SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended
March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the transition period from
to .
0-5860
(Commission file number)
Recoton Corporation
(Exact name of registrant as specified in its charter)
New York 11-1771737
(State or other jurisdiction of (L.R.S. Employer
incorporation or organization) Identification No.)
2950 Lake Emma Road, Lake Mary, Florida 32746
(Address of principal executive offices, including zip code)
407-333-8900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filings
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the most recent practicable date:
Outstanding as of
Class May 13, 1996
Common stock, par
value $.20 a share 11,236,481
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
RECOTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Tabular Amounts in Thousands)
MARCH 31, DECEMBER 31,
ASSETS 1996 1995
------ ------------ -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,483 $ 12,393
Accounts receivable (less allowance for
possible loss of $1,596,000 in 1996 and
$1,587,000 in 1995) 46,926 55,019
Inventories 66,034 66,484
Prepaid expenses and other current assets 7,622 6,583
------- -------
Total current assets 127,065 140,479
Property and equipment (at cost, less accumulated
depreciation and amortization) 25,463 24,163
Goodwill (less accumulated amortization) 16,244 16,391
Other assets 5,824 4,021
--------- --------
T O T A L $174,596 $185,054
========= ========
LIABILITIES
-----------
Current liabilities:
Bank loans and drafts payable $ 8,758 $13,176
Current portion of long-term debt 4,944 5,131
Accounts payable 12,017 15,144
Accrued expenses 6,043 7,417
Income taxes payable 855 3,209
-------- -------
Total current liabilities 32,617 44,077
Long-term debt (less current portion above) 19,189 20,511
Other noncurrent liabilities 1,058 1,069
-------- --------
Total liabilities 52,864 65,657
-------- --------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock - $1.00 par value each - authorized
10,000,000 shares; none issued -- --
Common stock - $.20 par value each - authorized 25,000,000 shares; issued
12,360,122 shares in 1996 and 12,296,160 shares in 1995 2,472 2,459
Additional paid-in capital 73,685 72,926
Retained earnings 50,403 48,797
Cumulative foreign currency translation
adjustment (257) (300)
-------- -------
Total 126,303 123,882
Treasury stock - 1,136,643 shares in 1996 and
1,132,770 shares in 1995, at cost (4,571) (4,485)
-------- ---------
Total stockholders' equity 121,732 119,397
-------- ---------
T O T A L $174,596 $185,054
======== ========
The attached notes are made a part hereof.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RECOTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In Thousands, Except Per Share Data)
Three Months Ended
MARCH 31,
1996 1995
<S> <C> <C>
Net sales $54,561 $36,954
Cost of goods sold 33,619 22,795
------- -------
Gross profit 20,942 14,159
------- -------
Selling, general and administrative expenses 18,302 11,457
Interest expense 647 73
Investment (income) (64) (205)
------- ------
T o t a l 18,885 11,325
------- -------
Income before income taxes 2,057 2,834
Income tax provision 451 704
------- -------
NET INCOME $ 1,606 $ 2,130
======= =======
Earnings per common share:
Primary $.14 $.19
Assuming full dilution $.14 $.19
Number of shares used in computing per share amounts:
Primary 11,668 11,202
====== ======
Assuming full dilution 11,682 11,202
====== ======
Dividends NONE NONE
The attached notes are made a part hereof.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RECOTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Tabular Amounts in Thousands)
Three Months Ended
MARCH 31,
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1996 1995
-------- ------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,606 $ 2,130
-------- -------
Adjustments to reconcile results of operations to net cash provided by
operating activities:
Depreciation and amortization 1,475 686
Provision for losses on accounts receivable 65 59
Deferred income taxes (83) (61)
Net change in asset and liability accounts:
Accounts receivable 8,036 9,753
Inventory 472 (2,131)
Prepaid expenses and other current assets (949) 118
Other assets (170) (29)
Accounts payable and accrued expenses (4,483) (3,021)
Income taxes payable (2,308) 63
Deferred compensation and other noncurrent
liabilities (11) 4
------- -------
Total adjustments 2,044 5,441
------- -------
Net cash provided by operating activities 3,650 7,571
------- ------
Cash flows from investing activities:
Expenditures for property and equipment (2,267) (1,583)
Net assets acquired from Ampersand (712)
Expenditures for trademarks, patents and
intellectual property (44) (31)
Loan to International Jensen Incorporated (2,000)
------- ------
Net cash used for investing activities (4,311) (2,326)
------- -------
Cash flows from financing activities:
Net repayments under credit agreements (4,418) (215)
Repayment of long-term bank borrowings (1,509) 20
Proceeds from exercise of stock options 494
Income tax benefit applicable to exercise
of stock options 192 3
Purchases of treasury stock (669)
------- -------
Net cash used for financing activities (5,241) (861)
-------- -------
Effect of foreign exchange rate changes on cash (8) 12
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(CARRIED FORWARD) (5,910) 4,396
------- -------
$(5,910) $ 4,396
Cash and cash equivalents - January 1 12,393 15,475
------- -------
CASH AND CASH EQUIVALENTS - MARCH 31 $ 6,483 $19,871
------- -------
Supplemental disclosures of cash paid for:
Interest $ 660 $ 115
======= =======
Income taxes $ 2,678 $ 700
======= =======
The attached notes are made a part hereof.
</TABLE>
<PAGE>
RECOTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE A - The attached summarized financial information does not include all
disclosures required to be included in a complete set of financial statements
prepared in conformity with generally accepted accounting principles. Such
disclosures were included with the consolidated financial statements of the
Company at December 31, 1995, included in its annual report on Form 10-K. Such
statements should be read in conjunction with the data herein.
NOTE B - The financial information reflects all normal recurring
adjustments which, in the opinion of management, are deemed necessary for a fair
presentation of the results for the interim periods. The results for the interim
periods are not necessarily indicative of the results to be expected for the
year. Historically, the Company's sales and earnings have been higher in the
second half of each year.
NOTE C - Inventory at March 31, 1996 is comprised of:
Raw materials and work-in-process $18,216
Finished goods 42,073
Merchandise in-transit 5,745
-------
T o t a l $66,034
=======
NOTE D - Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" is effective January 1, 1996. As
permitted under SFAS No. 123, the Company has decided to continue accounting for
employee stock compensation under APB 25 rules. However, in its financial
statements for the year ending December 31, 1996 the Company will disclose
supplementally on a pro forma basis its net income and earnings per common share
as if it had adopted the new standard's alternative accounting treatment. Such
alternative treatment calculates the total compensation expense to be recognized
as the fair value of the award at the date of grant.
The Company granted stock options for 234,741 and 318,209 shares during the
three months ended March 31, 1996 and 1995, respectively.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Comparison of the quarters ended March 31, 1996 and 1995:
Results of Operations
Net sales for the first quarter of 1996 increased by 47.6% to $54.6
million from $37.0 million in the same period in 1995. The sales increase is
primarily attributable to sales of the Interact, Performance and STD brands
which were acquired by the Company in September 1995 through the acquisition of
STD Holding Limited ("STD"), as well as increased domestic market share for the
Company's broad line of consumer electronic accessories, and the introduction of
new products, including remote controls, computer and cellular phone
accessories.
Gross profit for the first quarter of 1996 increased by approximately
$6.8 million as compared to the first quarter of 1995, and remained relatively
constant as a percentage of net sales at 38.4%. The dollar increase was
attributable to increased sales.
Selling, general and administrative expenses increased in 1996 by $6.8
million to $18.3 million, and increased as a percentage of net sales from 31.0%
to 33.5%. The increases were primarily due to the acquired STD operations,
higher sales and marketing expenses related to the Company's expansion in the
weak domestic market, increased research and development expenses and expenses
related to the Company's recently expanded Lake Mary, FL facility.
Interest expense increased by approximately $574,000 in the first
quarter of 1996. The increase is primarily attributable to the acquisition and
operations of STD and the financing of the Company's new Lake Mary, Florida
warehouse facility.
Investment income decreased by approximately $141,000 in the first
quarter of 1996. The decrease in investment income resulted from expanded
working capital requirements of the Company.
The effective income tax rate for the first quarter of 1996 decreased
to 21.9% from 24.8% as a result primarily of the higher proportion of income
earned by the Company's subsidiaries in Hong Kong and China, which are taxed at
a maximum rate of 16.5%. The effective income tax rate for the first quarter of
1996 may not be indicative of the effective income tax rate for the year ending
December 31, 1996 or thereafter because of the changes in the proportion of
domestic and foreign taxable income which might occur.
For the three months ended March 31, 1996, primary and fully-diluted
earnings per share were $.14 based on 11,668,000 (11,682,000 on a fully-diluted
basis) average common and common equivalent shares outstanding. For the
comparable three months of 1995, primary and fully-diluted earnings per share
were $.19 based on 11,202,000 average shares outstanding (on both a primary and
fully-diluted basis). The increase in average shares outstanding in 1996
primarily results from the 406,092 shares issued as part of the STD purchase in
September 1995.
Statement of Financial Standards No. 123, "Accounting for Stock-Based
Compensation," became effective January 1, 1996. The Company has decided to
continue accounting for employee stock-based compensation under APB 25 rules, as
permitted under SFAS 123, but will disclose in its annual financial statement
for the year ending December 31, 1996 the proforma effect on net income and
earnings per share as if it had adopted the new standard's alternative
accounting treatment.
Liquidity and Capital Resources
The Company maintains domestic lines of credit of $50 million with
three banks of which $5 million can only be used for acquisition purposes, any
of which may be terminated by such banks at any time. At March 31, 1996, loans
and letters of credit of $7.9 million were outstanding on the domestic lines of
credit and $3.6 million were outstanding for borrowings under foreign lines of
credit which now aggregate $13.9 million.
At March 31, 1996, the Company had working capital of approximately
$94.4 million as compared with approximately $96.4 million at December 31, 1995.
However, the Company's working capital ratio increased to 3.9 to 1 at March 31,
1996 from 3.2 to 1 at December 31, 1995. The increase in the working capital
ratio is primarily the result of decreases in both current assets and current
liabilities due to normal seasonal fluctuations.
In June and August of 1994, the Company purchased approximately 30
acres of land in Lake Mary, Florida on which it completed construction in 1995
of a 245,000 square foot warehouse building. The cost for the land and building
construction was approximately $7.2 million. The Company initially utilized a
combination of its own cash and existing bank lines for this project. However,
in December 1995 the Company obtained a five-year $7 million mid-term
uncollateralized bank loan in connection with this facility.
In August 1994, the Board of Directors authorized the repurchase by the
Company of up to 500,000 outstanding Common Shares. In 1995, 42,366 shares were
repurchased for $710,000; no shares were repurchased in the three months ended
March 31, 1996.
In September 1994, Recoton purchased selected assets and assumed
certain liabilities of Sound Quest, Inc., a leading supplier of car audio
installation and accessory products, for a purchase price of approximately $2.5
million plus additional contingent payments over five years, not to exceed $1.15
million. After this acquisition, Sound Quest's assumed bank loans of
approximately $1.175 million were repaid.
In February 1995, Recoton purchased selected assets of Ampersand, a
division of Ampco Industries, Inc., of Chatsworth, California, at a cost of
approximately $722,000. Ampersand is a manufacturer and supplier of car stereo
installation accessories.
In April 1995, Recoton announced the formation of Christie Design
Corporation located in Chatsworth, California. This wholly-owned subsidiary
develops and markets speaker products. Through March 31, 1996, the Company has
expended approximately $3.3 million for start-up and capital costs for this
subsidiary. The Company started manufacturing and shipping products in March
1996.
In September 1995, Recoton acquired STD Holding Limited, a Hong
Kong-based international manufacturer and marketer of multimedia and computer
accessories, including video game joysticks, controllers and accessories and
computer speakers sold under the Interact, Performance and STD brand names.
STD's operations are in Hong Kong, the People's Republic of China and Maryland
(U.S.A.). The total cost of the purchase of $22.7 million was paid through a
combination of cash and 406,092 Recoton Common Shares (valued at $8.3 million).
The cash portion of the purchase price was initially borrowed under existing
bank lines of credit. In December 1995, the Company obtained a five-year bank
term loan to replace these borrowings.
In January 1996, Recoton announced it had executed a definitive merger
agreement to acquire International Jensen Incorporated (IJI), a leading marketer
of home and automotive loudspeakers. The current total estimated cost is
approximately $58 million, plus the assumption of IJI debt. IJI's shareholders
are being offered cash and/or Recoton Common Shares for their IJI shares,
subject to specified maximums and adjustments, as more fully described in the
merger agreement. The cash portion of the purchase is expected to be financed
through medium-term debt and revolving lines of credit. The transaction is
subject to the approval of Jensen's stockholders as well as certain other
conditions. While another company has announced a competing bid for IJI, the
Company currently hopes to close the acquisition in late June.
The Company currently believes there is no material exposure to loss
due to foreign currency risks in its foreign subsidiaries. The Hong Kong dollar
has been pegged to the U.S. dollar at an official exchange rate of HK$7.78 to
US$1.00. Historically, there have been no material fluctuations in the Hong
Kong/United States and the Hong Kong/Chinese exchange rates. No material amounts
are invested in Canadian assets. Upon the consummation of the merger with IJI,
the Company may in the future, be exposed to currency fluctuation risks related
to IJI's European operations.
The Company has no other material commitments for capital expenditures,
although it will continue to evaluate possible acquisitions which may be
attractive to the growth of the Company.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Randi Marcus v. International Jensen Incorporated, Robert G. Shaw,
Robert H. Jenkins, David G. Chandler, Recoton Corporation, RC Acquisition Sub,
Inc., IJI Acquisition Corp. William Blair & Company, and William Blair Leveraged
Capital Fund Limited Partnership (Chancery Court, Delaware, Civil Action No.
14992). Pursuant to a summons dated May 10, 1996, Recoton and its wholly owned
subsidiary RC Acquisition Sub, Inc. ("RC Acquisition") were named as defendants
in a lawsuit brought by a stockholder of International Jensen Incorporated
("Jensen") claiming breach of fiduciary duty by the directors of Jensen and
certain affiliated parties in connection with a proposed merger of Jensen into
RC Acquisition pursuant to the merger agreement entered into between Recoton and
Jensen dated January 3, 1996 as amended (the "Merger Agreement") and alleging
that Recoton and RC Acquisition, among others, aided and abetted such breaches
of fiduciary duty. The suit also alleges that certain agreements entered into in
connection with or at the time of entering into the merger agreement with Jensen
were invalid and void as a matter of Delaware law, including the termination fee
provisions of the Merger Agreement, a license/option agreement between Jensen
and Recoton regarding the Jensen trademarks "Acoustic Research" and "AR," an
agreement between Recoton and Robert Shaw pursuant to which Recoton would
receive certain proceeds if Shaw sold his shares of Jensen stock under certain
circumstances and a stock option and voting agreement with William Blair
Leveraged Capital Fund Limited Partnership relating to stock of Jensen. The
plaintiff requests an injunction against the merger and related transactions,
recession of such transactions, attorney's fees and other relief as the Court
finds proper. The time for Recoton and RC Acquisition to respond to the
complaint has not yet elapsed. Recoton believes that the claims are without
merit and intends to defend against them vigorously.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(10.1) First Amendment to the Recoton Corporation Code Section 401(K)
Profit Sharing Plan and Trust Agreement, effective as of the
1st day of January 1995
(27) Financial Data Schedule
(b) Reports on Form 8-K: Reports were filed on Forms 8-K during the quarter
ended March 31, 1996 dated January 3, 1996 and January 30, 1996 describing,
under Item 5, the entering into of a merger agreement with International Jensen
Incorporated on January 3, 1996 and the amendment of such agreement on January
30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RECOTON CORPORATION
Date: May 14, 1996 /s/ Robert L. Borchardt
-----------------------
Robert L. Borchardt
President, Co-Chairman of
the Board and Co-Chief
Executive Officer
Date: May 14, 1996 /s/ Stuart Mont
---------------
Stuart Mont
Chief Operating Officer,
Executive Vice President
- Operations, Chief
Financial Officer and
Secretary
<PAGE>
EXHIBIT INDEX
Number Description
(10.1) First Amendment to the Recoton Corporation Codess. 401 (K)
Profit Sharing Plan and Trust Agreement, effective as of
the 1st day of January 1995
(27) Financial Data Schedule [EDGAR FILING ONLY]
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT TO THE
RECOTON CORPORATION CODE ss.401(K) PROFIT SHARING
PLAN AND TRUST AGREEMENT
Recoton Corporation, a New York corporation (the "Employer"), and Herbert
H. Borchardt, Robert L. Borchardt and Joseph Massot (collectively referred to as
the "Trustee") agree and consent to amend the Recoton Corporation Code ss.401(k)
Profit Sharing Plan and Trust Agreement effective the 1st day of January, 1995,
as follows:
1. Section 9.11 of Article IX of the Plan is amended by adding the
following provision as paragraph (D):
(D) Special rule for certain contributions. To apply Section 9.11(A) to
the allocation of net income, gain or loss with respect to Deferral
Contributions, the Advisory Committee will apply the weighted average
method. The "weighted average allocation" method treats a weighted
portion of the Deferral Contributions made during the valuation period
as if includible in the Participant's Account as of the beginning of
the valuation period. The weighted portion is a fraction, the
numerator of which is the number of days in the valuation period,
excluding each day in the valuation period which begins prior to the
contribution date of the applicable contributions, and the denominator
of which is the number of days in the valuation period.
2. Subparagraph A.(2) of Section 5.03 is deleted in its entirety and the
following inserted in lieu thereof:
(2) Matching Contributions Account and Employer
Contributions Account. Except as provided in Sections 5.01 and
5.02, for each Year of Service, a Participant's Nonforfeitable
percentage of his Matching Contributions Account and Employer
Contributions Account equals the percentage in the following
vesting schedule:
Percent of
Years of Service Nonforfeitable
With the Employer Accrued Benefit
Less than 3 None
3 20%
4 40%
5 60%
6 80%
7 or more 100%
Effective for any Plan Year for which the Plan is top
heavy, the Advisory Committee will calculate a Participant's
Nonforfeitable Percentage under the following schedule:
Percent of
Years of Service Nonforfeitable
With the Employer Accrued Benefit
Less than 2 None
2 20%
3 40%
4 60%
5 80%
6 or more 100%
The Advisory Committee will apply the top heavy
schedule to Participants who earn at least one Hour of Service
after the top heavy schedule becomes effective. A shift
between vesting schedules under this Section 5.03 is an
amendment to the vesting schedule and the Advisory Committee
must apply the rules of Section 7.05 accordingly. A shift to a
new vesting schedule under this Section 5.03 is effective on
the first day of the Plan Year for which the top heavy status
of the Plan changes.
Except as hereinabove amended, the Recoton Corporation Code ss.401(k)
Profit Sharing Plan and Trust Agreement shall remain unchanged and shall
continue in full force and effect, provided, however, that no amendment hereto
shall retroactively eliminate an optional form of benefit that is a protected
benefit under Code Section 411(d)(6) and applicable Treasury Regulations.
Signed, sealed and delivered
in the presence of: EMPLOYER:
RECOTON CORPORATION
____________________________ By: /s/ Joseph H. Massot
Joseph H. Massot
Vice President and
Treasurer
- ----------------------------
As to Employer
TRUSTEE:
____________________________ /s/ Herbert H. Borchardt
Herbert H. Borchardt
- ----------------------------
As to Trustee
____________________________ /s/ Robert L. Borchardt
Robert L. Borchardt
- ----------------------------
As to Trustee
____________________________ /s/ Joseph H. Massot
Joseph H. Massot
- ----------------------------
As to Trustee
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at March 31, 1996
(Unaudited) and the Condensed Consolidated Statement of Income for the Three
Months Ended March 31, 1996 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 082536
<NAME> RECOTON CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 6,483
<SECURITIES> 0
<RECEIVABLES> 48,522
<ALLOWANCES> 1,596
<INVENTORY> 66,034
<CURRENT-ASSETS> 127,065
<PP&E> 34,677
<DEPRECIATION> 9,214
<TOTAL-ASSETS> 174,596
<CURRENT-LIABILITIES> 32,617
<BONDS> 19,189
0
0
<COMMON> 2,472
<OTHER-SE> 119,260
<TOTAL-LIABILITY-AND-EQUITY> 174,596
<SALES> 54,561
<TOTAL-REVENUES> 54,625
<CGS> 33,619
<TOTAL-COSTS> 33,619
<OTHER-EXPENSES> 18,237
<LOSS-PROVISION> 65
<INTEREST-EXPENSE> 647
<INCOME-PRETAX> 2,057
<INCOME-TAX> 451
<INCOME-CONTINUING> 1,606
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,606
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
