## notes to consolidated financial statements 

## 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

## Consolidation 

The consolidated financial statements include the accounts of the Company and its majority-owned or controlled subsidiaries. Significant intercompany transactions have been eliminated. Investments in unconsolidated affiliates, over which the Company exercises significant influence, but not control, are accounted for by the equity method. Accordingly, the share of net income or loss of such unconsolidated affil- iates is included in consolidated net income. The implications of the Financial Accounting Standards Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities” on the Company’s consolidation policy are discussed later in this note. 

## Use of Estimates 

Preparation of financial statements in conformity with account- ing principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial state- ments and accompanying notes. Actual amounts could differ from these estimates. 

## Cash and Cash Equivalents 

All highly liquid investments purchased with an original matu- rity date of 3 months or less are classified as cash equivalents. 

## Inventories 

Inventories are stated at the lower of cost or market. Cost is determined using standard or average costs which approxi- mate the first-in, first-out costing method. 

## Property, Plant and Equipment 

Property, plant and equipment is stated at historical cost and depreciated over its estimated useful life using the straight-line method for financial reporting and both acceler- ated and straight-line methods for tax reporting. The estimated useful lives range from 20 to 40 years for build- ings and 3 to 12 years for the Company’s machinery, equipment and computer software. 

Repair and maintenance costs incurred to restore or keep capital assets at an acceptable level of operating condition, but without an increase in the previously estimated useful life or capacity of the asset are expensed as incurred. 

## Software Development Costs 

The Company capitalizes costs associated with software developed or obtained for internal use in accordance with American Institute of Certified Public Accountants Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Capitalized internal use software development costs include only (1) external direct costs of materials and services consumed in developing or obtaining the software, (2) payroll and payroll- related costs for employees who are directly associated with 

and who devote time to the project, and (3) interest costs incurred, when material, while developing the software. Capitalization of these costs ceases when the project is substantially complete and ready for its intended purpose. Capitalized internal use software development costs are amortized using the straight-line method over a range of 3 to 8 years, but not exceeding the expected life of the product. The Company capitalized $14.1 million of software and software development costs during the year ended November 30, 2004 and $25.1 million during the year ended November 30, 2003. 

In the fourth quarter of 2004, the Company changed its esti- mated useful life of certain software costs from 5 to 8 years. This change was due to the vendor stating their support for the software for a period longer than originally anticipated. In accordance with APB 20, “Accounting Changes,” this change was made beginning in the fourth quarter of 2004. The 2004 favorable impact to depreciation expense as a result of this change is $1.1 million ($0.8 million after-tax) and is reflected in the consolidated statement of income. 

## Goodwill and Other Intangible Assets 

In accordance with Statement of Financial Accounting Standard (SFAS) No. 142, ”Goodwill and Other Intangible Assets,“ goodwill and indefinite-lived intangible assets are reviewed at least annually for impairment using the discounted cash flow method. Separable intangible assets that have finite useful lives are amortized over their useful lives. An impaired intangible asset would be written down to fair value, using the discounted cash flow method. 

## Prepaid Allowances 

Prepaid allowances arise when the Company prepays sales discounts and marketing allowances to certain customers in connection with multi-year sales contracts. These costs are capitalized and amortized against net sales. The majority of the Company’s contracts are for a specific committed customer sales volume while others are for a specific time duration. Prepaid allowances on volume based contracts are amortized based on the actual volume of customer purchases, while prepaid allowances on time based contracts are amor- tized on a straight-line basis over the life of the contract. The amounts reported in the consolidated balance sheet are stated at the lower of unamortized cost or management’s esti- mate of the net realizable value of these allowances. 

## Revenue Recognition 

Revenue is recognized when it is realized or realizable and has been earned. The Company recognizes revenue when it has persuasive evidence of an arrangement, the product has been delivered to the customer, the sales price is fixed or deter- minable and collectibility is reasonably assured. The Company 

