Audiovox 2004 Annual Report Download - page 85

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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)
(5) Business Acquisitions
Code Systems, Inc.
On March 15, 2002, Code Systems, Inc. (Code), a wholly−owned subsidiary of
Audiovox Electronics Corp. (AEC), a wholly−owned subsidiary of the Company,
purchased certain assets of Code, an automotive security product company.
The purpose of this acquisition was to expand brand recognition and improve
OEM production with manufacturers. The results of operations of Code are
included in the accompanying consolidated financial statements from the
date of purchase. The purchase price consisted of approximately $7,100,
paid in cash at the closing, and a debenture (CSI Debenture) whose value is
linked to the future earnings of Code. The payment of any amount under the
terms of the CSI Debenture is based on performance and is scheduled to
occur in the first calendar quarter of 2006.
The Company accounted for the transaction in accordance with the purchase
method of accounting. An adjustment to the allocation of the purchase price
was made to certain acquired assets resulting in an increase to goodwill of
$706 during the year ended November 30, 2003. During the year ended
November 30, 2004, an adjustment to the purchase price was made due to the
collection of monies held in escrow at the time of closing, resulting in a
$513 decrease to goodwill. As a result of the acquisition, goodwill, as
adjusted, of $2,047 was recorded.
Simultaneous with this business acquisition, the Company entered into a
purchase and supply agreement with a third party. Under the terms of this
agreement, the third party will purchase or direct its suppliers to
purchase certain products from the Company. In exchange for entering into
this agreement, the Company issued 50 warrants in its subsidiary, Code,
which vested immediately. These warrants were deemed to have minimal value
based upon the then current value of Code. Furthermore, the agreement calls
for the issuance of additional warrants based upon the future operating
performance of Code.
Based upon the contingent nature of the debenture and warrants, no
recognition was given to the Code debenture or warrants as the related
contingencies were not considered probable and such additional warrants had
not vested at November 30, 2003 or 2004.
Recoton Audio Group
On July 8, 2003, the Company, through a newly−formed, wholly−owned
subsidiary, Audiovox Germany, acquired in cash (i) certain accounts
receivable, inventory and trademarks from the U.S. audio operations of
Recoton Corporation (the "U.S. audio business") or (Recoton) and (ii) the
outstanding capital stock of Recoton German Holdings GmbH (the
"international audio business"), the parent holding company of Recoton
Corporation's Italian, German and Japanese subsidiaries, for $40,046, net
of cash acquired, including transaction costs of $1,900. The primary reason
for this transaction was to expand the product offerings of AEC and to
obtain certain long−standing trademarks such as Jensen(R), Acoustic
Research(R) and others. The Company also acquired an obligation with a
German financial institution as a result of the purchase of the common
stock of Recoton German Holdings GmbH (see Note 9 of Notes to Consolidated
Financial Statements).
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