Audiovox 1998 Annual Report Download - page 15

The Company markets its products under its own brand as
well as private labels to a large and diverse distribution net-
work both domestically and internationally. The Company’s
products are distributed by two separate marketing groups:
Communications and Automotive. The Communications
group consists of Audiovox Communications Corp. (ACC)
and the Quintex retail operations (Quintex), both of which
are wholly-owned subsidiaries of the Company. The
Communications group markets cellular telephone products
and receives activation commissions and residual fees from
its retail sales. The price at which the Company’s retail out-
lets sell cellular telephones is often affected by the activa-
tion commission the Company will receive in connection
with such sale. The activation commission paid by a cellular
telephone carrier is based upon various service plans and
promotional marketing programs offered by the particular
cellular telephone carrier. The monthly residual payment is
based upon a percentage of the customer’s usage and is
calculated based on the amount of the cellular phone
billings generated by the base of customers activated by the
Company on a particular cellular carrier’s system. The
Automotive group consists of Audiovox Automotive
Electronics (AAE) and, through February 28, 1997, Heavy
Duty Sound, which are divisions of the Company, Audiovox
Communications (Malaysia) Sdn. Bhd., Audiovox Holdings
(M) Sdn. Bhd. and Audiovox Venezuela, C.A., which are
majority-owned subsidiaries. Products in the Automotive
group include automotive sound and security equipment,
car accessories, home and portable sound products and
mobile video. The Company allocates interest and certain
shared expenses to the marketing groups based upon esti-
mated usage. General expenses and other income items
which are not readily allocable are not included in the results
of the various marketing groups.
This Report on Form 10-K contains forward-looking state-
ments relating to such matters as anticipated financial per-
formance and business prospects. When used in this Report,
the words “anticipates,” “expects,” “may,” “intend” and
similar expressions are intended to be among the state-
ments that identify forward-looking statements. From time
to time, the Company may also publish forward-looking
statements. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements.
In order to comply with the terms of the safe harbor, the
Company notes that a variety of factors, including, but not
limited to, foreign currency risks, political instability, changes
in foreign laws, regulations and tariffs, new technologies,
competition, customer and vendor relationships, seasonal-
ity, inventory obsolescence and availability, could cause the
Company’s actual results and experience to differ materially
from the anticipated results or other expectations expressed
in the Company’s forward-looking statements.
The following table sets forth for the periods indicated
certain statements of income (loss) data for the Company
expressed as a percentage of net sales:
Percentage of Net Sales
Years Ended November 30,
1998 1997 1996
Net sales:
Product sales:
Cellular wholesale.................... 64.6% 61.1% 58.6%
Cellular retail............................ 0.7 1.0 1.3
Sound........................................ 12.7 14.4 16.4
Security and accessories ......... 13.8 15.2 14.6
Consumer goods
and all other......................... 3.8 2.7 2.8
95.6 94.4 93.7
Activation commissions............... 3.7 4.9 5.5
Residual fees ................................ 0.7 0.7 0.8
Total net sales .......................... 100.0 100.0 100.0
Cost of sales..................................... (85.6) (83.3) (83.9)
Gross profit....................................... 14.4 16.7 16.1
Warehousing and assembly............ (2.0) (1.9) (1.8)
Selling ............................................... (5.7) (6.0) (6.7)
General and administrative ............ (5.9) (5.8) (5.4)
Total operating expenses ....... (13.6) (13.7) (13.9)
Operating income ........................... 0.8 3.0 2.2
Interest expense .............................. (0.8) (0.4) (1.4)
Income of equity investments ........ 0.2 0.2 0.1
Gain on sale of
equity investment ........................ —5.9 0.2
Debt conversion expense............... —(2.0) (4.4)
Other income (expense) ................. 0.4 — (0.1)
Income tax expense ........................ (0.1) (3.5) (1.0)
Net income....................................... 0.5% 3.3% (4.4)%
Fiscal 1998 Compared to Fiscal 1997
Consolidated Results
Net sales were $616,695 for 1998, a decrease of $22,387,
or 3.5%, over the same period in 1997. The decrease in net
sales was accompanied by a corresponding 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 deben-
tures for 2,860,925 shares of Class A Common Stock. Costs
associated with this exchange were $12,844, including
income taxes.
13
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except share and per share data)
AUDIOVOX CORPORATION AND SUBSIDIARIES