retailers, specialty retail-
ers, new car dealers, original equipment manufacturers (OEM), independ-
ent installers of automotive accessories and the U.S. military.
The Company evaluates performance of the segments based upon
income before provision for income taxes. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies (Note 1). The Company allocates interest and certain
shared expenses, including treasury, legal and human resources, to the
segments based upon estimated usage. Intersegment sales are reflected
at cost and have been eliminated in consolidation. A royalty fee on the
intersegment sales, which is eliminated in consolidation, is recorded by
the segments and included in other income (expense). Certain items are
maintained at the Company’s corporate headquarters (Corporate) and are
not allocated to the segments. They primarily include costs associated
with accounting and certain executive officer salaries and bonuses and
certain items including investment securities, equity investments,
deferred income taxes, certain portions of excess cost over fair value of
assets acquired, jointly-used fixed assets and debt. The jointly-used
fixed assets are the Company’s management information systems,
which is jointly used by the Wireless and Electronics segments
and Corporate. A portion of the management information systems
costs, including depreciation and amortization expense, are allocated to
Notes to Consolidated
FINANCIAL STATEMENTS (continued) Audiovox Corporation and Subsidiaries