Audiovox 2001 Annual Report Download - page 47

The Company is exposed to credit losses in the event of nonperfor-
mance 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 monitors the
credit standing of the counter parties.
(b) Off-Balance Sheet Risk
Commercial letters of credit are issued by the Company during the ordi-
nary 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
$65,820 and $37,635, of which $45,569 and $16,834 were accrued for
purchases incurred as of November 30, 2000 and 2001, respectively.
The terms of these letters of credit are all less than one year. No mate-
rial loss is anticipated due to nonperformance by the counter parties to
these agreements.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 joint and several guarantees on behalf of
G.L.M. which aggregate $300.There is no market for these guarantees
and they were issued without explicit cost. Therefore, it is not practica-
ble 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, wireless carriers and service
providers, distributors, agents, mass merchandisers, warehouse clubs
and independent retailers.
At November 30, 2000 and 2001, one customer, a wireless carrier and
service provider, accounted for approximately 47% and 28% of
accounts receivable, respectively.
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. During the year ended November 30, 2000,
one customer accounted for approximately 50.5% of the Company’s
2000 sales. During the year ended November 30, 2001, one customer
accounted for approximately 35% of the Company’s 2001 sales.
The Company generally grants credit based upon analyses of its cus-
tomers’ financial position and previously established buying and pay-
ment patterns. The Company establishes collateral rights in accounts
receivable and inventory and obtains personal guarantees from certain
customers 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 electron-
ics industry. Additionally, customers specializing in certain automotive
sound, security and accessory products may be impacted by fluctua-
tions in automotive sales.
(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, 2000 November 30, 2001
Carrying Fair Carrying Fair
Amount Value Amount Value
Investment securities $ 5,484 $ 5,484 $ 5,777 $ 5,777
Long-term obligations $15,000 $15,000 $86,525 $86,525
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 report-
ing date (Note 7).
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.
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,
cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
(21) Segment Information
The Company has two reportable segments which are organized by
products: Wireless and Electronics. The Wireless segment markets
wireless handsets and accessories through domestic and interna-
tional wireless carriers and their agents, independent distributors and
retailers. The Electronics segment sells autosound, mobile electronics
and consumer electronics, primarily to mass merchants, power retail-
ers, specialty retailers, new car dealers, original equipment manufac-
turers (OEM), independent 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
45 Audiovox Corporation and Subsidiaries