Audiovox 1998 Annual Report Download - page 27

(1) Summary of Significant
Accounting Policies
(a) Description of Business
Audiovox Corporation and its subsidiaries (the Company)
design and market cellular telephones and accessories,
automotive aftermarket sound and security equipment,
other automotive aftermarket accessories and certain other
products, principally in the United States, Canada and over-
seas. In addition to generating product revenue from the
sale of cellular telephone products, the Company’s retail
outlets, as agents for cellular carriers, are paid activation
commissions and residual fees from such carriers.
The Company’s automotive sound, security and accessory
products include stereo cassette radios, compact disc play-
ers and changers, amplifiers, speakers and mobile LCD TV
and video cassette playback units; key based remote control
security systems; cruise controls and door and trunk locks.
These products are marketed through mass merchandise
chain stores, specialty automotive accessory installers, dis-
tributors and automobile dealers.
(b) Principles of Consolidation
The consolidated financial statements include the finan-
cial statements of Audiovox Corporation and its wholly-
owned and majority-owned subsidiaries. All significant
intercompany balances and transactions have been elimi-
nated in consolidation.
(c) Cash Equivalents
Cash equivalents of $1,337 at November 30, 1995 con-
sisted of short-term investments with terms of less than
three months. For purposes of the statements of cash flows,
the Company considers investments with original maturities
of three months or less to be cash equivalents.
(d) Cash Discount, Co-operative Advertising Allowances
and Market Development Funds
The Company accrues for estimated cash discounts, trade
and promotional co-operative advertising allowances and
market development funds at the time of sale. These dis-
counts and allowances are reflected in the accompanying
consolidated financial statements as a reduction of accounts
receivable as they are utilized by customers to reduce their
trade indebtedness to the Company.
(e) Inventory
Inventory consists principally of finished goods and is
stated at the lower of cost (primarily on a weighted moving
average basis) or market. The markets in which the
Company competes are characterized by declining prices,
intense competition, rapid technological change and fre-
quent new product introductions. The Company maintains a
significant investment in inventory and, therefore, is subject
to the risk of losses on write-downs to market and inventory
obsolescence. During the second quarter of 1998, the
Company recorded a charge of approximately $6,600 to
accurately reflect the Company’s inventory at the lower of
cost or market. No estimate can be made of losses that are
reasonably possible should additional write-downs to mar-
ket be required in the future.
(f) Derivative Financial Instruments
The Company, as a policy, does not use derivative financial
instruments for trading purposes. A description of the deriv-
ative financial instruments used by the Company follows:
(1) Forward Exchange Contracts
The Company conducts business in several foreign cur-
rencies 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 contracts for trading purposes. The for-
ward exchange rate contracts are entered into as hedges
of inventory purchase commitments and of trade receiv-
ables 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 addi-
tion, any previously deferred gains and losses on hedges
which are terminated prior to the transaction date are rec-
ognized in current income when the hedge is terminated
(Note 17(a)(1)).
(2) Equity Collar
As of November 30, 1997, the Company had an equity
collar for 100,000 of its shares in CellStar Corporation
(CellStar) (Note 6). The equity collar was recorded on the
balance sheet at fair value with gains and losses on the
equity collar reflected as a separate component of stock-
holders’ equity (Note 17(a)(2)). The equity collar acts as a
hedging item for the CellStar shares. Being that the item
being hedged, the CellStar shares, is an available-for-sale
security carried at fair market value with unrealized gains
and losses recorded as a separate component of stock-
holders’ equity, the unrealized gains and losses on the
equity collar are also recorded as a separate component
of stockholders’ equity.
During 1998, the Company sold the equity collar for
$1,499 in cash. As of November 30, 1998, the net gain on
the equity collar of $929 is recorded as a separate compo-
nent of stockholders’ equity.
The Financial Accounting Standards Board (FASB) issued
Statement No. 133, “Accounting for Derivative Instruments
and Hedging Activities” (Statement 133). Statement 133
established accounting and reporting standards for derivative
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 1998, 1997 and 1996
(Dollars in thousands, except share and per share data)
AUDIOVOX CORPORATION AND SUBSIDIARIES