Audiovox 1997 Annual Report Download - page 14

13
During the fourth quarter of 1996, the Company exchanged
$41,252 of its 6 1/4% subordinated debentures for 6,806,580 shares of
Class A Common Stock. This exchange resulted in a charge to earn-
ings of approximately $26,318 before income taxes. This charge
includes the loss on the exchange and the write-off of the remaining
debt issuance costs associated with the original issue of the deben-
tures.
Liquidity and Capital Resources
The Company’s cash position at November 30, 1997 was approxi-
mately $2,905 below the November 30, 1996 level. Operating activi-
ties used approximately $36,899, primarily from increases in inven-
tory and prepaid expenses and other assets, and a decrease in
accounts payable, accrued expenses and other current liabilities.
These events were partially offset by a decrease in accounts receiv-
able and an increase in income taxes payable. Investing activities
provided approximately $37,695, composed primarily of $45,937
from the sale of investment securities, partially offset by the purchase
of property, plant and equipment of $3,986 and purchase of equity
investments of $4,706. Financing activities used approximately
$3,458, principally from the repayment of borrowings under line of
credit agreements.
On February 9, 1996, the Company’s 10.8% Series AA and 11.0%
Series BB Convertible Debentures matured. The Company paid
$4,362 to holders on that date.The remaining $1,100 was converted
into 206,046 shares of Common Stock. On November 25, 1996, the
Company concluded an exchange of $41,252 of its 6 1/4% subordi-
nated debentures for 6,806,580 shares of the Company’s Class A
Common Stock. Accounting charges to earnings for this transaction
were $29,206, including income taxes on the gain of the exchange of
the bonds. As a result of the exchange, stockholders’ equity was
increased by $34,426.
On October 1, 1996, business formally conducted by the
Company’s cellular division was continued in a newly-formed, whol-
ly-owned subsidiary called Audiovox Communications Corp.
Capitalization of this company was accomplished by exchanging the
assets of the former division, less their respective liabilities, for all of
the common stock.
On May 5, 1995, the Company entered into the Second Amended
and Restated Credit Agreement (the Credit Agreement) which super-
seded the first amendment in its entirety. During 1997 and 1996, the
Credit Agreement was amended ten times providing for various
changes to the terms. The terms as of November 30, 1997 are sum-
marized below.
Under the Credit Agreement, the Company may obtain credit
through direct borrowings and letters of credit. The obligations of the
Company under the Credit Agreement continue to be guaranteed by
certain of the Company’s subsidiar ies and are secured by accounts
receivable and inventory of the Company and those subsidiaries.
The obligations were secured at November 30, 1996 by a pledge
agreement entered into by the Company for 2,125,000 shares of
CellStar Common Stock and 100 shares of ACC. Subsequent to
November 30, 1996, the shares of CellStar Common Stock were
released from the Pledge Agreement. Availability of credit under the
Credit Agreement is a maximum aggregate amount of $95,000, sub-
ject to certain conditions, and is based upon a formula taking into
account the amount and quality of its accounts receivable and inven-
tory. The Credit Agreement expires on February 28, 2000.
The Credit Agreement contains several covenants requiring,
among other things, minimum levels of pre-tax income and mini-
mum levels of net worth as follows: Pre-tax income of $4,000 per
annum; pre-tax income of $1,500 for the two consecutive fiscal quar-
ters ending May 31, 1997, 1998 and 1999; pre-tax income of $2,500 for
the two consecutive fiscal quarters ending November 30, 1997, 1998
and 1999; the Company cannot have pre-tax losses of more than
$1,000 in any quarter; and the Company cannot have pre-tax losses
in any two consecutive quarters. In addition, the Company must
maintain a minimum level of total net worth of $170,000. The Credit
Agreement provides for adjustments to the covenants in the event of
certain specified non-operating transaction. Additionally, the agree-
ment includes restrictions and limitations on payments of dividends,
stock repurchases and capital expenditures. During 1997, the
Company received amendments and waivers to allow the Company
to make stock repurchases and enter into the equity collar.
Subsequent to year end, the Company received a waiver which
allowed for the delay in issuance of its financial statements.
The Company granted to an investor in CellStar, in connection
with the CellStar initial public offering, two options to purchase up to
an aggregate of 1,750,000 shares of CellStar Common Stock owned by
the Company, 1,500,000 of which was exercised in full on June 1, 1995
at an exercise price of $11.50 per share. As a result, the Company
recorded a gain, before provision for income taxes, of $8,435. This
reduced the Company’s ownership in CellStar below 20% and, as
such, the Company will no longer account for CellStar under the
equity method of accounting. Subsequent to November 30, 1996, the
remaining 250,000 shares under the remaining option expired. The
remaining 2,375,000 CellStar shares owned by the Company will be
accounted for as an investment in marketable equity securities.
During 1997, the Company sold 1,835,000 shares of its CellStar shares
for a gain of $23,232, net of income tax. The Company continues to
hold 865,000 shares of CellStar common stock. Based upon the clos-
ing market price of CellStar on November 30, 1997, the unrealized
gain in equity is $12,194, net of deferred taxes.
The Company believes that it has sufficient liquidity to satisfy its
anticipated working capital and capital expenditure needs through
November 30, 1998 and for the reasonable foreseeable future.