Audiovox 2000 Annual Report Download - page 27

A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other-than-temporary results in a
reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. Premiums
and discounts are amortized or accreted over the life of the related held-
to-maturity security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned.
(G)DERIVATIVE FINANCIAL INSTRUMENTS
The Company, as a policy, does not use derivative financial instruments
for trading purposes. A description of the derivative financial instruments
used by the Company follows:
(1) FORWARD EXCHANGE CONTRACTS
The Company conducts business in several foreign currencies and, as
a result, is subject to foreign currency exchange rate risk due to the
effects that exchange rate movements of these currencies have on the
Company’s costs. To minimize the effect of exchange rate fluctuations
on costs, the Company enters into forward exchange rate contracts.
The Company, as a policy, does not enter into forward exchange con-
tracts for trading purposes. The forward exchange rate contracts are
entered into as hedges of inventory purchase commitments and of
trade receivables due in foreign currencies.
Gains and losses on the forward exchange contracts that qualify as
hedges are reported as a component of the underlying transaction.
Foreign currency transactions which have not been hedged are
marked to market on a current basis with gains and losses recognized
through income and reflected in other income (expense). In addition,
any previously deferred gains and losses on hedges which are termi-
nated prior to the transaction date are recognized in current income
when the hedge is terminated (Note 21(a)(1)).
(2) EQUITY COLLAR
As of November 30, 1999, the Company had an equity collar for
200,000 of its shares in CellStar Corporation (CellStar) (Note 8). The
equity collar was recorded on the balance sheet at fair value with
gains and losses on the equity collar reflected as a separate compo-
nent of stockholders’ equity. The equity collar acted as a hedging item
for the CellStar shares. During 2000, the Company sold 200,000
shares of CellStar common stock and in connection with the sale of
the shares, recognized $1,499 ($929 net of taxes) representing the net
gain on the hedge of the available-for-sale securities (Note 21(a)(2)).
In June 1999 and June 2000, respectively, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 137, “Accounting for Derivative Instruments and
Hedging Activities-Deferral of the “Effective Date of FASB Statement
No. 33” and SFAS No. 138, “Accounting for Certain Derivative Instruments
and Certain Hedging Activities”. SFAS 137 and 138 amend SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities,” which
was issued in June 1998. SFAS 137 deferred the effective date of SFAS 133
to all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and meas-
ures those instruments at fair value. Implementation of SFAS 133 will be
as of December 1, 2000. Management of the Company does not believe
that the implementation of SFAS 133 will have a material impact on its
financial position, results of operations or liquidity.
(H)DEBT ISSUANCE COSTS
Costs incurred in connection with the restructuring of bank obligations
(Note 12(a)) have been capitalized. During 1999 and 2000, the Company
capitalized $1,220 and $148, respectively, in fees associated with the
restructuring and various amendments to the Company’s credit agreement.
These charges are amortized over the lives of the respective agreements.
Amortization expense of these costs amounted to $169, $160 and $434 for
the years ended November 30, 1998, 1999 and 2000, respectively.
(I)PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Equipment under capital
lease is stated at the present value of minimum lease payments.
Depreciation is calculated on the straight-line method over the estimated
useful lives of the assets as follows:
Buildings 20-30 years
Furniture, fixtures and displays 5-10 years
Machinery and equipment 5-10 years
Computer hardware and software 3-5 years
Automobiles 3 years
Leasehold improvements are amortized over the shorter of the lease term
or estimated useful life of the asset. Assets acquired under capital lease
are amortized over the term of the lease.
(J)INTANGIBLE ASSETS
Intangible assets consist of patents, trademarks and the excess cost over
fair value of assets acquired for subsidiary companies and equity invest-
ments. Excess cost over fair value of assets acquired is being amortized,
on a straight-line basis, over periods not exceeding twenty years. The
costs of other intangible assets are amortized on a straight-line basis over
their respective lives.
Accumulated amortization approximated $2,583 and $3,145 at Novem-
ber 30, 1999 and 2000, respectively. Amortization of the excess cost over
fair value of assets acquired and other intangible assets amounted to
$382, $429 and $547 for the years ended November 30, 1998, 1999 and
2000, respectively.
On an ongoing basis, the Company reviews the valuation and amortization
of its intangible assets. As a part of its ongoing review, the Company esti-
mates the fair value of intangible assets taking into consideration any
events and circumstances which may diminish fair value.
AUDIOVOX CORPORATION AND SUBSIDIARIES
AUDIOVOX 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)