Audiovox 1999 Annual Report Download - page 24

AUDIOVOX
22
Notes to Consolidated
FINANCIAL STATEMENTS
Years Ended November 30, 1997, 1998 and 1999
(Dollars in thousands, except share and per share data)
Audiovox Corporation and Subsidiaries
(1) Summary of Significant
Accounting Policies
(a) Description of Business
Audiovox Corporation and its subsidiaries (the Company) design and
market a diverse line of products and provide related services throughout
the world. These products and services include handsets and accessories
for wireless communications, fulfillment services for wireless carriers,
automotive entertainment and security products, automotive electronic
accessories and consumer electronics.
The Company operates in two primary markets:
(1) Wireless communications. The Wireless Group markets wireless
handsets and accessories through domestic and international
wireless carriers and their agents, independent distributors and
retailers.
(2) Mobile and consumer electronics. The Electronics Group sells
autosound, mobile electronics and consumer electronics primarily
to mass merchants, power retailers, specialty retailers, new car
dealers, original equipment manufactures (OEMs), independent
installers of automotive accessories and the U.S. military.
(b) Principles of Consolidation
The consolidated financial statements include the financial state-
ments of Audiovox Corporation and its wholly-owned and majority-owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
(c) Cash Equivalents
Investments with original maturities of three months or less are consid-
ered cash equivalents. There were no cash equivalents at November 30,
1998 or 1999.
(d) Cash Discounts, Co-operative Advertising Allowances and
Market Development Funds
The Company accrues for estimated cash discounts, trade and promo-
tional co-operative advertising allowances and market development funds
at the time of sale. These discounts 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 declin-
ing prices, intense competition, rapid technological change and frequent
new product introductions. The Company maintains a significant invest-
ment 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 accu-
rately reflect the Company’s inventory at the lower of cost or market. No
estimate can be made of losses that are reasonably possible should addi-
tional write-downs to market be required in the future.
(f) Investment Securities
The Company classifies its debt and equity securities in one of three cate-
gories: trading, available-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in the near
term. Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold the security until maturity. All
other securities not included in trading or held-to-maturity are classified
as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts. Unrealized hold-
ing gains and losses on trading securities are included in earnings.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported
as a component of accumulated other comprehensive income until real-
ized. Realized gains and losses from the sale of available-for-sale securi-
ties are determined on a specific identification basis.
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 instru-
ments 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 19(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 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 (Note 19(a)(2)). The equity collar acted as
a hedging item for the CellStar shares. The investment in 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
accumulated other comprehensive income (loss).