Audiovox 2003 Annual Report Download - page 56

required by our customers and overall lower demand for wireless products. The
average selling price of handsets, however, increased to $136 per unit in fiscal
2002 from $127 per unit in fiscal 2001. This increase was due to higher selling
prices of the newly−introduced 1X digital products.
Sales incentives expense increased $20,845 (net of reversals) compared to
2001 due to increased sales incentive programs and a reduction in the reversals
for unclaimed sales incentives. In connection with the introduction of the new
1X phones, one sales incentive program with a large customer resulted in an
increase of $18,000 in sales incentives. The reversals for unclaimed sales
incentives decreased by $2,374 in fiscal 2002 compared to fiscal 2001 for
Wireless due to more of the Company's larger customers claiming earned sales
incentives as compared to prior periods. These sales incentive programs are
expected to continue and will either increase or decrease based upon competition
and customer demands.
Gross Profit
Gross profit margins remained essentially unchanged at 2.0% vs. 2.2% in
2001 due to the sales of new, higher margin products and lower inventory
write−downs, offset by increased sales incentive programs. The Company expects
due to market conditions, competition and customer concentration, it could
experience increased sales incentives expense in the future. Inventory
write−downs were $20,650 in 2001 compared to $13,823 in 2002. The write−downs
recorded in 2002 were a result of the reduction of selling prices primarily
related to older model, digital hand−held phones and other wireless products in
anticipation of newer digital technologies. At November 30, 2002, the Company
had on hand approximately 630,000 units of previously written−down inventory
which, after write−down, had an extended value of approximately $84,638. The new
technology that was introduced during the second quarter of 2002 was 1XXT and
GPS phones. In addition to inventory write−downs recorded in previous quarters,
the Company determined the valuation of the older technology digital models on
hand as of November 30, 2002 by reviewing open purchase orders from customers
and selling prices subsequent to the balance sheet date as well as indications
from customers based upon current negotiations. A majority of the units that
were previously written−down in fiscal 2001 have been sold. The remaining
balance of inventory previously written−down in fiscal 2001 is not material and
none of this inventory was scrapped. The Company expects that, due to market
conditions and customer consolidation, it could experience additional
write−downs in the future.
Gross margins were favorably impacted by reimbursement from a vendor for
software upgrades performed on inventory sold of $1,615 and $1,331 for fiscal
2001 and 2002, respectively. Without this reimbursement, gross margins would
have been lower by 0.1% and 0.2% for fiscal 2001 and 2002, respectively. The
Company has received price protection of $4,550 and $32,643 for fiscal 2001 and
2002, respectively, from a vendor for certain inventory, of which $4,550 and
$27,683 was recorded as a reduction to cost of sales, as related inventory was
sold. The other $4,960 in price protection for 2002 has been reflected as a
reduction to the remaining inventory cost. Without this price protection, gross
profit margins would have been lower by 0.5% and 4.5% for fiscal 2001 and 2002,
respectively. The Company has an agreement with its vendor for additional future
price protection with respect to specific inventory items, if needed.
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