Audiovox 1999 Annual Report Download - page 16

AUDIOVOX
14
increased over 400% in fiscal 1999 to approximately $52 million from $10
million in fiscal 1998. Consumer electronics increased over 200% to
$38,150 in fiscal 1999 from $11,794 in fiscal 1998. These increases were
partially offset by decreases in Prestige audio and SPS sound lines.
Operating expenses were $32,977 in fiscal 1999, a 21.6% increase
from operating expenses of $27,126 in fiscal 1998. Selling expenses
increased during fiscal 1999, primarily in salaries, commissions and divi-
sional marketing. These increases were partially offset by decreases in
advertising. General and administrative expenses increased from fiscal
1998, mostly in salaries, provision for doubtful accounts and temporary
personnel. Warehousing and assembly expenses increased to $5,991 in
fiscal 1999 from $4,434 in fiscal 1998, primarily due to tooling expenses,
warehousing and direct labor. Pre-tax income for fiscal 1999 was $11,296,
an increase of $5,359 from fiscal 1998.
The Company believes that the Electronics Group has an expanding
market with a certain level of volatility related to both domestic and inter-
national new car sales. Also, certain of its products are subject to price
fluctuations which could affect the carrying value of inventories and gross
margins in the future.
Other Income and Expense
Interest expense and bank charges decreased $57 during fiscal 1999
from fiscal 1998.
Management fees and equity in income from joint venture invest-
ments increased by approximately $3,150 for fiscal 1999 compared to fis-
cal 1998 as detailed in the following table:
1998 1999
(Dollars in thousands)
Manage- Equity Manage- Equity
ment Income ment Income
Fees (Loss) Total Fees (Loss) Total
Bliss-tel ............. — $ (13) $ (13) — $ (55) $ (55)
ASA ................... — 1,860 1,860 — 3,506 3,506
TALK .................. — (509) (509) — 1,121 1,121
G.L.M................. $ 7 — 7 — — —
Pacific................ — (337) (337) — — —
Posse ................. 29 70 99 $30 30 60
Quintex West .... — — — — (375) (375)
$36 $1,071 $1,107 $30 $4,227 $4,257
During 1998, the Company purchased 400,000 Japanese yen (approxi-
mately $3,132) of Shintom debentures and exercised its option to convert
the Shintom debentures into shares of Shintom common stock. These
shares are included in the Company’s available-for-sale marketable secu-
rities at November 30, 1998. During the fourth quarter of 1999, the
Company recorded an other-than-temporary decline in market value of its
Shintom common stock in the amount of $1,953 and a related deferred
tax benefit of $761. The write-down has been recorded as a component of
other expense in the consolidated statements of income.
During 1998, the Company purchased an additional 1,400,000
Japanese yen (approximately $9,586) of Shintom Debentures and exer-
cised its option to convert 737,212 Japanese yen of Shintom debentures
into shares of Shintom common stock. The Company sold the Shintom
common stock yielding net proceeds of $5,830 and a gain of $787.
During 1999, the Company purchased an additional 3,100,000
Japanese yen (approximately $27,467) of Shintom Debentures and exer-
cised its option to convert 2,882,788 Japanese yen of Shintom debentures
into shares of Shintom common stock. The Company sold the Shintom
common stock yielding net proceeds of $27,916 and a gain of $3,501. As of
November 30, 1999, the remaining debentures of 1,125,024 Japanese yen
are included in the Company’s available-for-sale marketable securities.
As of December 1999, the Company completed the liquidation of
Audiovox Pacific Pty. Ltd.
Provision for Income Taxes
Income taxes are provided for at a blended federal and state rate of
40% for profits from normal business operations. During fiscal 1999, the
Company implemented various tax strategies which have resulted in low-
ering the effective tax rate.
Fiscal 1997 Compared to Fiscal 1998
Consolidated Results
Net sales were $616,695 for 1998, a decrease of $22,387, or 3.5%,
over 1997. The decrease in net sales was accompanied by a correspon-
ding decrease in gross profit margins to 14.4% from 16.7% in 1997.
Operating expenses decreased to $83,670 from $87,067, a 3.9%
decrease. Operating income for 1998 was $4,871, a decrease of $14,824,
or 75.3%, compared to 1997. During 1997, the Company sold 1,835,000
shares of its holdings of CellStar for a net gain of $23,232. Also during
1997, the Company exchanged $21,479 of its subordinated convertible
debentures for 2,860,925 shares of Class A common stock. Costs associ-
ated with this exchange were $12,844, including income taxes.
Wireless Group Results
Net sales in 1998 were $441,590, a decrease of $2,810, or 0.6%, from
1997. Unit sales of wireless handsets increased 354,000 units, or 12.0%,
over 1997. Average unit selling prices decreased approximately 6.9%. The
number of new wireless subscriptions processed by Quintex decreased
22.8%, with a corresponding decrease in activation commissions of
approximately $8,276. Part of the decrease was due to the closing of
some retail locations. The average commission received by Quintex per
activation also decreased by approximately 4.9% from 1997. Unit gross
profit margins decreased to 7.3% from 11.1% in 1997, primarily due to
reduced selling prices, which were partially offset by a corresponding
decrease of 3.0% in average unit cost. In addition, the Company recorded
a $6.6 million charge to adjust the carrying value of certain wireless
inventories, partially offset by a $1.0 million credit from a supplier. This
charge was the result of a software problem in a line of analog handsets,
as well as a continuing decrease in the selling prices of analog handsets
due to pressure from the growing presence of digital handsets in the mar-
ket. While the analog market is still sizable, the Wireless Group may
experience lower gross profits in the future due to the price sensitivity of
this market place. Operating expenses decreased to $48,257 from
$49,582. As a percentage of net sales, operating expenses decreased to
10.9% during 1998 compared to 11.2% in 1997. Selling expenses
decreased $1,763 from 1997, primarily in commissions, salesmen
salaries, payroll taxes and benefits, partially offset by increases in market
development funds and co-operative advertising. General and administra-
tive expenses increased over 1997 by $632, primarily in occupancy costs
and temporary personnel. Warehousing and assembly expenses
decreased over 1997 by $194, primarily in tooling and direct labor. Pre-tax
loss for 1998 was $1,786, a decrease of $13,368 compared to 1997.
Management’s Discussion and
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued) Audiovox Corporation and Subsidiaries