Audiovox 2001 Annual Report Download - page 37

35 Audiovox Corporation and Subsidiaries
During 2001, 314,800 warrants were exercised and converted into
314,800 shares of common stock (Note 16(d)).
(4) Transactions With Major Suppliers
(a) Sale/Leaseback Transaction
In April 2000, AX Japan purchased land and a building (the Property)
from Shintom Co., Ltd. (Shintom) for 770,000,000 Yen (approximately
$7,300) and entered into a leaseback agreement whereby Shintom
leased the Property from AX Japan for a one-year period.This lease is
being accounted for as an operating lease by AX Japan. Shintom is a
stockholder who owns all of the outstanding preferred stock of the
Company and is a manufacturer of products purchased by the Company
through its previously-owned equity investee, TALK Corporation
(TALK). The Company currently holds stock in Shintom and has previ-
ously invested in Shintom convertible debentures (Note 7).
The purchase of the Property by AX Japan was financed with a
500,000,000 Yen ($4,671) subordinated loan obtained from Vitec Co.,
Ltd. (Vitec), a 150,000,000 Yen loan ($1,397) from Pearl First (Pearl)
and a 140,000,000 Yen loan ($1,291) from the Company. The land and
building have been included in property, plant and equipment, and the
loans have been recorded as notes payable on the accompanying
consolidated balance sheet as of November 30, 2001. Vitec is a major
supplier to Shintom, and Pearl is an affiliate of Vitec. The loans bear
interest at 5% per annum, and principle is payable in equal monthly
installments over a six-month period beginning six months subsequent
to the date of the loans. The loans from Vitec and Pearl are subordi-
nated completely to the loan from the Company, and, in liquidation, the
Company receives payment first.
Upon the expiration of six months after the transfer of the title to the
Property to AX Japan, Shintom had the option to repurchase the
Property or purchase all of the shares of stock of AX Japan.This option
could be extended for one additional six-month period. The option to
repurchase the building is at a price of 770,000,000 Yen plus the equity
capital of AX Japan (which in no event can be less than 60,000,000
Yen) and can only be made if Shintom settles any rent due AX Japan
pursuant to the lease agreement. The option to purchase the shares of
stock of AX Japan is at a price not less than the aggregate par value of
the shares and, subsequent to the purchase of the shares, AX Japan
must repay the outstanding loan due to the Company. If Shintom does
not exercise its option to repurchase the Property or the shares of
AX Japan, or upon occurrence of certain events, AX Japan can dispose
of the Property as it deems appropriate. The events which result in the
ability of AX Japan to be able to dispose of the Property include
Shintom petitioning for bankruptcy, failing to honor a check, failing to pay
rent, etc. If Shintom fails, or at any time becomes financially or otherwise
unable to exercise its option to repurchase the Property, Vitec has the
option to repurchase the Property or purchase all of the shares of stock
of AX Japan under similar terms as the Shintom options.
AX Japan had the option to delay the repayment of the loans for an
additional six months if Shintom extended its options to repurchase
the Property or stock of AX Japan. In September 2000, Shintom
extended its option to repurchase the Property and AX Japan delayed
its repayment of the loans for an additional six months.
In March 2001, upon the expiration of the additional six-month period,
the Company and Shintom agreed to extend the lease for an additional
one-year period. In addition, Shintom was again given the option to
purchase the Property or shares of stock of AX Japan after the expira-
tion of a six-month period or extend the option for one additional six-
month period. AX Japan was also given the option to delay the
repayment of the loans for an additional six months if Shintom
extended its option for an additional six months.
In connection with this transaction, the Company received 100,000,000
Yen ($922) from Shintom for its 2,000 shares of TALK stock. The Com-
pany had the option to repurchase the shares of TALK at a purchase
price of 50,000 Yen per share, with no expiration date. Given the option
to repurchase the shares of TALK, the Company did not surrender con-
trol over the shares of TALK and, accordingly, had not accounted for
this transaction as a sale. In August 2000, the Company surrendered its
option to repurchase the shares of TALK. As such, the Company recorded
a gain on the sale of shares in the amount of $427 in August 2000.
(b) Inventory Purchases—Shintom and TALK
The Company engages in transactions with Shintom and TALK. TALK,
which holds world-wide distribution rights for product manufactured by
Shintom, has given the Company exclusive distribution rights on all
wireless personal communication products for all countries except
Japan, China, Thailand and several mid-eastern countries. Through
October 2000, the Company held a 30.8% interest in TALK (Note 13).
The Company no longer holds an equity interest in TALK.
Transactions with Shintom and TALK include financing arrangements
and inventory purchases which approximated 11%, 7% and 1.5% for
the years ended November 30, 1999, 2000 and 2001, respectively, of
total inventory purchases. At November 30, 1999, 2000 and 2001, the
Company had recorded $20, $1 and $331, respectively, of liability due
to TALK for inventory purchases included in accounts payable. The
Company also had documentary acceptance obligations payable to
TALK as of November 30, 1999 (Note 11(b)).There were no documen-
tary acceptance obligations payable to TALK as of November 30, 2000
and 2001. At November 30, 1999, 2000 and 2001, the Company had
recorded a receivable from TALK in the amount of $3,741, $3,823 and
$265, respectively, a portion of which is payable with interest (Note 6),
which is reflected in receivable from vendors on the accompanying
consolidated financial statements.
(c) Inventory Purchases—Other
Inventory purchases from two major suppliers approximated 56%, 72%
and 75% of total inventory purchases for the years ended November 30,
1999, 2000 and 2001, respectively. Although there are a limited number
of manufacturers of its products, management believes that other sup-
pliers could provide similar products on comparable terms. A change in
suppliers, however, could cause a delay in product availability and a
possible loss of sales, which would affect operating results adversely.