Audiovox 1997 Annual Report Download - page 12

tions, in occupancy, office expenses and bad debt expense.
Warehousing and assembly expenses decreased from 1996 by $233,
primarily from the transfer of Heavy Duty Sound business to the new
joint venture. Pre-tax income for 1997 was $8,002, an increase of
$2,303 compared to last year. Without the transfer of the Heavy Duty
Sound business, pre-tax income increased $2,796 compared to 1996.
The Company believes that the Automotive group has an expand-
ing market with a certain level of volatility related to both domestic
and international new car sales. Also, certain of its products are sub-
ject to price fluctuations which could affect the carrying value of
inventories and gross margins in the future.
The following table sets forth for the periods indicated certain
statements of income data for the Automotive group expressed as a
percentage of net sales:
Automotive
1997 1996
Net sales:
Sound $ 91,763 47.3% $ 98,303 52.2%
Security and accessories 97,446 50.3 87,234 46.3
Other 4,701 2.4 2,879 1.5
Total net sales 193,910 100.0 188,416 100.0
Gross profit 40,326 20.8 35,622 18.9
Total operating expenses 27,989 14.4 25,559 13.6
Operating income 12,337 6.4 10,063 5.3
Other expense (4,335) (2.2) (4,364) (2.3)
Pre-tax income $ 8,002 4.1% $ 5,699 3.0%
Other Income and Expense
Interest expense and bank charges decreased by $5,938 for 1997
compared to 1996. This was due to reduced interest bearing debt and
the decrease in interest bearing subordinated debentures which were
exchanged for shares of common stock.
Management fees and equity in income from joint venture invest-
ments increased by approximately $651 for 1997 compared to 1996 as
detailed in the following table:
1997 1996
Equity Equity
Management Income Management Income
Fees (Loss) Total Fees (Loss) Total
ASA – $1,857 $1,857 – – –
ASMC – – – – $ 948 $ 948
G.L.M. $ 12 – 12 $100 – 100
Pacific – (685) (685) 22 (334) (312)
Quintex West – – – 18 – 18
Posse 97 187 284 46 17 63
$109 $1,359 $1,468 $186 $ 631 $ 817
Audiovox Pacific has experienced an overall decline in gross mar-
gins, as the cellular market in Australia has experienced the same
competitive factors as those in the United States.
During January 1997, the Company completed an exchange of
$21,479 of its subordinated debentures for 2,860,925 shares of Class A
Common Stock (Exchange). As a result of the Exchange, a charge of
$12,686 was recorded. The charge to earnings represents (i) the dif-
ference in the fair market value of the shares issued in the Exchange
and the fair market value of the shares that would have been issued
under the terms of the original conversion feature plus (ii) a write-off
of the debt issuance costs associated with the subordinated deben-
tures plus (iii) expenses associated with the Exchange offer. The
Exchange resulted in taxable income due to the difference in the face
value of the bonds converted and the fair market value of the shares
issued and, as such, a current tax expense of $158 was recorded. An
increase in paid in capital was reflected for the face value of the
bonds converted, plus the difference in the fair market value of the
shares issued in the Exchange and the fair market value of the shares
that would have been issued under the terms of the original conver-
sion feature for a total of $33,592.
During 1997, the Company sold a total of 1,835,000 shares of
CellStar for net proceeds of $45,937 and a net gain of $23,232.
Provision for Income Taxes
Income taxes are provided for at a blended federal and state rate
of 41% for profits from normal business operations. During 1997, the
Company had several non-operating events which had tax provisions
calculated at specific rates, determined by the nature of the transac-
tion. The tax treatment for the debt conversion expense of $12,686,
which lowered income before provision for income taxes, did not
reduce taxable income as it is a non-deductible item. Instead of
recording a tax recovery of $5,201, which would lower the provision
for income taxes, the Company actually recorded a tax expense of
$158. This and other various tax treatments resulted in an effective
tax rate of 51.6% for 1997.
Fiscal 1996 Compared to Fiscal 1995
Net sales increased by approximately $97,175, or 19.4% for fiscal
1996, compared to fiscal 1995. This result was primarily attributable
to increases in net sales from the cellular division of approximately
$76,413, or 23.9%, automotive security and accessory equipment of
approximately $20,418, or 27.9% and other products, primarily home
stereo systems of $3,052. These increases were partially offset by a
decrease in automotive sound equipment of approximately $2,708, or
2.5%.
The improvement in net sales of cellular telephone products was
primarily attributable to an increase in unit sales. Net sales of cellular
products increased by approximately 857,000 units, or 70.9%, com-
pared to fiscal 1995, primarily resulting from an increase in sales of
hand-held portable cellular telephones and transportable cellular
telephones, partially offset by a decline in sales of installed mobile
cellular telephones. The average unit selling price declined approxi-
mately 23.7% vs. 1995 as production efficiencies and market compe-
tition continues to reduce unit selling prices. The Company believes
that the shift from installed mobile cellular telephones to hand-held
11