Audiovox 1997 Annual Report Download - page 21

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.
(h) Debt Issuance Costs
Costs incurred in connection with the issuance of the convertible
subordinated debentures and restructuring of the Series A and Series
B convertible subordinated notes (Note 10) and the restructuring of
bank obligations (Note 9(a)) have been capitalized. These charges
are amortized over the lives of the respective agreements.
Amortization expense of these costs amounted to $37, $1,109, and
$1,319 for the years ended November 30, 1997, 1996 and 1995, respec-
tively. During 1997 and 1996, the Company wrote off $245 and
$3,249, respectively, of debt issuance costs (Note 10).
(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 years
Furniture, fixtures and displays 5-10 years
Machinery and equipment 5-10 years
Computer hardware and software 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, non-competition
agreements, and the excess cost over fair value of assets acquired for
certain subsidiary companies and equity investments. Excess cost
over fair value of assets acquired is being amortized 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 $1,759 and $1,413 at
November 30, 1997 and 1996, respectively. Amortization of the excess
cost over fair value of assets acquired and other intangible assets
amounted to $363, $145, and $127 for the years ended November 30,
1997, 1996, and 1995, respectively. During 1997, the Company made
investments in two companies that resulted in additional excess cost
over fair value of assets acquired (Note 8).
On an ongoing basis, the Company reviews the valuation and
amortization of its intangible assets. As a part of its ongoing review,
the Company estimates the fair value of intangible assets taking into
consideration any events and circumstances which may diminish fair
value.
The recoverability of the excess cost over fair value of assets
acquired is assessed by determining whether the amortization over
its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of
impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the
Company’s average cost of funds. The assessment of the recoverabili-
ty of the excess cost over fair value of assets acquired will be impact-
ed if estimated future operating cash flows are not achieved.
(k) Equity Investments
The Company has common stock investments which are
accounted for by the equity method (Note 8).
(l) Cellular Telephone Commissions
Under various agreements, the Company typically receives an ini-
tial activation commission for obtaining subscribers for cellular tele-
phone services. Additionally, the agreements typically contain provi-
sions for commissions based upon usage and length of continued
subscription. The agreements also typically provide for the reduction
or elimination of initial activation commissions if subscribers deacti-
vate service within stipulated periods. The Company has provided a
liability for estimated cellular deactivations which is reflected in the
accompanying consolidated financial statements as a reduction of
accounts receivable.
The Company recognizes sales revenue for the initial activation,
length of service commissions, and residual commissions based
upon usage on the accrual basis. Such commissions approximated
$35,749, $37,930, and $43,307 for the years ended November 30,
1997, 1996, and 1995, respectively. Related commissions paid to out-
side selling representatives for cellular activations are reflected as cost
of sales in the accompanying consolidated statements of income
(loss) and amounted to $19,924, $20,443, and $15,374 for the years
ended November 30, 1997, 1996, and 1995, respectively.
(m) Advertising
The Company expenses the production costs of advertising as
incurred and expenses the costs of communicating advertising when
the service is received. During the years ended November 30, 1997,
1996, and 1995, the Company had no direct response advertising.
(n) Warranty Expenses
Warranty expenses are accrued at the time of sale based on the
Company’s estimated cost to repair expected returns for products. At
November 30, 1997 and 1996, the liability for future warranty expense
amounted to $2,257 and $2,618, respectively.
(o) Foreign Currency
Assets and liabilities of those subsidiaries and equity investments
located outside the United States whose cash flows are primarily in
local currencies have been translated at rates of exchange at the end
of the period. Revenues and expenses have been translated at the
weighted average rates of exchange in effect during the period. Gains
and losses resulting from translation are accumulated in the cumula-
tive foreign currency translation account in stockholders’ equity.
Exchange gains and losses on hedges of foreign net investments and
on intercompany balances of a long-term investment nature are also
recorded in the cumulative foreign currency translation adjustment
account. Other foreign currency transaction gains and losses are
included in net income, none of which were material for the years
ended November 30, 1997, 1996, and 1995.
(p) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
AUDIOVOX CORPORATION AND SUBSIDIARIES
N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
(continued)
20