Audiovox 1998 Annual Report Download - page 20

due to increased sales in Prestige Security, Protector
Hardgoods and alarms and video, partially offset by
decreases in net sales of AA security and cruise controls.
Gross margins increased to 20.8% from 18.9% in 1996. This
increase was experienced in the AV and Private Label sound
lines and cruise control, Protector Hardgoods and AA secu-
rity accessory lines, partially offset by decreases in Prestige
Security. Operating expenses increased to $27,989 from
$25,559. Selling expenses increased over 1996 by $1,151,
primarily in our international operations, in commissions and
advertising. General and administrative expenses increased
over 1996 by $1,512, primarily from our international opera-
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 1996.
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
expanding market with a certain level of volatility related to
both domestic and international 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.
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 subordi-
nated debentures which were exchanged for shares of com-
mon stock.
Management fees and equity in income from joint venture
investments increased by approximately $651 for 1997 com-
pared to 1996 as detailed in the following table:
1997 1996
Manage- Equity Manage- Equity
ment Income ment 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
margins, 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 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 conversion feature plus (ii) a write-off
of the debt issuance costs associated with the subordinated
debentures plus (iii) expenses associated with the Exchange
offer. The Exchange resulted in taxable income due to the dif-
ference 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 con-
version 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, deter-
mined by the nature of the transaction. The tax treatment for
the debt conversion expense of $12,686, which lowered
income before provision for income taxes, did not reduce tax-
able income as it is a non-deductible item. Instead of record-
ing a tax recovery of $5,201, which would have lowered 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.
18
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
AUDIOVOX CORPORATION AND SUBSIDIARIES