Audiovox 2001 Annual Report Download - page 34

Notes to Consolidated Financial Statements (Continued) 32 Audiovox Corporation and Subsidiaries
marked to market on a current basis with gains and losses recog-
nized through income and reflected in other income (expense). In
addition, any previously deferred gains and losses on hedges
which are terminated prior to the transaction date are recognized in
current income when the hedge is terminated (Note 20(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
20(a)(2)). 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 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 avail-
able-for-sale securities (Note 20(a)(2)).
(i) Debt Issuance Costs
Costs incurred in connection with the restructuring of bank obligations
(Note 11(a)) have been capitalized. During 2000, the Company capi-
talized $148 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 $160, $434 and $336 for the
years ended November 30, 1999, 2000 and 2001, respectively.
(j) 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 pay-
ments. 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.
In July 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, “Accounting for Asset Retirement Obligations”
(Statement 143). Statement 143 is effective for fiscal years beginning
after June 15, 2002, and establishes an accounting standard requiring
the recording of the fair value of liabilities associated with the retire-
ment of long-lived assets in the period in which they are incurred. The
Company does not expect the adoption of Statement 143 to have a
significant effect on its results of operations or its financial position.
(k) Intangible Assets
Intangible assets consist of patents, trademarks and the excess cost
over fair value of equity investments (goodwill). Excess cost over fair
value of equity investments 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 $3,145 and $3,502 at
November 30, 2000 and 2001, respectively. Amortization of the excess
cost over fair value of assets acquired and other intangible assets
amounted to $429, $547 and $344 for the years ended November 30,
1999, 2000 and 2001, respectively.
On an ongoing basis, the Company reviews the valuation and amortiza-
tion 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 remain-
ing 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 recoverability of the excess cost over fair value
of assets acquired will be impacted if estimated future operating cash
flows are not achieved.
In July 2001, the FASB issued Statement No. 141, “Business
Combinations” (Statement 141), and Statement No. 142, “Goodwill
and Other Intangible Assets” (Statement 142). Statement 141 requires
companies to account for acquisitions entered into after June 30, 2001
using purchase method and establishes criteria to be used in deter-
mining whether acquired intangible assets are to be recorded sepa-
rately from goodwill. These criteria are to be applied to business
combinations completed after June 30, 2001. Statement 141 will
require, upon adoption of Statement 142, that the Company evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and make any necessary reclassifica-
tions in order to conform with the new criteria in Statement 141 for
recognition apart from goodwill. The Company does not believe that
implementation of Statement 141 will have an impact on the
Company’s financial position and results of operations.
Statement 142 requires that goodwill and intangible assets with indefi-
nite useful lives no longer to be amortized, but rather will be tested for
impairment at least annually. Statement 142 also requires that intangi-
ble assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values and reviewed
for impairment in accordance with SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of.” Upon adoption of Statement 142, the company will be
required to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption.To accomplish this,
the Company must identify its reporting units and determine the carry-
ing value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting
units as of the date of adoption. The Company will adopt the require-
ment of the provisions of Statement 142 effective December 1, 2002.
Implementation of Statement 142 will result in the Company no longer
recording amortization expense relating to it $4,732 of goodwill, net
of accumulated amortization, recorded as of November 30, 2001 of
approximately $342 per year. The Company’s goodwill consists solely