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, 1999
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______ to
___________
Commission file number: 0-5860
----------------------------
RECOTON CORPORATION
(Exact name of Registrant as Specified in its Charter)
NEW YORK 11-1771737
(State or Other Jurisdiction (IRS Employer
of Incorporation or Identification No.)
Organization)
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
reporting 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 latest practicable date: 11,713,803 Common Shares, par
value $.20 per share, as of May 14, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
RECOTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(TABULAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
------ ---------------- --------------
(UNAUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 30,092 $ 21,385
Accounts receivable (less allowance for doubtful
accounts of $3,597,000 in 1999 and $4,940,000
in 1998) 137,398 183,230
Inventories 157,914 161,294
Prepaid, refundable and deferred income taxes 13,934 12,931
Prepaid expenses and other current assets 15,419 12,629
---------- ---------
TOTAL CURRENT ASSETS 354,757 391,469
PROPERTY AND EQUIPMENT (at cost, less accumulated
depreciation and amortization) 40,300 40,693
TRADEMARKS AND PATENTS (less accumulated amortization) 4,711 4,777
GOODWILL (less accumulated amortization) 36,650 37,233
DEFERRED INCOME TAXES 9,096 8,070
OTHER ASSETS 8,281 4,428
----------- -----------
T O T A L $453,795 $486,670
=========== ===========
LIABILITIES
CURRENT LIABILITIES:
Bank loans and drafts payable $ 64,000 $ 95,526
Current portion of long-term debt 9,362 9,359
Accounts payable 50,114 63,848
Accrued expenses 22,241 40,418
Income taxes payable 3,402 4,023
----------- ----------
TOTAL CURRENT LIABILITIES 149,119 213,174
LONG-TERM DEBT (less current portion above) 146,841 114,186
OTHER NONCURRENT LIABILITIES 11,300 11,315
----------- ----------
TOTAL LIABILITIES 307,260 338,675
--------- --------
SHAREHOLDERS' EQUITY
PREFERRED SHARES - $1.00 par value each - authorized
10,000,000 shares; none issued -- --
COMMON SHARES - $.20 par value each - authorized
25,000,000 shares; issued 12,936,870 shares in
1999 and 12,933,704 shares in 1998 2,587 2,587
ADDITIONAL PAID-IN CAPITAL 83,370 80,867
RETAINED EARNINGS 73,624 75,088
CUMULATIVE OTHER COMPREHENSIVE INCOME (6,583) (4,090)
---------- ----------
TOTAL 152,998 154,452
TREASURY SHARES - 1,235,717 shares in 1999 and
1,235,367 shares in 1998, at cost (6,463) (6,457)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY 146,535 147,995
----------- ----------
T O T A L $453,795 $486,670
============ ==========
</TABLE>
The attached notes are made a part hereof.
<PAGE>
RECOTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT INCOME PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
-------- ----------
<S> <C> <C>
NET SALES $143,906 $144,717
COST OF SALES 87,998 89,607
---------- ----------
GROSS PROFIT 55,908 55,110
---------- ----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 52,843 47,449
INTEREST EXPENSE 5,239 3,500
INVESTMENT INCOME (168) (79)
----------- -----------
T O T A L 57,914 50,870
---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (2,006) 4,240
INCOME TAX PROVISION (CREDIT) (542) 636
------------ -----------
NET INCOME (LOSS) $(1,464) $3,604
============ ===========
INCOME (LOSS) PER SHARE:
BASIC $(.13) $.31
===== ====
DILUTED* $(.13) $.30
===== ====
NUMBER OF SHARES USED IN COMPUTING
PER SHARE AMOUNTS:
BASIC 11,699 11,582
====== ======
DILUTED* 11,699 11,885
====== ======
DIVIDENDS NONE NONE
==== ====
* The effect of the assumed exercise of outstanding stock options and warrants
for the three months ended March 31, 1999 is antidilutive and therefore is not
reflected in the diluted loss per share.
</TABLE>
The attached notes are made a part hereof.
<PAGE>
RECOTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(TABULAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (1,464) $ 3,604
----------- --------
Adjustments to reconcile results of operations to net cash provided by
operating activities:
Depreciation 2,231 2,015
Amortization of intangibles 896 773
Provision for (recoveries of) losses on accounts receivable (465) 611
Deferred income taxes 551 (409)
Expense applicable to stock options granted at
prices less than fair market value 55
Change in asset and liability accounts:
Accounts receivable 44,028 7,025
Inventory 1,882 (6,237)
Prepaid and refundable income taxes (2,495) (393)
Prepaid expenses and other current assets (2,830) (327)
Other assets (762) (177)
Accounts payable and accrued expenses (30,960) (6,554)
Income taxes payable 471 912
Other noncurrent liabilities 27 (56)
---------- --------
TOTAL ADJUSTMENTS 12,574 (2,762)
---------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,110 842
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for trademarks, patents and
intellectual property (32) (49)
Expenditures for property and equipment (1,976) (2,974)
---------- --------
NET CASH USED FOR INVESTING ACTIVITIES (2,008) (3,023)
---------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under credit agreements
and other bank debt $(31,526) $(4,400)
Net proceeds from sale of senior subordinated notes 33,899
Repayment of long-term bank borrowings (2,336) (2,176)
Proceeds from exercise of stock options 12 528
Purchase of treasury stock (5) (6)
----------- --------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 44 (6,054)
----------- --------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES
ON CASH OF FOREIGN SUBSIDIARIES (439) (29)
----------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,707 (8,264)
CASH AND CASH EQUIVALENTS - January 1 21,385 17,247
----------- --------
CASH AND CASH EQUIVALENTS - MARCH 31 $ 30,092 $ 8,983
=========== ========
SUPPLEMENTAL DISCLOSURES:
INTEREST PAID $ 4,431 $ 3,615
=========== ========
INCOME TAXES PAID (REFUNDS RECEIVED) $ 136 $ 593
=========== ========
</TABLE>
The attached notes are made a part hereof.
<PAGE>
RECOTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(TABULAR AMOUNTS IN THOUSANDS)
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,
1998, 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, 1999 is comprised of:
Raw materials and work-in-process $ 33,937
Finished goods 112,812
Merchandise in-transit 11,165
----------
T O T A L $157,914
==========
NOTE D - Total comprehensive income is summarized as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 1998
-------- -------
Net income (loss) $(1,464) $ 3,604
Other comprehensive income - foreign
currency transaction adjustments (net
of income tax effect) (2,493) (1,302)
------- -------
Total comprehensive income (loss) $(3,957) $ 2,302
======= =======
NOTE E - In connection with the sale of $35 million of senior
subordinated notes to institutional investors in February 1999, the
Company issued 310,000 common stock purchase warrants valued at
approximately $2,490,000; such amount has been credited to
additional paid-in capital and is being charged to operations over
the term of the notes.
NOTE F - The following table presents certain operating segment
information for each of the three month periods ended March 31, 1999
and March 31, 1998:
(IN THOUSANDS)
-------------------------------------------------------
VIDEO AND
COMPUTER
GAME RAC ACCESSORIES UNALLOCATED
BUSINESS BUSINESS BUSINESS CORPORATE TOTAL
---------- -------- ----------- ----------- -----
1999:
Net sales:
External customers $ 50,012 $ 47,541 $ 46,353 $143,906
Intersegment 6,509 1,067 131 7,707
Income (loss) before
income taxes 3,677 (4,671) 3,987 $(4,999) (2,006)
1998:
Net sales:
External customers $ 53,995 $ 48,042 $ 42,680 $144,717
Intersegment 7,789 475 309 8,573
Income (loss) before
income taxes 6,724 (3,010) 3,804 $(3,278) 4,240
NOTE G - See "Legal Proceedings" in Part II, Item 1 of this Form 10-Q for
a discussion of a lawsuit commenced in April 1999 against Interact
Accessories, Inc. (a wholly-owned subsidiary of the Company) and one
of its suppliers by Sony Computer Entertainment America, Inc. See
"Legal Proceedings" in Part I, Item 3 of the Company's Form 10-K for
the year ended December 31, 1998 for a discussion of the status of
the investigation conducted by the United States Customs Service and
the United States Attorney's Office in Orlando, Florida.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Comparison for the Quarters Ended March 30, 1999 and 1998
GENERAL
Recoton Corporation (with its subsidiaries, Recoton or the Company) is
a global leader in the development, manufacturing and marketing of branded video
and computer game accessories, home and mobile audio products and other
electronic accessories for aftermarket use by consumers. Recoton's diverse
accessory lines include highly functional accessories for audio, video, car
audio, camcorder, multi-media/computer, home office, cellular and standard
telephone, music and video game products and 900 Megahertz (MHz) wireless
technology headphones and speakers. The Company's products are sold under
various brand names including: AAMP, ADVENT, AMBICO, AMPERSAND, AR/ACOUSTIC
RESEARCH, DISCWASHER, HECO, INTERACT, JENSEN, LINEAR RESEARCH, MACAUDIO, MAGNAT,
NHT(NOW HEAR THIS), NITRO, PARSEC, PERIPHERAL, PHASE LINEAR, RECOTON, REMBRANDT,
ROADGEAR, ROSS, SOLE CONTROL, SOUNDQUEST, AND STINGER.
A significant part of Recoton's growth strategy has been to expand
through acquisitions. Since prior to 1995, Recoton has developed, manufactured
and marketed a broad range of consumer electronic accessories. In 1995 the
Company significantly expanded into the video and computer game accessory
business with the acquisition of STD Holding Limited, a Hong Kong-based
company, and the business of its U.S. distribution arm now operating under the
name InterAct Accessories, Inc. In August 1996, Recoton acquired the branded
products business of International Jensen Incorporated (now known as Recoton
Audio Corporation), which allowed the Company to enter the market for
loudspeakers and other audio products for home and automotive aftermarket use as
well as expand the Company's foothold for growth worldwide.
Commencing with its financial statements for the year ended
December 31, 1998, the Company has classified its business into three principal
segments in accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information." Each
segment's earnings before corporate interest and income taxes are reported to
the Company's chief operating decision-makers. General corporate expenses other
than certain interest costs have been allocated to each segment on the basis
used for internal management decision making purposes.
Listed below are the Company's three segments:
o VIDEO AND COMPUTER GAME BUSINESS: This segment consists of STD Holding
Limited and its Hong Kong and other Chinese subsidiaries (STD), including
its manufacturing operations producing video and computer game accessories
and InterAct Accessories, Inc. (InterAct), the Company's distributor of
computer and video game accessories in the United States. Products sold
under the INTERACT brand name include peripherals and other accessories to
enhance the enjoyment of playing video and computer games, including
joysticks, controllers, game steering wheels and other accessories as well
as computer and multi-media accessories. The profits on products produced by
STD for and sold by the Company's other business segments has been allocated
to them. For the three months ending March 31, 1999 approximately 35% of the
Company's revenues were from sales by this segment.
o RECOTON AUDIO CORPORATION BUSINESS: This segment consists of Recoton Audio
Corporation and its United States and European subsidiaries (RAC), which
primarily sell audio products for home and aftermarket mobile use. Home
audio products are sold under the ADVENT, AR/ACOUSTIC RESEARCH, JENSEN AND
NHT/(NOW HEAR THIS) brand names and in Europe under the HECO and MAGNAT
brand names. Home audio products include state-of-the-art designed
high-fidelity, high-performance stereo and home theater loudspeaker systems.
Audio products for the automobile and marine aftermarket, sold under the
ADVENT, JENSEN, LINEAR RESEARCH, NITRO, PHASE LINEAR and ROADGEAR brand
names in the United States and the MAGNAT and MACAUDIO brand names in
Europe, include speakers, subwoofers, amplifiers, cassette receivers,
equalizers, electronic crossovers, signal processors, CD players, CD
changers and installation accessories. For the three months ending March 31,
1999 approximately 33% of the Company's revenues were from sales by this
segment.
o ACCESSORIES BUSINESS: This segment consists of Recoton Corporation; Christie
Design Corporation, a research and development subsidiary; Recoton (Far
East) Ltd., a Hong Kong distributor; AAMP of Florida, Inc., a distributor of
car audio installation products; and Recoton Canada Limited, a Canadian
distributor of all Recoton products. Products sold include indoor and
outdoor television antennas, storage cases, headphones, remote controls, and
other accessories for home and mobile audio, camcorder, cellular and
standard telephone, music and video products, and 900 MHz and other wireless
technology products marketed under numerous brand names including AAMP,
ADVENT, AMBICO, DISCWASHER, JENSEN, PARSEC, RECOTON, ROADGEAR, SOLE CONTROL,
SOUNDQUEST AND STINGER and, under licenses, SPRINT for telephone accessories
and ROLLING STONE for music storage. For the three months ending March 31,
1999, approximately 32% of the Company's revenues were from sales by this
segment.
RESULTS OF OPERATIONS
The following table presents certain operating segment information for
the indicated three months ended March 31.
(IN MILLIONS)
-----------------------------------------------
Video and Computer RAC Accessories
1999 Game Business Business Business
- ------------------ ------------------ ----------- ------------
Net sales....................... $50.0 $47.5 $46.4
Gross profit.................... 22.9 14.4 18.6
Income (loss) before
income taxes and unallocated
expenses....................... 3.7 (4.7) 4.0
Video and Computer RAC Accessories
1998 Game Business Business Business
- ------------------ ------------- ---------- -----------
Net sales....................... $54.0 $48.0 $42.7
Gross profit.................... 24.5 14.8 15.8
Income (loss) before
income taxes and unallocated
expenses....................... 6.7 (3.0) 3.8
The financial results of the reportable segments have been prepared
using a management approach, which is consistent with the basis and manner in
which Recoton management internally aggregates financial information for the
purposes of assisting in making internal operating decisions. In this regard,
certain corporate expenses were allocated among subsidiaries for decision-making
purposes which may be a less precise measure than would be required for
standalone financial information of an entity prepared in accordance with
generally accepted accounting principles.
Net sales for the first quarter were $143.9 million compared to $144.7
million in the first quarter of 1998. Sales by segment were as follows:
o Sales for the video and computer game business for the first
quarter of 1999 were $50.0 million, a decrease of 7.4% compared
to $54.0 million for the same period in 1998. Sales in the 1998
first quarter were exceptionally high as retailers replenished
depleted inventories after an unexpectedly strong 1997 holiday
selling season. Sales in the 1998 first quarter were also
bolstered by new video and PC game accessories product
introductions by InterAct. While the 1998 holiday sell-through
was considered strong by retailers, they had anticipated a
stronger than actual holiday selling season and consequently
entered the first quarter of 1999 with higher inventories of
video and PC game products than they had in the prior year's
first quarter. Sell-through of the Company's video and PC game
accessories remain strong and the Company plans to begin
introducing many new products for delivery in the second half of
1999 and into 2000 to coincide with the introductions of new
platforms by Sony, Nintendo and Sega. In addition, InterAct
previewed at the recent Electronics Entertainment Expo in Los
Angeles its entry into the world of e-commerce with the debut of
SharkWire Online(TM), the first and only game console add-on
system that introduces gamers to their own on-line community. The
Company also recently announced a licensing agreement with
Mattel, Inc. which allows it to offer an array of licensed
Barbie(R) brand peripherals and accessories for Sony's
PlayStation(R), Nintendo's GameBoy(R) and personal computers.
o Net sales for the RAC business for the first quarter of 1999 were
$47.5 million compared to $48.0 million for the same period in
1998. The reduction in sales by the RAC business is due primarily
to lower sales of its domestic home audio speaker products as a
result of planned discontinuance of certain low-margin products
and lower sales in Europe due to generally soft economic
conditions. In spite of soft sales in Europe and in the domestic
home audio business, this segment enjoyed continued growth in
mobile electronic products.
o Sales by the accessory business increased to $46.4 million for
the first quarter of 1999 from $42.7 million in the first quarter
of 1998. This was mainly due to increased accessory sales of the
Company's licensed SPRINT brand of telephone accessories and
continued growth in the AAMP/Stinger division.
Gross profit for the first quarter of 1999 increased to $55.9 million
and increased as a percentage of net sales to 38.9% from 38.1% for the same
period in 1998. The gross margin increase was due mainly to increased margins on
AAMP products and accessory products being distributed under the SPRINT license.
Gross profit and gross margin in the first quarter of 1999 compared to the prior
year's quarter by segments was as follows:
o Gross profit for the video and computer game business decreased
$1.6 million to $22.9 million due to the decrease in sales of
this segment. Gross margin, however, increased slightly from
45.4% to 45.8% due to product mix.
o Gross profit for the RAC business decreased $0.4 million to $14.4
million in the first quarter of 1999. Gross margin decreased
from 30.8% of net sales in 1998 to 30.3% in 1999. The decrease in
gross margin was due to a decrease in sales of home audio
products and soft sales in Europe.
o Gross profit for the accessories business increased $2.8 million
to $18.6 million for the first quarter of 1999 and gross margin
increased from 37.0% for the first quarter of 1998 to 40.1% for
the first quarter in 1999 mainly due to increased sales of the
Company's licensed SPRINT brand of telephone accessories and
mobile audio installation products sold under the AAMP/Stinger
brands.
Selling, general and administrative expenses increased for the first
quarter of 1999 from the levels in the first quarter of 1998 by $5.4 million to
$52.8 million, and increased as a percentage of net sales from 32.8% in 1998 to
36.7% in 1999. The increase was primarily attributable to increased market
development and promotional activities on InterAct products less the benefit of
lower bad debt expense resulting primarily from the recovery of certain bad
debts previously written off.
Interest expense (net of investment income) increased by $1.7 million
to $5.1 million for the first quarter of 1999 compared to the same period in
1998. The increase was attributable to the Company's increased level of
borrowing and higher interest costs associated with its outstanding debt. See
"LIQUIDITY AND CAPITAL RESOURCES."
On a consolidated basis, the loss before income taxes for the first
quarter of 1999 was $2.0 million compared to income of $4.2 million reported for
the same period in 1998. This change is mainly due to increased promotional
dollars to retailers to assist them in selling through higher inventory levels
of video and PC game products, as well as losses for the home audio division
which includes a charge of $1.2 million related to the closing of the Company's
audio amplifier manufacturing division acquired in 1997 at a cost of $1.1
million. The following discussion on a segment basis reflects results before
income taxes and before unallocated expenses, which expenses consist primarily
of interest:
o Income before income taxes and unallocated expenses for the video
and computer game business was $3.7 million for the first quarter
of 1999 compared to $6.7 million in the first quarter of 1998.
This difference was mainly due to higher promotional expenses in
1999 than in 1998 due to pricing pressures.
o Loss before income taxes and unallocated expenses for the RAC
business was $4.7 million, which includes a loss before income
taxes and unallocated expenses of the U.S. home audio division of
RAC of $2.6 million, for the first quarter of 1999 compared to a
loss of $3.0 million for the first quarter of 1998.
Income before income taxes and unallocated expenses for the
accessories business was $4.0 million for the first quarter of
1999 compared to $3.8 million for the first quarter of 1998.
In recent years, the Company's income taxes and effective consolidated
income tax rate have been materially affected by changes in the proportion of
domestic and foreign earnings. While earnings from operations in North America
and Western Europe are primarily taxed at or above United States income tax
rates, earnings from the Company's Asian operations are taxed at a current
maximum rate of 16.0%. However, the actual tax rate from Asian operations is
dependent upon the proportion of earnings from mainland China, which have been
subject to a tax holiday. Recoton's Chinese subsidiary, being a
production-oriented Foreign Investment Enterprise located in a Special Economic
Zone in China, was granted a five year tax holiday beginning in 1996. This tax
holiday allows for full exemption from Chinese corporate tax for the 1996 and
1997 years, and a 50% exemption for the following three years. Through March 31,
1999, the Company has not provided for additional U.S. income taxes which would
be payable upon the payment of dividends from its Hong Kong subsidiaries,
because the earnings of these subsidiaries are considered indefinitely invested.
The Company's effective income tax rate on future earnings form Hong Kong and
additional U.S. income taxes on the Hong Kong retained earnings at March 31,
1999 are, in part, dependent upon the Company's future domestic cash
requirements. While the Company currently projects that its Hong Kong retained
earnings at March 31, 1999 will remain indefinitely invested, such estimate is
subject to future revision based upon such factors as the Company's domestic
operations, its ability to borrow or otherwise obtain funds to finance its
operations, market conditions in the consumer electronics industry and general
economic conditions in the United States and Asia. The Company's income tax
expense for the first quarter of 1999 is based on a 27% estimated effective
annual income tax rate for 1999. This rate is estimated by management based upon
its forecast of the Company's profitability in each of its various foreign and
domestic tax jurisdictions. This resulted in a net income tax credit of $542,000
for the three months ended March 31,1999. For the three months ended March 31,
1998, the Company's income tax expense was based upon a 15% estimated effective
annual income tax rate.
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement, effective
for fiscal years beginning after December 15, 1997, requires the Company to
report components of comprehensive income in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. To date, the
Company's comprehensive income has been comprised of the Company's net income or
loss and foreign currency translation adjustments (which adjustments were a
negative $2.5 million for the three months ended March 31, 1999 and a negative
$1.3 million for the same period in 1998). Included in the consolidated
statements of stockholders' equity. As a result of significant fluctuations in
the value of the U.S. dollar in relation to currencies in Western Europe for the
three months ended March 31, 1999 and 1998, and the related foreign currency
translation adjustments recorded by the Company, in addition to the changes in
net income or loss, comprehensive loss for the quarter ended March 31, 1999 was
$4.0 million as compared to comprehensive income of $2.3 million for the quarter
ended March 31, 1998. (See Note D of the notes to the Condensed Consolidated
Financial Statements.)
For the first quarter of 1999, basic and diluted EPS were a loss of
$.13/share on average outstanding shares of 11,699,000. For the first quarter of
1998, basic EPS was $.31/share and diluted EPS was $.30/share based on average
shares of 11,582,000 (basic) and 11,885,000 (diluted).
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires
capitalization of costs of software developed or purchased for internal use. The
Company elected early adoption of the SOP for 1998 which resulted in the
capitalization of software development costs of approximately $405,000 for the
year ended 1998,all of which was reflected in the fourth quarter of 1998. For
the three months ended March 31, 1999 approximately $150,000 of such cost was
capitalized. The after tax effect on net income for the first quarter of 1999
was approximately $110,000 or $.01 per diluted share.
In view of the Company's operating performance, it has recently
retained the services of a consulting firm to aid in the evaluation, development
and implementation of a comprehensive plan geared towards improving the
Company's overall operations, cash flow and return on assets. The plan, when
finalized, may result in significant restructuring charges. Recoton and its
Board of Directors expect to have a comprehensive plan completed and to commence
implementation by approximately July 15, 1999.
IMPACT OF INFLATION AND CHANGING PRICES
The impact of inflation and changing prices on the Company's net sales
and revenues and on income from continuing operations for the three months
ending March 31, 1999 was negligible.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have historically been, and
are expected to continue to be, cash flow from operations, borrowings under
credit facilities provided by banks in the United States and abroad and proceeds
from the sale of the Company's securities, including the private placement of
the Company's notes. At March 31, 1999, the Company had cash and cash
equivalents of $30.1 million compared with $21.4 million at December 31, 1998.
At March 31, 1999, the Company had working capital of approximately
$205.6 million as compared to approximately $178.3 million at December 31, 1998.
The Company's ratio of current assets to current liabilities was 2.4 to 1 at
March 31, 1999 and 1.8 to 1 at December 31, 1998. The increase in working
capital and the working capital ratio are primarily the result of the proceeds
from the issuance of $35 million in aggregate principle amount of senior
subordinated notes used to reduce outstanding borrowings under the revolving
credit facility. Trade receivables decreased $45.8 million to $137.4 million at
March 31, 1999 as compared to December 31, 1998. Inventories decreased from
December 31, 1998 levels by $3.4 million to $157.9 million at March 31, 1999.
Accounts payable and accrued expenses decreased $31.9 million to $72.4 million
at March 31, 1999. These changes ae the result of the Company's normal sales
patterns, where sales have traditionally been higher in the third and fourth
quarters of each year.
The Company currently has a multibank credit facility (the Credit
Facility), entered into in January 1997 and modified several times with the most
recent modification occurring on March 12, 1999. The Company presently has a
$86.5 million revolving credit facility through December 26, 1999, reduced from
$101.5 million, which was in effect on December 31, 1998. The outstanding
borrowings and commitments pursuant to letters of credit under the revolving
facility were approximately $76.0 million at March 31, 1999 as compared to $95.7
million at December 31, 1998. The Company also has a $15.0 million term loan,
repayable in quarterly installments with the last installment due in May 2001
($11.3 million balance as of March 31, 1999). The revolving credit loans and
term loan bear interest at various rates depending on elections made by the
Company. The applicable rates include rates tied to the London Inter Bank
Offering Rate (LIBOR) and rates tied to the greater of the prime rate or a
federal funds-based rate. As of March 31, 1999 the loan tied to the LIBOR rate
bore interest at approximately 8.70% per annum and loans tied to the prime rate
bore interest at approximately 8.25%. The majority of the Company's borrowings
under the revolver and the term loan are at the LIBOR based rate. It is unlikely
that the revolving credit facility will be extended at the time of its
expiration in December 1999. The Company is currently in the process of
negotiating with institutional lenders various alternate financing sources.
There can not, however, be any assurance that a replacement facility will be
arranged.
In January 1997, the Company issued $75 million in principal amount of
adjustable rate senior notes due January 6, 2007 (the 1997 Notes), which bear
interest at 9.75% (8.75% in 1998) per annum. The 1997 Notes require
interest-only payments for the first four years, then seven equal installments
of principal on each anniversary date, beginning January 2001. In September
1998, the Company issued an additional $25 million in principal amount of
10-year senior notes due September 1, 2008 (the 1998 Notes), which bear interest
at 9.52%, on terms substantially identical to the Senior Notes. The 1998 Notes
require interest-only payments for the first four years, then seven equal
installments of principal on each anniversary date, beginning September 2002.
In 1999, both note agreements were amended and the interest rates were
increased effective January 1, 1999 to 9.75% and 9.52% for the $75 million and
$25 million notes, respectively, subject to reduction to 9.25% on the $75
million notes and 9.02% on the $25 million notes should the Company receive
certain stipulated minimum proceeds from the public sale of either or both of
its common stock or subordinated debt.
In February 1999, the Company issued $35 million in aggregate
principal amount of senior subordinated notes due February 4, 2004 (the 1999
Notes) and 310,000 common stock purchase warrants. The proceeds were used to
reduce outstanding borrowings under the Company's revolving credit facility. The
1999 Notes are subject to required prepayment from the proceeds received by the
Company from the sale of either high yield indebtedness or common shares.
Interest is payable quarterly at 11.5% a year to November 4, 1999 increasing to
12.5% per annum on November 4, 1999 and by 0.50% per annum on each of the next
five interest payment dates. The common share purchase warrants are exercisable
at $18.26 a share and mature on February 4, 2004. The note agreements also
provide that if any of the 1999 Notes are not repaid by May 4, 2001, the Company
will issue to the holders of the 1999 Notes additional common share purchase
warrants to purchase such number of shares as equals 310,000 multiplied by a
fraction, the numerator of which is the then-unpaid principal amount of notes
and the denominator of which is $35 million. The pricing of the additional
warrants would be based on market values for the Company's common shares at that
time.
The Company also has outstanding borrowings from one member of the
multibank credit lenders aggregating approximately $9.6 million at March 31,
1999, which are due at various times through July 2001. Covenants similar to
those applicable to the multibank credit facility apply to these loans. The
Company has granted two mortgages on Florida property which it owns to secure
repayment of $2.6 million of such indebtedness. Interest rates on such loans
ranged between 6.6% and 8.4%.
Certain of the Company's foreign subsidiaries have lines a credit of
approximately $17.4 million with foreign banks, primarily for import facilities.
The banks have security interests to the extent of merchandise purchased under
these lines. As of March 31, 1999, there were no trust receipt loans and
approximately $3.6 million of letters of credit outstanding which reduce the
amounts available under the domestic and foreign lines.
At December 31, 1998 and at various times prior to such date, the
Company was not in compliance with certain financial covenants, including those
involving the maintenance of financial ratios and minimum tangible net worth,
under the notes and the Credit Facility. At such times both the note holders and
bank lenders either amended the covenants or waived the Company's non-compliance
with such covenants and temporarily relaxed such covenants until such time as
terms of the Credit Facility and notes were amended to include less restrictive
covenants. At March 31, 1999, the Company was in compliance with the amended
covenants under the notes and the Credit Facility. However, there can be no
assurances that the Company will be in compliance in subsequent quarters or that
the bank lenders or note holders will waive or amend any of the covenants should
the Company be in violation of any such covenants in the future.
The Company expects to soon reach agreements with the U.S. Attorney's
Office and U.S. Customs Service to settle all outstanding criminal and civil
matters involved in a pending customs investigation. The Company plans to enter
guilty pleas to a number of counts involving country of origin mismarking and
undervaluation of imports, which will be subject to judicial approval. The
Company is presently negotiating the precise terms of written agreements with
the government. While the Company is optimistic that this matter will be settled
shortly, there can be no assurance that the agreements will be finalized or
approved. In the three months ended December 1998, the Company recorded $14.0
million for this global settlement, which together with related fees and costs
of approximately $1.0 million, was separately reflected in the 1998 consolidated
statement of operations. The classification of the accrual on the consolidated
balance sheets is based on the expected periods of payment, subject to approval
by the government.
In January 1998, the Company completed construction of an
approximately 318,000 square foot expansion of its warehouse on its Lake Mary,
Florida property. The cost of the building construction was approximately $5.0
million.
To date there has been limited exposure to loss due to foreign
currency risks in the Company's Asian subsidiaries, because the Hong Kong dollar
has been pegged to the U.S. dollar at an official exchange rate of HK $7.75 to
US $1.00. Additionally, in recent years there have been no material fluctuations
in the Hong Kong/Chinese exchange rates. Also, the Company maintains the
majority of its currency in Asia in U.S. dollar accounts. However, as a result
of the turmoil in the Asian currency markets which began in mid-1998, there can
be no assurance that these relationships will continue.
The Company's operations, which are currently being transacted on a
global basis, are exposed to variations in foreign exchange rates. The Company's
shareholders' equity was reduced by a foreign currency translation adjustment of
approximately $2.5 million for the three months ended March 31, 1999. During the
three months ended March 31, 1998, the Company's shareholders' equity was
reduced by a foreign currency translation adjustment of approximately $1.3
million. The changes in the exchange rates of the German and Italian currencies
against the American dollar, which were the principle causes of the foreign
translation adjustment, had no material impact on the Company's results of
operations but such adjustments served to reduce the Company's tangible net
worth close to levels required to be maintained under financial covenants in the
Company's loan and note purchase agreements.
If there are any material adverse changes in the relationships between
the European and/or Canadian currencies with the United States dollar or if the
Hong Kong or Chinese currencies should no longer be tied to the U.S. dollar,
such changes could adversely affect the results of the Company's European,
Canadian and/or Asian operations included in the consolidated financial
statements and could cause further increases in the amount of foreign currency
translation adjustments which are charged directly to shareholder's' equity.
The Company has leased expanded facilities for sales and warehousing
in Germany and the U.K. and is considering enlarging its manufacturing
facilities in Mainland China. In addition the Company is considering the
acquisition of additional computer hardware and software to be used both in the
United States and in its foreign locations. The Company will also continue to
evaluate possible acquisitions that may be attractive to the growth of the
Company.
YEAR 2000
The Company is in the process of analyzing and addressing what is
known as the year 2000 (or Y2K) issue. Based on current information, the Company
believes that it will be year 2000 compliant in a timely manner and the cost of
achieving such compliance will not have a materially adverse effect on the
Company's results of operations or financial condition. As noted in the
following discussion, however, there are multiple variables in determining
whether full Y2K compliance can be achieved, many of which are dependent on
efforts of third parties. For a discussion of this problem see the Company's
Form 10-K for the year ended December 31, 1999, " Item 7. Management's
Discussion and Analysis of Financial Conditions and Results of Operations."
As noted in such Form 10-K, the Company is currently in the process of
contacting its key vendors and service providers, as well as key customers, to
ascertain their Y2K compliance to the extent that their problems could affect
the Company's internal systems or other aspects of the Company's business.
Inquiry letters have been sent to all key United States and most key foreign
vendors, service providers and customers. Returns from such persons are being
received. The Company expects to complete that information gathering process by
June 1, and if appropriate responses are not received from a vendor, service
provider, or customer, the Company will assume that such persons will not be Y2K
compliant and will commence the process of ascertaining whether any contingency
plans will be necessary. The Company has not yet determined when it will have
that process completed. The Company at this time cannot make any prediction as
to the degree of compliance by such vendors and service providers or the
consequence to the Company of any noncompliance. Any serious Y2K problems which
significant vendors and service providers encounter could materially adversely
impact the Company. If significant customers (especially those which are
ordering from the Company electronically) have Y2K problems, that also could
materially adversely impact the Company by seriously impacting the level of
their purchases from the Company until such problems are resolved.
IMPLICATIONS TO THE COMPANY FROM THE ADOPTION OF A EUROPEAN COMMON CURRENCY
The Company has extensive operations in certain European countries,
including Germany, Italy and the United Kingdom. It also sells to additional
countries in Europe. For the three months ended March 31, 1999, approximately
15% of the Company's net sales were in Europe. With the exception of the United
Kingdom, all of the countries in which the Company has operations have confirmed
their participation in a new 11-country European common currency, the Euro. The
Company does not at this time anticipate that the adoption of the Euro and any
resulting changes in European economic and market conditions will have any
material adverse impact on the Company or its European business. For a further
discussion of the implications to the Company regarding the adoption of a
common European currency, see the Company's form 10-K for the year ended
December 31, 1999, "Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations."
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
All of the Company's foreign borrowings are denominated in U.S.
dollars, its functional currency. A substantial portion approximately 83% of the
Company's borrowings bear fixed interest rates. However, borrowings under the
revolving credit portion of the Credit Facility are made at rates in effect when
the loans are made and remain in effect until they are "rolled-over" (typically
30 to 60 days later), unless the Company has elected to borrow at the prime rate
or other floating interest rate under one of several interest rate options
available to it when each loan is made. A $15.0 million term loan ($11.3 million
balance as of March 31, 1999), which is due in installments through May 2001,
bears interest which varies on a quarterly basis with changes in the Company's
financial ratios and changes in LIBOR.
The Company and certain of its subsidiaries have intercompany loans
which are not denominated in their home country currency, which exposes the
Company to exchange rate fluctuations. The Company has not entered into any
foreign currency or derivative contracts to hedge these potential exchange
adjustments, which are initially recorded as cumulative foreign currency
translation adjustments (a component of shareholders' equity), but will
ultimately be reflected in operations when the debt is repaid. Exclusive of
intercompany receivables and payables for current transactions, the principal
outstanding exposure at March 31, 1999 (expressed in U.S. dollars at current
exchange rates) for foreign currency loans made by the Company and its
subsidiaries to other subsidiaries in Germany and Italy is $32.9 million. These
loans have no fixed due dates.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SONY V. INTERACT. Sony Computer Entertainment America Inc. (SCEA) sued
InterAct Accessories, Inc., a subsidiary of the Company, and Datel Electronics,
Ltd., the supplier of InterAct's GameShark product, in the U.S. District Court
for the Northern District of California on April 7, 1999. SCEA alleges that
InterAct disclosed the password to SCEA's development web site to Datel, and
that Datel downloaded programs, documentation and other files related to Sony's
PlayStation product. The complaint seeks a preliminary and permanent injunction,
actual damages, compensatory damages in excess of $1 million, an accounting of
all profits derived from infringement, a constructive trust of all benefits
gained by defendants, punitive damages, pre-judgment interest and costs. The
parties agreed to expedited discovery and a preliminary injunction against sale
by Datel of any product which "incorporates, or was designed and/or developed,
in whole or in part, with the aid of, reference to, or access to any" SCEA
proprietary data. The matter is currently in discovery. The Company believes
that the version of the GameShark being sold for use with Sony's PlayStation
does not violate the preliminary injunction or the requested permanent
injunction. Sales of such product have not at this time been affected by the
action.
ITEM 5. OTHER INFORMATION.
When used in this Form 10-Q and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer, the
words or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," "expect," "believe," "hope" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
such forward-looking statements, which speak only as of the date made.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K: none
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
/S/ ROBERT L. BORCHARDT
------------------------------
Robert Borchardt
Chairman of the Board, President and Chief
Executive Officer
/S/ JOSEPH H. MASSOT
--------------------------------
Joseph H. Massot
Vice President, Treasurer and Principal
Accounting Officer
Dated: May 17, 1999
<PAGE>
EXHIBIT INDEX
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at March 31, 1999
(Unaudited) and the Condensed Consolidated Statement of Income for the Three
Months Ended March 31, 1999 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 30,902
<SECURITIES> 0
<RECEIVABLES> 140,995
<ALLOWANCES> 3,597
<INVENTORY> 157,914
<CURRENT-ASSETS> 354,757
<PP&E> 74,881
<DEPRECIATION> 34,581
<TOTAL-ASSETS> 453,795
<CURRENT-LIABILITIES> 149,119
<BONDS> 146,841
0
0
<COMMON> 2,587
<OTHER-SE> 143,948
<TOTAL-LIABILITY-AND-EQUITY> 453,795
<SALES> 143,906
<TOTAL-REVENUES> 144,074
<CGS> 87,998
<TOTAL-COSTS> 87,998
<OTHER-EXPENSES> 53,308
<LOSS-PROVISION> (465)
<INTEREST-EXPENSE> 5,239
<INCOME-PRETAX> (2,006)
<INCOME-TAX> (542)
<INCOME-CONTINUING> (1,464)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,464)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
