Audiovox 2004 Annual Report Download - page 83

AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2002, 2003 and 2004
(Dollars in thousands, except share and per share data)
On May 29, 2002, Toshiba Corporation (Toshiba) purchased an additional 20%
of Audiovox Communications Corp. (ACC). Such purchase accounted for
approximately 31 shares at approximately $774 per share, for approximately
$23,900 in cash, increasing Toshiba's total ownership interest in ACC to
25%. In addition, Toshiba paid $8,107 in exchange for an $8,107 convertible
subordinated note (the Note) which was paid in full during the sale of
Cellular to UTSI (see Note 2 of Notes to Consolidated Financial
Statements). The Note bore interest at a per annum rate equal to 1.75% and
interest was payable annually on May 31st of each year, commencing May 31,
2003.
As a result of the issuance of ACC's shares, the Company recognized a gain,
net of expenses of $1,735, of $14,269 ($8,847 after provision for deferred
taxes) during the year ended November 30, 2002. The gain represents the
excess of the sale price per share over the carrying amount per share
multiplied by the number of shares issued to Toshiba. The gain on the
issuance of the subsidiary's shares has been recognized in the accompanying
consolidated statements of operations for the year ended November 30, 2002
in accordance with the Company's policy on the recognition of such
transactions, which is an allowable method under Staff Accounting Bulleting
Topic 5.H.
In connection with the issuance of ACC shares to Toshiba, the Company
recorded deferred tax liabilities and valuation allowances aggregating
$6,867. These deferred tax liabilities and valuation allowances were
reversed and included in the gain on the sale of the Cellular business
during the year ended November 30, 2004 (See Note 2). This accounting is in
accordance with EITF 93−17 "Recognition of Deferred Tax Assets for a Parent
Company's Excess Tax Basis in the Stock of a Subsidiary That Is Accounted
for as a Discontinued Operation" which states the tax benefit for the
excess of outside tax basis over financial reporting basis should be
recognized when it is apparent that the temporary difference will reverse
in the foreseeable future. Based on the sale of ACC's net assets to UTSI
and the fact ACC is a dormant subsidiary, the Company has no intention to
sell the stock of ACC in the foreseeable future which would result in a
taxable transaction.
In connection with Toshiba's 20% purchase of ACC, the following agreements
(which were terminated on November 1, 2004 as a result of the sale to the
Cellular business to UTSI) were entered into:
o Stockholders agreement − provided for the composition of the board of
directors of ACC and identified certain items, other than in the
ordinary course of business, that ACC cannot do without prior approval
from Toshiba.
o Distribution arrangement − whereby ACC would be Toshiba's exclusive
distributor for the sale of Toshiba cellular products in the United
States, Canada, Mexico and all countries in the Caribbean and Central
and South America through May 29, 2007.
o Employment agreement with the President and Chief Executive Officer
(the Executive) of ACC − ACC was required to pay the Executive an
annual base salary of $500 in addition to an annual bonus equal to 2%
of ACC's annual earnings before income taxes. The Company, under the
employment agreement, was required to establish and pay a bonus of
$3,200 to key employees of ACC, including the Executive, to be
allocated by the Executive. The bonus was for services previously
rendered and, accordingly, the bonus has been included in discontinued
operations in the accompanying statements of operations for the year
ended November 30, 2002. During
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