SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 1998
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 (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
2950 LAKE EMMA ROAD, LAKE MARY, FLORIDA 32746
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (407) 333-8900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON SHARES, $.20 PAR VALUE
(TITLE OF CLASS)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing:
$144,534,570 based on the closing price on the Nasdaq Stock Market of $14.50 as
of March 23, 1999. For purposes of this computation, all executive officers and
directors of the registrant have been deemed to be affiliates. Such
determination should not be deemed to be an admission that such persons are, in
fact, affiliates of the registrant.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: 11,701,153 Common
Shares as of March 23, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement to be filed with the Securities and Exchange
Commission (the "Commission") with respect to the registrant's Annual Meeting of
Shareholders to be held in 1999 (the "1999 Proxy Statement") is incorporated by
reference into Part III of this Form 10-K.
<PAGE>
PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THAT TERM IN THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 (THE ACT)(SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934). ADDITIONAL WRITTEN OR ORAL FORWARD-LOOKING
STATEMENTS MAY BE MADE BY THE COMPANY FROM TIME TO TIME, IN FILINGS WITH THE
SECURITIES EXCHANGE COMMISSION, PRESS RELEASES OR IN OTHER STATEMENTS BY THE
COMPANY. STATEMENTS CONTAINED IN THIS ANNUAL REPORT THAT ARE NOT HISTORICAL
FACTS ARE FORWARD-LOOKING STATEMENTS MADE PURSUANT TO THE SAFE HARBOR PROVISIONS
OF THE ACT. FORWARD-LOOKING STATEMENTS MAY INCLUDE, BUT ARE NOT LIMITED TO,
PROJECTIONS OF REVENUE, INCOME OR LOSS AND CAPITAL EXPENDITURES, STATEMENTS
REGARDING FUTURE OPERATIONS, FINANCING NEEDS, ANTICIPATED COMPLIANCE WITH
FINANCIAL COVENANTS IN LOAN AGREEMENTS, PLANS FOR ACQUISITION OR SALE OF ASSETS
OR BUSINESSES AND CONSOLIDATION OF OPERATIONS OF NEWLY ACQUIRED BUSINESSES,
PLANS RELATING TO PRODUCTS OR SERVICES OF THE COMPANY, ASSESSMENTS OF
MATERIALITY, PREDICTIONS OF FUTURE EVENTS AND THE EFFECTS OF PENDING AND
POSSIBLE LITIGATION, AS WELL AS ASSUMPTIONS RELATING TO THESE STATEMENTS. IN
ADDITION, WHEN USED IN THIS DISCUSSION, THE WORDS "ANTICIPATES," "BELIEVES,"
"ESTIMATES," "EXPECTS," "INTENDS," "PLANS" AND VARIATIONS OF SUCH TERMS AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT TO RISKS AND
UNCERTAINTIES, SOME OF WHICH CANNOT BE PREDICTED OR QUANTIFIED BASED ON CURRENT
EXPECTATIONS. CONSEQUENTLY, FUTURE EVENTS AND ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH IN, CONTEMPLATED BY, OR UNDERLYING THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT, OTHER FILINGS, PRESS
RELEASES OR OTHER STATEMENTS BY THE COMPANY. STATEMENTS IN THIS ANNUAL REPORT,
PARTICULARLY IN "ITEM 1. BUSINESS", "ITEM 3. LEGAL PROCEEDINGS", THE "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" AND "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," DESCRIBE CERTAIN
FACTORS, AMONG OTHERS, THAT COULD CONTRIBUTE TO OR CAUSE SUCH DIFFERENCES. OTHER
FACTORS THAT COULD CONTRIBUTE TO OR CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, UNANTICIPATED DEVELOPMENTS IN ANY ONE OR MORE OF THE FOLLOWING
AREAS: RECEPTIVITY OF CONSUMERS TO NEW CONSUMER ELECTRONICS TECHNOLOGIES,
ABILITY OF THE COMPANY TO INTRODUCE NEW PRODUCTS TO MEET CONSUMER NEEDS AND
CONSUMER ACCEPTANCE OF THE COMPANY'S NEW PRODUCT INTRODUCTIONS; ABILITY TO
SUCCESSFULLY IDENTIFY, ACQUIRE AND INTEGRATE NEW BUSINESS INTO THE COMPANY'S
OPERATION; COMPETITION; NUMBER AND NATURE OF CUSTOMERS AND THEIR PRODUCT ORDERS;
ABILITY TO OBTAIN ADEQUATE FINANCING; ABILITY OF SUPPLIERS TO CONTINUE TO SOURCE
PRODUCTS AND COMPONENTS; FACTORS RELATED TO FOREIGN MANUFACTURING, SOURCING AND
SALES (INCLUDING CHINESE AND OTHER FOREIGN GOVERNMENT REGULATION, TRADE AND
IMPORTATION CONCERNS, FLUCTUATION IN EXCHANGE RATES AND ADOPTION OF A UNIFORM
CURRENCY IN CERTAIN EUROPEAN COUNTRIES); BORROWING COSTS; CHANGES IN TAXES DUE
TO CHANGES IN THE MIX OF U.S. AND NON-U.S. REVENUE; ABILITY TO MAINTAIN
CONFIDENTIAL INFORMATION AND OBTAIN AND MAINTAIN PROPRIETARY RIGHTS; PENDING OR
THREATENED LITIGATION AND INVESTIGATIONS; THE AVAILABILITY OF KEY PERSONNEL; THE
OPERATION OF MANAGEMENT INFORMATION AND COMPUTER SYSTEMS AT THE COMPANY AND AT
THE COMPANY'S CUSTOMERS AND VENDORS, ESPECIALLY AS IT RELATES TO THE YEAR 2000
ISSUE; ENVIRONMENTAL AND OTHER LEGAL REGULATIONS; AND OTHER RISKS FACTORS WHICH
MAY BE DETAILED FROM TIME TO TIME IN THE COMPANY'S SECURITIES AND EXCHANGE
COMMISSION FILINGS.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT, WHICH SPEAK ONLY AS
OF THE DATE SET FORTH ON THE SIGNATURE PAGE. THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER SUCH DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNEXPECTED EVENTS.
Aamp(TM), Advent(RM), Ambico(RM), Ampersand(TM), Ar(RM)/acoustic
Research(RM), Discwasher(RM), Heco(RM), Interact(RM), Jensen(RM), Linear
Research(RM), Macaudio(RM), Magnat(RM), Nht(RM) (Now Hear This(TM)), Nitro(RM),
Parsec(RM), Perfectcase(TM), Peripheral(TM), Phase Linear(RM), Recoton(RM),
Rembrandt(RM), Ross(TM), Sole Control(RM), Soundquest(RM), and Stinger(rm) ARE
TRADEMARKS OF RECOTON CORPORATION OR ITS SUBSIDIARIES. Sony Playstation(RM) ,
Nintendo 64(RM), Rolling Stone(RM) and Sprint(RM) ARE MARKS OF OTHER COMPANIES
LICENSED FOR USE ON SPECIFIC PRODUCTS MANUFACTURED BY OR FOR RECOTON CORPORATION
OR ITS SUBSIDIARIES.
ITEM 1. BUSINESS
THE COMPANY
Recoton Corporation (with its subsidiaries, Recoton or the
Company) is a leading worldwide marketer, developer and manufacturer of
consumer electronics products for aftermarket use, with over 62 years of
experience. The Company classifies its business into three principal 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 as well as products for other Recoton segments, 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 include peripherals and other
accessories to enhance the enjoyment of playing video and computer
games, including joysticks, controllers, game steering wheels and
other accessories, including the Company's popular GAME SHARK(R), a
device which assists the game player, as well as computer, multi-media
and home office accessories. In fiscal 1998, 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 home and mobile audio products. Home audio
products, sold under the ADVENT, AR/ACOUSTIC RESEARCH, JENSEN and
NHT/(NOW HEAR THIS) brand names and, in Europe, under the MAGNAT and
Heco brand names, 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, ROAD GEAR and PHASE LINEAR
brand names in the United States and 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. In fiscal 1998,
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 Ltd., a Canadian distributor of all Recoton products. Products
sold include indoor and outdoor TV 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. These products
are 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. In fiscal 1998,
approximately 32% of the Company's revenues were from sales by this
segment.
As noted above, Recoton's products are offered under a number of brand
names, many of which are recognized by consumers and all of which the Company
believes are valued by its retail customers. Recoton sells its products through
specialty consumer electronics and video retailers, mass merchants, office and
computer products retailers and direct mail retailers. The Company also sells
certain of its products to original equipment manufacturers (OEMs). As a result
of its broad array of branded product offerings and its value-added marketing
services, such as customized merchandise planogramming, inventory management and
just-in-time delivery, Recoton believes that it is one of the few companies that
can act as a "one-stop shop" to its retailer customers for consumer electronic
accessories. Recoton believes that the combination of its diverse product
offerings, value-added marketing services and multiple brand names has led to
its holding leading market positions in key product areas, which serves as a
significant competitive advantage in the consumer electronic products industry.
Recoton has grown as the consumer electronics industry has grown.
Starting with its formation in 1936 as a manufacturer of phonograph needles, the
Company has kept pace with the ever-changing needs of the consumer, expanding
its product offerings as the industry has evolved. From supporting the
now-superseded technologies of phonographs, eight track cartridges and citizen
band radios and the fading technologies of cassette tapes, it now provides
products for current core technologies such as compact discs, video cassettes,
and video and PC games and emerging technologies such as digital versatile discs
(DVD) and high definition television (HDTV). It has also benefited from the
emergence of home-based work and the desire to have the benefit of business
technologies such as computers and telecommunications available for home use.
The Company's product offerings have expanded with the introduction of each of
these new technologies. As each new technology has emerged, Recoton has found
that the demand for its products has increased, with its new products usually
being additive to its business, rather than immediately replacing older
products. While consumers who acquire new systems desire additional products to
interconnect, accessorize or maximize their new purchases, many of the older
systems remain operational and consumers still need to maintain or upgrade them.
Starting in 1989, Recoton realized that it could more easily satisfy
these burgeoning consumer needs through selective acquisitions as well as
internal growth. Since that time it has completed 14 acquisitions as part of its
growth strategy to expand its customer base, enter new geographic markets,
broaden its product offerings and obtain new technologies. Recoton seeks to
maximize the benefit of each acquisition by consolidating overhead expenses and
leveraging sales and marketing expertise, thereby making its products more
competitive. Two recent acquisitions have significantly changed the Company's
focus. In 1995 it acquired STD Holding Limited, a Hong Kong based manufacturer
of video and computer game accessories such as joysticks and controllers
primarily marketed under the brand name INTERACT. As a result of this
acquisition, Recoton believes it is now the world's largest third party supplier
of video game accessories. In 1996 Recoton significantly enhanced its presence
in the international market with the acquisition of International Jensen
Incorporated (IJI), now known as Recoton Audio Corporation, a global developer
and marketer of home and car stereo speakers, car stereos and CD players and car
amplifiers sold under many well recognized brand names including ADVENT,
AR/ACOUSTIC RESEARCH, JENSEN, PHASE LINEAR and NHT/(NOW HEAR THIS) in the United
States and MAGNAT and MACAUDIO, each a recognized brand in Germany. This
acquisition has made Recoton one of the world's largest marketers of home
speakers and mobile audio speakers and electronics.
The products which Recoton sells, most of which are accessories or
other products purchased after a consumer has purchased an audio or video
system, game platform or information systems, usually carry a higher margin for
the retailer than the hardware which comprises the basic system. Retailers
therefore have an incentive to aggressively market these types of products. For
this and other reasons, Recoton has seen a growth in the floor space which
retailers devote to the sale of accessories. The Company anticipates
continuation of this trend as the consumer electronics industry is entering a
new phase based on digitalization of many of the prevailing technologies.
Recoton believes that DVDs will become the prevailing media for at- home movie
viewing as the superior viewing opportunities of high definition television
becomes prevalent. Recoton also anticipates a growing trend for add-on high
quality speakers as HDTV television monitors, which are often sold without
speakers or only with modest speaker capability, become the core of the home
entertainment system. The Company believes that additional growth opportunities
will emerge through the convergence of consumer electronics and the computer, in
both the home and car environment, and the growth of personal communications
equipment such as cell phones.
INDUSTRY OVERVIEW
The consumer electronics market is large and diverse. It has evolved
from phonographs, radios, home stereos and televisions to now encompass a wide
variety of innovative technologies and products. These include personal
computers (PCs), compact disc (CD) players, camcorders, video cassette recorders
(VCRs), cellular and cordless telephones, video game systems and home theaters.
Some of these products (such as CD players, camcorders and VCRs) have reached a
plateau of maturity, while others (such as cellular telephones, video game
products, computer products and home theater systems) are still growing in
consumer acceptance.
Additionally, the consumer electronics market is undergoing rapid and
frequent changes. Advances in certain technologies for mature products such as
televisions, camcorders and telephones are leading to new innovations such as
high definition television, plasma screen televisions, new television delivery
systems such as direct broadcast satellite (DBS) systems, digital versatile disc
systems, which deliver ultra-high quality pictures and stereo sound, and digital
cameras and camcorders. These advances may herald a new growth in consumer
electronics as they are phased in. The Consumer Electronics Manufacturers
Association (CEMA) has stated that sales of consumer electronics have been
growing at an average of three to five percent a year since 1991 and industry
sales in 1999 are projected to be $79 billion, up by approximately five percent
from the estimated record sales for 1998 of $75 billion.
The broadening and expansion of the consumer electronics market has
been due to a greater awareness of consumer electronics products and changes in
consumer tastes, lifestyles and work habits, including a growing desire to spend
more time at home, whether for relaxation or work. This trend has been seen in
the strong growth in "home theater" listening and viewing environments and
multimedia and video game products and in the increasing popularity of
telecommuting, with the need for more sophisticated home offices. In addition,
many consumer electronic accessories are necessary to maintain and operate
consumer electronics products while others are used to expand, upgrade or
enhance the functionality of particular products.
The nature of retail marketing for consumer electronics products has
been evolving in recent years. Certain types of retailers, such as traditional
department stores, have withdrawn from the market but other types of retailers,
such as large national consumer electronics superstores and other mass
merchants, have become more prevalent. Simultaneously, more small retailers such
as drug stores and food markets are carrying consumer electronics items for the
convenience of their customers. It is expected that these trends towards both
larger "big box" discount stores and smaller convenience-oriented local
retailers will continue. The Company's distribution channels have similarly
evolved as the market for its products has changed.
The gross profit margins realized by retailers on accessories are
typically higher than those on electronics components because consumers often
purchase accessories without price comparison. Additionally, inventory costs
and floor space required to display and sell accessories are substantially less
than what is necessary to sell equipment. Retailers also have found that a broad
offering of accessories provides additional services to the consumer, which
allow retailers to differentiate themselves from their competitors. In addition,
retailers recognize that having accessories available can encourage add-on sales
to a consumer electronics purchase, lead to impulse purchases and encourage
repeat visits by customers, all of which provide the opportunity to sell
additional consumer electronics products and accessories.
Recoton believes that retailers are increasing their efforts to market
accessories, speakers, multimedia products and electronic game products by
increasing floor space devoted to those products, enhancing their in-store
accessory staffing and merchandising and spending more on accessory advertising
and promotion. Recoton believes that in order to achieve greater purchasing and
operating economies and to reduce costs, retailers are consolidating their
relationships with suppliers that offer a broad assortment of consumer
electronics accessories and can provide timely product availability and strong
merchandising support.
PRODUCTS
Recoton offers a broad line of over 4,000 consumer electronics
products for home, office and mobile aftermarket use in many consumer
electronics categories. Its products are offered under a number of brand names,
many of which are recognized by consumers and all of which the Company believes
are valued by its retail customers. These products are positioned, packaged and
priced to appeal to a broad range of retailers and customers. Recoton's
capabilities enable it to market its products through multiple retail channels
and to competing retailers within specific retailer categories.
VIDEO AND COMPUTER GAME
The Company markets video and computer game peripherals under the
INTERACT brand, including joysticks, controllers, game steering wheels
(including the best-selling V-3 and the new force feedback V-4 steering wheels),
and other products to enhance the enjoyment of playing video and computer games.
One of the more unique products offered by the Company is the GAME SHARK(R), a
device for use with Sony PlayStation, Nintendo 64 and PCs which contains
hundreds of codes to give the player tips on how to win many of the most popular
games. Certain of these products are also sold under the Sony and Nintendo brand
names pursuant to licenses granted to the Company. The Company also markets an
extensive computer and multi-media accessory product line, sold under the
INTERACT brand name, including UL-listed surge protection devices, connection
cables, disc and disc drive cleaning products, dust covers, copy holders, and
mouse and wrist pads, as well as shielded computer speakers, sold under the
ADVENT, JENSEN and AR brand names. Recoton believes it is the largest third-
party provider of video and computer game peripherals and that video gaming is
one of the fastest growing sectors of the consumer electronics industry.
RAC
Home audio products, 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, include state-of-the-art designed high-fidelity,
high-performance stereo and home theater loudspeaker systems. Each of the
speaker lines is positioned to reach a different target customer. Audio products
for the automobile and marine aftermarket, sold under the Advent, JENSEN, LINEAR
RESEARCH, NITRO, PHASE LINEAR and ROAD GEAR brand names in the United States and
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. Recoton
believes it is a leading marketer of high-fidelity speakers and other audio
products for the home and automobile audio markets.
ACCESSORIES
Recoton offers a wide variety of accessory products to interconnect,
accessorize and maximize the enjoyment of various consumer electronics products
and systems. These include antennas; audio, CD/audio and/or cassette
accessories; camcorder and video accessories; carrying and storage cases;
cellular and other telephone accessories; headphones; mobile audio accessories;
and remote controls. These are sold under the AAMP, AR/ACOUSTIC RESEARCH,
INTERACT, JENSEN, PERFECTCASE, PERIPHERAL, ROAD GEAR, ROLLING STONE, ROSS, SOLE
CONTROL, SOUND QUEST, SPRINT and STINGER brand names, depending on the product.
Recoton also markets a proprietary line of wireless products, sold under the
ADVENT, JENSEN and RECOTON brand names, which includes stereo headphones,
amplified speaker systems, video broadcast systems, and a portable
indoor/outdoor weather-resistant speaker. These products use patented 900 MHz,
863MHz, 433 MHz and 2.45 GHz technology to transmit pictures and sound signals
from a TV, VCR, cable box, satellite box, stereo or sound system through walls,
floors and ceilings to stereo headphones, amplified indoor/outdoor loudspeakers
or other television sets within 150 feet.
CUSTOMERS AND DISTRIBUTION
Recoton seeks to provide consumers with access to its products on a
global basis in multiple countries through multiple distribution channels and at
multiple price points. The customers for the Company's products for its segments
except as noted include consumer electronics, computer and office supply
superstores, mass merchants, catalog showrooms, direct mail merchants, TV
shopping channels, warehouse clubs and music and video chains (office supply
superstores and music and video chains do not generally purchase home and mobile
audio products) . Recoton has a strong, diverse and growing customer base of
more than 1,000 retailers which the Company believes have more than 30,000
storefronts.
Recoton also makes significant sales of selected accessories products
to original equipment manufacturers and via private labels to other accessory
vendors which purchase Recoton's audio, video, CD and telephone accessories,
loudspeakers and wireless products. The Company also has two factory outlet
stores (one in Florida and one in Arizona).
During the past few years, Recoton has expanded its presence in the
global marketplace. The acquisition of IJI (now Recoton Audio Corporation) with
its European subsidiaries in 1996 has led to significant growth in European
sales in all product lines. Through RAC's United Kingdom, German and Italian
subsidiaries and Recoton's Hong Kong distributor subsidiary, Recoton markets and
distributes a growing portion of its product line to European retailers and
distributors. Through Recoton Canada Ltd., the Company markets and distributes
its full product lines to Canadian retailers. Through STD and Recoton's Hong
Kong distributor subsidiary, it sells Asian-sourced products to other Recoton
subsidiaries and OEM customers around the world. Sales in Europe are considered
part of the RAC business and sales in Canada are considered part of the
accessories business. Recoton views its international customer base as an
important source for continued growth. Information with respect to Recoton's
operations by geographic area is set forth in the financial statements (see Note
P of the Notes to Financial Statements).
Most of Recoton's customers operate on a purchase order basis and
Recoton does not ordinarily have long term contracts with its customers. In
addition, due to the allocation of retail shelf space to suppliers of products
far in advance of the placement and shipment of orders for such products,
Recoton's sales are reliant to a great extent on its ability to influence such
allocations prior to order placement. Because it is the Company's practice to
maintain sufficient inventory of finished goods and components to fill orders
promptly, the level of backlog is not significant nor can it be considered to be
an important predictor of future performance.
Wal-Mart was a significant customer of the RAC and video and computer
game segments in 1997 and 1998. In 1997 and 1998, sales to Wal-Mart represented
approximately $57.0 million and $120.5 million, or approximately 11% and 17% of
the consolidated revenues for each year, respectively. No other customer
represented greater than 10% of Recoton's consolidated revenues in 1997 or 1998
and no customer represented greater than 10% of the Company's consolidated
revenues in 1996.
SALES, MARKETING AND CUSTOMER SUPPORT
Recoton's marketing strategy is to develop strong relationships with a
broad array of customers. Recoton seeks to establish "partnership" relationships
with the retailers selling its products. One way this is done is by offering
"one stop shopping" for a wide variety of consumer electronics accessories, so
as to better attract and support retailers who are consolidating their vendor
relationships to achieve greater purchasing and operating economies. Another
strategy used to solidify such relationships is to offer extensive marketing,
inventory management and customer support services. These services include
consumer support programs, distinctive packaging, multiple brand names to choose
from, drop shipping, electronic data interchange, extensive product promotion,
in-store inventory management, pre-ticketing services and in-store product
displays and training.
Recoton further supports its products by advertising in leading trade
and consumer publications, participating in trade shows and engaging in a wide
variety of regional promotions and sales incentive programs. The Company also
advertises and provides support for both its retail customers and consumers
through several Internet web sites, including WWW.RECOTON.COM, WWW.RCOT.COM and
WWW.INTERACT-ACC.COM among many others.
The Company's distribution and sales strategy involves the utilization
of a worldwide network of sales executives, regional managers, independent sales
representatives and exclusive distributors. Recoton compensates its independent
sales representatives on a commission basis. Regional sales personnel work in
the field with Recoton's customers and independent sales representative
organizations. The Company also maintains a toll free support center, staffed
five days per week, 12 hours per day, to aid consumers in the U.S. and Canada.
WORKING CAPITAL PRACTICES
The Company generally carries significant inventory in the products
which it offers in order to meet customer needs for just-in-time delivery. This
increases its capital requirements. Since most of the items held in inventory
are considered staples that can be sold at least at cost, the Company does not
believe that it is at any significant risk of inventory obsolescence for these
items. Customers are generally billed at normal trade terms with payment terms
ranging from 30 to 60 days. With the exception of the Company's inventory and
billing practices, the Company does not have any extraordinary working capital
requirements. Consistent with the needs to supply products to its customers,
inventories are closely controlled and maintained at levels related to product
cycles and responsive to normal delivery requirements of customers.
ACQUISITIONS
A significant part of Recoton's growth strategy has been to expand its
business through the pursuit of strategic acquisitions. Through 14 acquisitions
since 1989, Recoton has:
o OBTAINED NEW PRODUCTS AND TECHNOLOGIES, as it did with stereo
headphones when it acquired Calibron in 1989, antennas when it
acquired All Channel Products in 1989, maintenance products when it
acquired Discwasher in 1991, camcorder and video accessories when it
acquired Ambico in 1992, remote controls when it acquired Infrared
Research in 1994, mobile audio installation products when it acquired
Ampersand in 1995 and video and computer game accessories when it
acquired STD in 1995;
o SIGNIFICANTLY EXPANDED ITS PRESENCE IN SPECIFIC PRODUCT LINES, as it
did with television antennas when it acquired Parsec in 1991, speaker
and other audio products when it acquired IJI in 1996 and mobile
audio installation products when it acquired AAMP in 1997;
o INCREASED ITS MANUFACTURING CAPACITY, as it did with the Company's
original Florida plant (which was subsequently expanded) when it
acquired Calibron in 1989, the Chinese manufacturing facilities when
it acquired STD in 1995 and the Benecia, California facilities when it
acquired IJI in 1996;
o ENHANCED OVERSEAS DISTRIBUTION CAPABILITIES, as it did when it
acquired IJI and HECO in 1996 and Tambalan in 1997;
o OBTAINED NEW MARKETING TECHNIQUES, as it did with the direct marketing
talents when it acquired AAMP in 1997; and
o BROADENED ITS CUSTOMER BASE, as it did when it acquired STD in 1995
and IJI in 1996.
Recoton seeks to maximize the benefit of each acquisition by
consolidating overhead expenses and leveraging sales and marketing expertise.
While there may be certain duplications of expenses immediately following an
acquisition, Recoton aims to achieve cost savings from the introduction of
efficiencies of scale, thereby making Recoton and its products more competitive.
Recoton intends to continue to acquire businesses and assets that will
compliment its existing business and are consistent with its financial resources
and existing debt covenants. Recoton regularly evaluates acquisition
opportunities as they are presented to the Company.
RESEARCH AND PRODUCT DEVELOPMENT
Recoton's research and development efforts are primarily oriented
towards meeting consumers' desires for changing products to accessorize or
supplement existing and new consumer electronics technologies. Recoton seeks to
continuously enhance its products to remain a leader in the consumer electronics
after-market. In conjunction with its agents, customers and contract
manufacturers, the Company continuously reviews its product lines and
identifies, develops and introduces in a timely fashion new accessory products
for growing areas of consumer demand. These efforts focus primarily on improving
existing products and utilizing what the Company knows about these products to
devise similar products in other emergent categories, rather than on conducting
more speculative research.
Recoton maintains research and development facilities for its
accessories business in Florida and Illinois, for its RAC business in Florida
and California and for its video and computer game business in Hong Kong and
California. In addition it utilizes from time to time selected outside
engineering services. Recoton has been recently expanding its engineering
department to increase its in-house development capabilities. This expansion has
included the establishment of a digital engineering group for its video and
computer game business to take advantage of the expected digital revolution in
consumer electronics.
Research and development efforts for video and computer game products
include producing new gaming and sound-related products to enhance video game
platforms and entertainment applications for multimedia personal computers. In
development are additions to the Company's line of joysticks and controllers for
use with Nintendo 64-bit consoles, Sony PlayStation, the soon-to-be-introduced
128-bit Sega Dreamcast system and personal computers.
Significant efforts on producing new and advanced home and audio
loudspeaker systems include the redesigning of the speaker lines sold under the
ADVENT, JENSEN and NHT brands and the addition of models to the AR/ACOUSTIC
RESEARCH line of speakers.
900 MHz and other wireless technology products in development include
advanced headphones and speakers permitting Recoton to offer its wireless audio
and video products on a worldwide basis, and a spread-spectrum transmission
system for wireless audio and video that provides low-interference,
longer-distance, high-end CD-quality performance for wireless audio, video and
security video products. The Company is also engaged in customer-funded R&D
efforts for certain specific prospective applications of its wireless technology
to products manufactured by other companies.
Recoton's use of in-house industrial designers, software developers
and engineers and other capabilities have been a major strength in obtaining and
increasing its OEM business.
Through its continual product development efforts, Recoton believes
that it has been able to establish new retail accounts, enhance existing
customer relationships, attract a growing base of consumer electronics companies
as OEM customers and differentiate itself from its competitors.
In 1996, 1997 and 1998, Recoton's expenditures for research and
development were approximately $2.9 million, $4.2 million and $6.0 million,
respectively. In addition, the Company's expenditures for product and packaging
design were approximately $1.3 million, $2.5 million and $3.2 million,
respectively. The growth in research and development expenditures from 1996 to
1997 was primarily reflective of a full year of operations of the audio
operations acquired from IJI, and the increase from 1997 to 1998 was primarily
reflective of increased efforts to develop new products.
PRODUCTION AND SUPPLY
Recoton's manufacturing strategy is to produce high-quality consumer
electronics products for its retailer and OEM customers through a cost-efficient
production process.
Recoton utilizes its own Chinese manufacturing facilities, as well as
third-party manufacturers or suppliers located primarily in China, for most of
its products or components of such products. SEE "ITEM 2. PROPERTIES." The
Company's vendors are required to manufacture products in accordance with strict
specifications and quality control standards set by Recoton, in either finished
form or as components for assembly at Recoton's Florida, California or China
facilities.
Most products which Recoton manufactures use standard parts and
components which can be purchased from multiple sources. In a few instances,
however, a business decision has been made to source certain components and
products from one or a small number of suppliers for certain business reasons,
such as attractive pricing. Recoton's wireless products are currently the only
major product which is sourced from one third party vendor, who subcontracts
component manufacturing to other sources. Substantially all of the Company's
video and computer game accessories and, increasingly, other products are
sourced from Recoton's Chinese manufacturing facility. While the Company does
not have guaranteed supply arrangements with any of its suppliers, it has never
experienced an inability to obtain necessary components or other raw materials.
The Company believes that its sources and supply of components and other raw
materials are adequate for its needs. No single third-party vendor or group of
related vendors has provided more than 10% of the Company's raw material and
component purchases in any of the years 1996 through 1998.
Recoton coordinates most of its offshore sourcing for the North
American market with its buying agents. These agents coordinate information
flows with Recoton's suppliers, provide translation services, facilitate
financing, conduct quality control inspections and oversee shipping. Recoton's
high volume allows it to consolidate shipments and ship frequently, thereby
obtaining preferential shipping rates and lowering costs. It has been necessary,
however, from time to time to utilize more expensive air shipments in order to
meet customers' time sensitive needs. Recoton's Hong Kong subsidiaries
coordinate sourcing and shipping to customers located outside of the United
States.
COMPETITION
The consumer electronics market is highly fragmented and subject to
intense competition. In each segment, Recoton's competitors include
manufacturers and suppliers of consumer electronics accessories, consumer
electronics equipment manufacturers that market their own lines of accessories,
various companies which offer broad lines of consumer electronics products,
companies which offer certain product lines and manufacturers of brand name
consumer electronics hardware.
Specific competitors by segments include:
o VIDEO AND COMPUTER GAME: Altec-Lansing, Fellows, Labtech, Logitech,
Microsoft, Nintendo, Sega, Sony and Thrustmaster;
o RAC: Bose, Boston Acoustics, Harmon Industries and Polk for home
audio products and Kenwood, Pioneer, Audiovox and Sony for mobile
audio products; and
o ACCESSORIES: Allsop, Gemini/Magnavox, Thomson/RCA, Sony and Zenith.
Shelf space is a key factor in determining sales of consumer
electronics products. The allocation of retail space is influenced primarily on
the basis of company and brand name reputation, product variety and quality,
customer service and support, product reliability, the ability to meet customer
delivery needs, price, product features and the proprietary nature of certain
products. Recoton believes that it competes favorably with respect to these
factors.
TRADEMARKS AND PATENTS
Recoton believes that it has established a high level of brand name
recognition with its retailers and their customers. SEE "--PRODUCTS" for a
discussion of the various marks used for products.
As a result of its own product development, acquisitions and exclusive
and non-exclusive licenses, Recoton has many United States and foreign patents,
including patents on its 900 MHz wireless products, speakers, headphones,
amplifiers, non-contact hydrodynamic multimedia compact disc cleaning product,
CD-to-cassette adapter, antennas, connectors and adapters to eliminate tangles
in coiled telephone cords. Additionally, Recoton has various patents pending
including applications relating to speakers, surge protectors, remote controls
and car stereos and routinely applies for other patents on products as they are
developed. The Company does not consider any patents or trademarks essential to
its business.
Recoton licenses certain of its proprietary rights for use in products
manufactured by others and has licensing agreements with other companies (such
as Sprint, Straight Arrow Publishing Company for Rolling Stone, Nintendo and
Sony) to sell Company-made products under their marks. Neither the annual
royalties received nor the royalties paid under these licensing agreements are
significant to the Company's operations.
Recoton attempts to protect its proprietary information under domestic
and international patent, copyright and trade secret laws and through the use of
other safeguards. Recoton on occasion receives communications from others
asserting that certain of Recoton's products may be covered by such parties'
patent or intellectual property rights. Recoton believes that its products do
not infringe on the intellectual property rights of any third parties.
EMPLOYEES
At December 31, 1998, Recoton had approximately 4,800 employees
worldwide, of which approximately 3,270 are employed by the video and computer
game segment, 370 are employed by the RAC segment and 1,160, including corporate
administrative personnel, are employed by the accessories segment. The number of
employees employed at STD's Chinese manufacturing facility fluctuates
significantly on a seasonal basis.
Approximately 650 employees at Recoton's Lake Mary, Florida premises
are covered by a collective bargaining agreement with the Glass Molders,
Pottery, Plastics & Allied Workers International Union, which expires on August
3, 1999. As Florida is a "right to work" state, only approximately 27 employees
are currently members of the union. Approximately 39 employees in Canada are
covered by a collective bargaining agreement with the National Automobile,
Aerospace, Transportation and General Workers Union, which expires on August 10,
2000. At this time Recoton considers its employee relations to be good.
REGULATORY AND ENVIRONMENTAL MATTERS
With operations in numerous jurisdictions, the Company is subject to
many national, state and local laws of general business applicability. These
include laws regulating occupational, health and safety and the work place
environment; discrimination and sexual harassment; removal or remediation of
certain hazardous substances; the importation and exportation of products; the
marketing, advertising and sale of goods; customs and foreign trade; and
payments to foreign governments and their officials. In addition, the Company
may be subject from time to time to regulation by certain federal agencies
relating to its products, including the Federal Communications Commission with
respect to its wireless transmitting devices and certain computer and video game
accessories. Additional laws may be enacted from time to time which may
adversely impact the Company. Under various national, state and local
environmental laws and regulations, a current or previous owner or operator
(including a lessee) of real property may become liable for the cost of removal
or remediation of hazardous substances on such property. Such legal requirements
often impose liability without regard to fault. Although the Company has not
been notified of, and is not aware of, any environmental liability in connection
with its leased and owned facilities, there can be no assurance that the Company
will not be required to bear any such costs in the future.
SEASONALITY
The Company's results of operations are subject to the seasonality of
the consumer electronics industry and, as a result, net sales and net income
have on an historical basis been substantially greater during the third and
fourth quarters of each year, as the Company's retail customers increase their
inventories in anticipation of the year-end selling season, than during the
first two quarters. Historically, the Company's net sales in each quarter have
exceeded net sales in the comparable quarter of the prior year. However, sales
in the first and second quarters in each year have tended to be lower than sales
in the third and fourth quarters of the previous year. A significant reason for
this, in addition to seasonality, is that most of the Company's significant
acquisitions have occurred in the third or fourth quarters. The Company's
results of operations may also fluctuate on a quarterly basis due to product
sales mix and the timing of significant orders, new product introductions and
acquisitions.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of
the directors and executive officers of the Company as of December 31, 1998. The
executive officers of the Company are appointed by the Board of Directors of the
Company and serve at the discretion of the Board of Directors. The members of
the Board are each elected to three year terms, approximately one-third of which
expire each year.
Name Age Positions (End of Term as Director)
- ---- --- -----------------------------------
Robert L. Borchardt 60 Director (1999); President, Chairman of the
Board and Chief Executive Officer
Stuart Mont 58 Director (1999); Chief Operating Officer,
Chief Financial Officer, Executive Vice
President-Operations and Secretary
Peter Wish 63 Director (2000); Executive Vice President-
Administration
Joseph H. Massot 54 Director (2001); Vice President, Treasurer,
Principal Accounting Officer and Assistant
Secretary
Stephen Chu 41 Director (2000); President of STD Holding
Limited
George Calvi 48 Director (1999)
Paul E. Feffer 77 Director (1999)
Irwin S. Friedman 64 Director (2001)
Joseph M. Idy 58 Director (2001)
Ronald E. McPherson 69 Director (2000)
Terrence O' Flynn 54 Senior Vice President-OEM Sales and
Executive Vice President-Sales & Marketing
of the Recoton Accessories Division
Dennis P. Wherry 53 Senior Vice President-Operations
Craig W. Dykes 40 Vice President-Information Systems
Peter M. Ildau 60 Vice President-Corporate Communications
Arnold Kezsbom 46 Vice President-Financial Planning
Richard D. Miller 36 Vice President-Compliance
The business experience, principal occupations and employment, as well
as period of service, of each of the directors and executive officers of the
Company during at least the last five years are set forth below:
ROBERT L. BORCHARDT has served as a director of Recoton since 1964, as
President since 1976, as Chief Executive Officer since 1996 and as Chairman
since June 1998. He was Co-Chairman from 1992 until June 1998, Co-Chief
Executive Officer from 1992 until 1996, Executive Vice President from 1969 until
1976, a Vice President from 1964 until 1969 and Treasurer from 1969 until 1975.
Mr. Borchardt began working for the Company in 1961. He is on the Executive
Board of the Consumer Electronic Manufacturing Association (CEMA), a division of
the Electronics Industries Alliance (EIA), is on the Board of Governors of the
Electronic Industries Alliance and is a trustee of the Electronics Industries
Foundation.
STUART MONT has served as a director of Recoton since 1975, as Chief
Operating Officer since 1993, as Chief Financial Officer since 1992, as
Secretary since 1989 and as Executive Vice President- Operations since 1992. He
was a Vice President from 1978 until 1989, Senior Vice President from 1989 until
1992, and Treasurer from 1975 until 1989. Mr. Mont has also served as President
of Recoton Canada Ltd. since 1992.
PETER WISH has served as a director of Recoton since 1969 and as
Executive Vice President- Administration since 1992. Mr. Wish was Vice President
from 1969 until 1976 and Executive Vice President from 1976 until 1992.
JOSEPH H. MASSOT has served as a director of Recoton since 1985, as
Principal Accounting Officer, Vice President and Treasurer since 1989 and as
Assistant Secretary since 1983. He was Recoton's Controller and Assistant
Treasurer from 1978 until 1989.
STEPHEN CHU has served as a director of Recoton since 1997, as
President and a Managing Director of STD and of its various subsidiaries since
1990, and as President of Recoton Japan Inc. since 1998. STD was acquired by the
Company in 1995.
GEORGE CALVI has served as a director of Recoton since 1984. Mr. Calvi
was Vice President from 1978 until 1988, Senior Vice President-Sales and
Marketing from 1988 until 1992 and Executive Vice President-Sales and Marketing
of the Company from 1992 until 1996.
PAUL E. FEFFER has served as a director of Recoton since 1996. He has
been Chairman of Feffer Consulting Co., Inc., an international media consulting
firm, since 1991. Mr. Feffer founded Feffer and Simons Inc. in 1955, which was
sold to Doubleday & Co. in 1962 (where he remained as President of the
subsidiary Feffer and Simons until 1986) and was Chairman of Baker & Taylor
International, a subsidiary of W. R. Grace & Co., from 1987 until 1991. From
1991 to 1996 he was a consultant to Merck & Company's publishing division.
Feffer & Simons and Baker & Taylor specialized in international publishing and
book and magazine distribution and development of overseas markets for U.S.
publishers.
IRWIN S. FRIEDMAN has served as a director of Recoton since 1982. Mr.
Friedman has been President, Chief Executive Officer and the principal
shareholder of I. Friedman Equities, Inc., a corporate financial consulting
firm, for more than five years. He has also been a director of The Kushner-
Locke Company, a California-based publicly-traded media company, since June
1998.
JOSEPH M. IDY has served as a director of Recoton since 1990. Mr. Idy
has been a stockbroker and money manager at PaineWebber Inc. for more than
fifteen years and Senior Vice President of PaineWebber Inc. since 1989.
RONALD E. MCPHERSON has served as a director of Recoton since 1969. He
was Secretary of Recoton from 1964 and a Vice President from 1978, until his
retirement in 1989.
TERRENCE O'FLYNN has served as Senior Vice President-OEM Sales since
1996 and Executive Vice President-Sales & Marketing of the Recoton Accessories
Division since January 1999. He was Senior Vice President-Marketing from 1994
until 1996. Previously, Mr. O'Flynn was Director of Marketing of the Ladies
Professional Golf Association from 1993 to 1994, President and a member of the
Board of Directors of Mitsubishi Electronics America - Consumer Products Group
from 1990 to 1993 and, prior to 1990, Executive Vice President of Mitsubishi
Electronics America - Consumer Products Group.
DENNIS P. WHERRY has served as Senior Vice President-Operations since
1993. He was Senior Vice President-Operations of Recoton's Calibron Division
from 1991 until 1993. Between 1989 and 1991, Mr. Wherry was an employee of the
Company responsible for Florida operations. Mr. Wherry was President of
Calibron, Inc. from 1985 until its assets were acquired by the Company in 1989.
CRAIG W. DYKES has served as Vice President-Information Systems since
1991. He was Director of Information Systems from 1987 until 1989 and an
Assistant Vice President from 1989 until 1991.
PETER M. ILDAU has served as Vice President-Corporate Communications
since 1993. He was Director of Marketing from 1990 until 1991 and Vice
President-Advertising between 1991 and 1993.
ARNOLD KEZSBOM has served as Vice President-Financial Planning since
1995 (such position was made an executive office in June 1998) and a Vice
President of Recoton Canada Ltd. since 1994. He was Vice President, Sales and
Marketing of the Ambico and Discwasher Divisions from 1992 until 1995. Mr.
Kezsbom was Vice President/General Manager of Ambico, Inc. from 1991 until it
was acquired by Recoton in 1992.
RICHARD D. MILLER has served as Vice President-Compliance since 1995.
He was Recoton's Compliance Officer from January 1995 until December 1995.
Previously, he was a Trade Specialist (April 1992-January 1995) and Import
Specialist (January 1989-April 1992) with the U.S. Customs Service.
ITEM 2. PROPERTIES.
Recoton considers its facilities to be modern, well maintained and
suitable for their present and intended purposes at the current level of
operations.
CORPORATE OPERATIONS AND ACCESSORIES BUSINESS
Recoton's principal executive office and the principal manufacturing,
assembling, packaging, product research and development, warehousing and
distribution operations for the accessories business are located in Lake Mary,
Florida, a suburb of Orlando. Operations at this facility include molding, hot
stamping and packaging. The Lake Mary complex, which is owned by the Company,
consists of two buildings totaling approximately 763,000 square feet, including
a recent warehouse addition of approximately 318,000 square feet, situated on
two nearby parcels totaling approximately 43 acres.
RAC BUSINESS
The home audio portion of RAC's business is based in several
contiguous leased buildings aggregating approximately 100,000 square feet in
Benecia, California, which includes office, sales, marketing, research and
development, manufacturing, assembly, warehouse and distribution facilities.
Operations conducted at this facility include the assembly of home speakers. The
leases run through December 31, 2002, with a five year renewal option, at an
aggregate annual rent of approximately $670,000, subject to annual adjustments.
The mobile audio portion of RAC's business is based in the Company's Lake Mary,
Florida facility.
VIDEO AND COMPUTER GAME BUSINESS
The administrative, sales, engineering and R&D operations for STD are
located in an approximately 15,800 square foot owned facility in the New
Territories of Hong Kong. The Company's rights on the underlying land runs
through June 2047; if the land grant is not renewed at that time, both the land
and the rights to owned space will revert to the government without any
compensation to the Company. The Company also leases two nearby facilities
aggregating approximately 9,800 square feet under short term leases with rent
aggregating approximately $99,000. The corporate office for InterAct is located
in leased facilities in Baltimore, Maryland. The Company does not anticipate any
difficulty obtaining renewals of these leases or additional nearby space if
necessary.
The manufacturing facility for STD consists of numerous separate
contiguous or near-by facilities owned or leased by the Company, aggregating
approximately 556,000 square feet, located in Shenzhen, a special economic zone
of the Guanzdong Province of China near Hong Kong. The plant includes 26
production lines, plastics injection facilities and metal works. Video games and
computer accessories, as well as other Recoton products such as multimedia
speaker systems, universal remote controls, television antennas, CD and DVD
cleaners, are manufactured at this facility. In 1997, the facility was certified
as conforming to the requirements of ISO 9001 by the International Standards
Organization. The owned portion consists of five manufacturing floors in an
industrial building aggregating approximately 44,000 square feet. The Chinese
government has granted the Company the right to use the land on which the owned
facility is located until July 2025; if the land grant is not renewed, both the
land and the rights to owned space will revert to the government without any
compensation to the Company. The leased portion consists of additional
manufacturing and warehouse facilities aggregating approximately 385,000 square
feet. These leases are generally short term, and aggregate rentals for the
leased facilities total approximately $890,000 per year. The Company does not
anticipate any difficulty obtaining renewals of these leases or additional
nearby space if necessary.
ADDITIONAL FACILITIES
Recoton and its subsidiaries have additional leased facilities
elsewhere in the United States. These include corporate office, sales,
marketing, warehouse and/or research & development facilities in or near New
York, New York; Richmond, Virginia; Bentonville, Arkansas; Ft. Lauderdale,
Florida; Lake Mary, Florida; Clearwater, Florida; Des Plaines, Illinois;
Springfield, Missouri; Scottsdale, Arizona; Lake Tahoe, Nevada; Sparks, Nevada;
Benecia, California; Santa Clara, California; and San Diego, California.
Additional overseas facilities include office, sales, marketing, warehouse
and/or distribution facilities in Pickering, Ontario; Bolton, England; London,
England; Pulheim, Germany; Bologna, Italy; Milan, Italy; and Tokyo, Japan. If
the leases for these facilities could no longer be maintained, alternative
replacement facilities could be obtained without any material financial impact
on Recoton or the applicable subsidiary.
ITEM 3. LEGAL PROCEEDINGS.
The Company is the subject of an investigation being conducted by the
United States Customs Service and the United States Attorney's Office in
Orlando, Florida. In July 1994, agents of the United States Customs Service,
working with the United States Attorney's Office in Orlando, Florida, seized
property and business records from the Company's facility pursuant to a search
warrant. The investigation has focused on country of origin marking, duty
undervaluation, duty-free eligibility under the Caribbean Basin Initiative,
duties with respect to dies, molds and tooling used overseas, commissions paid
to agents, importation of merchandise subject to textile quota, other instances
of undervaluation and other miscellaneous matters, during the period 1989
through mid-1995. The Company has held extensive discussions with the U.S.
Customs Service and the U.S. Attorney's Office with a view towards reaching a
settlement of this matter. The Company expects to soon reach agreements with the
U.S. Attorney's Office and the U.S. Customs Service to settle all outstanding
criminal and civil matters involved in the 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. The Company has recorded a one-time charge of $14.0 million for this
global settlement, which, together with related fees and costs of approximately
$1.0 million, has been reflected in its financial statements for the fourth
quarter of 1998. Neither the U.S. Attorney's Office nor the U.S. Customs Service
has been asked to approve the description of this matter.
Although the Company is from time to time involved in ordinary routine
litigation incidental to its business, it is not presently a party to any other
legal proceedings which, if determined adverse to the Company would be expected,
either individually or in the aggregate, to have a material adverse affect on
the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common shares are traded on the Nasdaq Stock Market
National Market System under the symbol "RCOT." The following table sets forth
for the periods indicated the high and low sale prices of such shares as
reported on the Nasdaq Stock Market since January 1, 1997:
QUARTER ENDED HIGH LOW
1997
March 31............................... $17.125 $13.125
June 30................................. 14.25 11.00
September 30............................ 16.50 11.50
December 31............................. 15.375 12.50
1998
March 31................................ 27.50 13.125
June 30................................. 36.25 23.00
September 30............................ 39.438 16.625
December 31............................. 24.00 13.50
1999
March 31 (through March 23, 1999)....... 21.75 12.00
On March 23, 1999, the last reported sale price for the Company's
common shares on the Nasdaq Stock Market was $14.50 per share. As of March 23,
1999, there were 428 record holders of the common shares.
DIVIDEND POLICY. The Company has never paid cash dividends on its
common shares and does not anticipate paying cash dividends on its common shares
in the foreseeable future. The Company's policy has been to retain all available
earnings for the development and growth of its business. Pursuant to covenants
in certain adjustable rate senior notes issued by Recoton, the Company may not
pay dividends in cash or property unless the aggregate of all dividends, plus
other restricted payments (as defined) and basket investments (as defined) does
not exceed $5 million plus 50% (or minus 100% in the case of a loss) of
consolidated net income for the period commencing on January 1, 1997 and ending
on and including the last day of the fiscal quarter of the Company most recently
ended as of the date such basket investment is made or such dividend or other
restricted payment is declared or made; and the Company is not in default under
such senior notes. In deciding whether to pay dividends in the future, the
Company's Board of Directors will consider factors it deems relevant, including
the Company's earnings and financial condition and its working capital and
capital expenditure requirements.
SALES OF UNREGISTERED SECURITIES. There were no sales of unregistered
shares by the Company in 1998.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below as of and for
each of the fiscal years in the five-year period ended December 31, 1998 are
derived from the consolidated financial statements of Recoton Corporation and
its subsidiaries, which financial statements have been audited by Cornick,
Garber & Sandler, LLP, independent public accountants, whose report relating to
the consolidated financial statements for the three years ended December 31,
1998 appears in this report. Due to the significant acquisition activity of the
Company during the periods set forth below, the selected financial data may not
be comparable from year to year. SEE FOOTNOTE (1) BELOW. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Acquisitions" and the consolidated financial statements, notes
thereto and other financial information included elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
(In Thousands, except income per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:(1)
Net sales......................................... $163,973 $212,677 $331,700 $502,048 $700,408
Cost of sales..................................... $ 97,317 $129,981 $206,715 $306,725 $429,334
Gross profit...................................... $ 66,656 $ 82,696 $124,985 $195,323 $271,074
Selling, general and
administrative expenses........................ $ 49,454 $ 62,747 $109,194 $175,873 $229,452
Provision for expected U.S.
customs settlement(2) .......................... $ - $ - $ - $ - $ 15,000
Operating income.................................. $ 17,202 $ 19,949 $ 15,791 $ 19,450 $ 26,622
Interest expense.................................. $ 608 $ 793 $ 4,946 $ 12,496 $ 17,920
Investment income................................. $ (479) $ (569) $ (271) $ (534) $ (464)
Income before income taxes........................ $ 17,073 $ 19,725 $ 11,116 $ 7,488 $ 9,166
Income tax provision (credit)..................... $ 5,269 $ 4,672 $ 2,736 $ (6,093) $ 4,836
Net income........................................ $ 11,804 $ 15,053 $ 8,380 $ 13,581 $ 4,330
Income per share(3)............................... $ 1.13 $ 1.34 $ .73 $ 1.18 $ .36
Weighted average shares (4)....................... 10,421 11,255 11,542 11,546 12,179
BALANCE SHEET DATA (END OF PERIOD):
Working capital................................... $ 96,402 $158,807 $222,388 $178,295
$ 83,223
Total assets...................................... $118,764 $185,054 $334,733 $407,262 $486,670
Short-term debt, including current
portion of long-term debt....................... $ 863 $ 18,307 $ 51,628 $ 14,570 $104,885
Long-term debt.................................... $ 5,221 $ 20,511 $101,753 $161,427 $114,186
Shareholders' equity.............................. $ 96,634 $119,397 $128,474 $139,283 $147,995
---------------
(1) Data reflects sales, and any resulting profit and income, resulting from
acquisitions from the dates of such acquisitions. The following
acquisitions occurred on the dates set forth below: Infrared Research
Laboratories, Inc.: January 11, 1994; Sound Quest, Inc.: September 16,
1994; Ampco Industries, Inc.: February 27, 1995; STD Holding Limited:
August 31, 1995; International Jensen Incorporated: August 28, 1996;
Heco GmbH: December 20, 1996; Tambalan Limited: February 28, 1997; Capa
Industries, Inc.: December 18, 1997; and AAMP of Florida, Inc.: November
19, 1997.
(2) In the fourth quarter of 1998, the Company recorded $14.0 million for
the expected global settlement of a pending customs investigation and
related fees and costs of approximately $1.0 million. There can be no
assurance that agreements to settle these matters will be finalized or
approved. The classification of the accrual on the 1998 consolidated
balance sheet is based on the expected periods of payment, subject to
approval by the government. See Note O to the Notes to Consolidated
Financial Statements and Item 3, Legal Proceedings, for further
information.
(3) Represents income per share on a diluted basis. Basic income per share
was $1.18, $1.39, $.74, $1.19 and $.37 for 1994, 1995, 1996, 1997 and
1998 respectively. (4)
(4) As adjusted to give effect to share distributions effected in the form
of stock dividends.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
"SELECTED CONSOLIDATED FINANCIAL DATA" APPEARING ABOVE AND THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997
AND 1998 APPEARING AT PAGES F-1 THROUGH F-32.
GENERAL
Recoton Corporation (with its subsidiaries, Recoton or the Company) is
a global leader in the development, manufacturing and marketing of video and
computer game accessories, home and mobile accessories and other electronic
accessories for aftermarket use. 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 diverse product offerings 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. Prior to 1995, Recoton 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 Holdings 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.
The Company classifies its business into three principal segments.
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 profit on products produced by STD for
and sold by the Company's other business segments has been allocated
to them. In fiscal 1998 approximately 35% of the Company's revenues
were from sales of 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 home and mobile audio products. Home audio
products are sold domestically 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 MAC AUDIO brand names in Europe, include
speakers, subwoofers, amplifiers, cassette receivers, equalizers,
electronic crossovers, signal processors, CD players, CD changers and
installation accessories. In fiscal 1998 approximately 33% of the
Company's revenues were from sales of 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. In fiscal 1998,
approximately 32% of the Company's revenues were from sales of this
segment.
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data of the
Company expressed as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 59.3 61.1 62.3 61.1 61.3
---- ---- ---- ---- ----
Gross profit................................................ 40.7 38.9 37.7 38.9 38.7
Selling, general and administrative expenses................ 30.2 29.5 32.9 35.0 32.8
Provision for expected U.S. customs settlement.............. 2.1
----- ----- ----- ---- -----
Operating income............................................ 10.5 9.4 4.8 3.9 3.8
Interest expense............................................ 0.4 0.4 1.5 2.5 2.6
Investment income........................................... (0.3) (0.3) - (0.1) (0.1)
----- ----- ---- ------- -----
Income before income taxes.................................. 10.4 9.3 3.3 1.5 1.3
Income tax provision (credit)............................... 3.2 2.2 0.8 (1.2) 0.7
----- ----- ----- ------ ------
Net income.................................................. 7.2 % 7.1% 2.5% 2.7% 0.6%
=== === === === ===
</TABLE>
The following table presents certain operating segment information for
the indicated years ended December 31 (further described in Note P to the
Consolidated Financial Statements):
<TABLE>
<CAPTION>
(IN MILLIONS)
Video and Computer RAC Accessories
1998 Game Business Business Business
------------------ ------------- ------------
<S> <C> <C> <C>
Net sales........................... $243.9 $234.1 $222.4
Gross profit........................ 110.4 73.9 86.8
Income (loss) before
income taxes, unallocated
expenses and provision for
expected U.S. customs settlement... 27.4 (0.9) 14.3
Video and Computer RAC Accessories
1997 Game Business Business Business
------------------ ------------ ------------
Net sales........................... $126.3 $182.0 $193.7
Gross profit........................ 64.5 65.6 65.2
Income (loss) before
income taxes(1).................. -- -- --
Video and Computer RAC Accessories
1996 Game Business Business(2) Business
------------------- ------------- ------------
Net sales........................... $79.0 $64.6 $188.1
Gross profit........................ 34.7 21.1 69.2
Income (loss) before
income taxes(1).................. -- -- --
-------------
(1) It is not practicable to provide comparable data for 1996 and 1997
because the Company did not maintain records of certain shared
costs and expenses in prior years.
(2) From date of acquisition on August 28, 1996.
</TABLE>
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.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 was the most successful sales year in Recoton's history. Net
sales increased from 1997 by $198.4 million, or 39.5%, to $700.4 million. The
record sales performance achieved by Recoton in 1998 is primarily the result of
expanded retail distribution, innovative new product introductions across the
Company's group of brand names, a strong worldwide distribution system and
global market share increases for the Company's consumer electronics, video and
PC gaming products and mobile accessories and loudspeakers. Net sales for the
video and computer game business were $243.9 million in 1998, an increase of
93.1% compared to $126.3 million in 1997. This record sales performance is the
result of the Company's continued R&D commitment and aggressive sales and
marketing strategy. Net sales for the RAC business were $234.1 million in 1998
compared to $182.0 million in 1997, an increase of 28.6%, due mainly to enhanced
offerings and a dynamic sales and marketing program. Net sales in the Company's
accessories business increased by $28.6 million, or 14.8%, to $222.4 million.
This increase is attributable to both the inclusion of AAMP (acquired in
November 1997) and expanded retail distribution of the Company's products.
Gross profit in 1998 increased $75.8 million to $271.1 million and
decreased as a percentage of net sales to 38.7% from 38.9% in 1997. The dollar
increase in gross profit was primarily reflective of strong growth in the sales
of video game, multimedia and mobile electronic products and the additional
sales due to the inclusion of AAMP. The slight decline in the gross profit
margin for the year was primarily attributable to sales mix and lower than
anticipated sales in home speaker products, resulting in higher factory overhead
per unit sold. In 1998, gross profit for the video and computer game business
increased $45.9 million to $110.4 million mainly due to the growth in sales of
video game and multimedia products, RAC business increased $8.3 million to $73.9
million primarily due to mobile accessories and speaker sales and the
accessories business increased $21.6 million to $86.8 million mainly due to the
inclusion of AAMP. As a percent of net sales, gross profit for the video game
and multimedia products decreased to 45.3% in 1998 from 51.1% in 1997 mainly due
to sales mix from the inclusion of PC products sourced by STD from outside
manufacturers, which sold at a lower margin than products manufactured by STD,
and competitive pricing pressures due to the mature nature of certain products.
RAC's gross margin decreased to 31.6% in 1998 compared to 36.0% in 1997 due
mainly to lower than anticipated gross profit margin in the domestic home
speaker products. Gross margin on the accessories business increased to 39.0% in
1998 compared to 33.7% in 1997 due primarily to the inclusion of AAMP sales for
the full year and the transfer of PC product sales to the video and computer
game business.
Selling, general and administrative expenses increased in 1998 by
$53.6 million to $229.5 million, and decreased as a percentage of net sales from
35.0% in 1997 to 32.8% in 1998. The dollar increase was attributable to the
variable selling expenses relating to the increased sales volume. There were
also additional expenses for promotional activities and market development. The
percent decrease was attributable to fixed costs being absorbed by the higher
sales volume.
As further described in Note O of the Notes to Consolidated Financial
Statements, 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. The Company has recorded $14.0 million for this global
settlement, which together with related fees and costs of approximately $1.0
million, has been separately reflected in the 1998 consolidated statement of
operations. The classification of the accrual on the 1998 consolidated balance
sheet is based on the expected periods of payment, subject to approval by the
government.
Interest expense (net of investment income) increased by $5.4 million
to $17.9 million in 1998. The increase was attributable to increased borrowings
(interest rates were approximately the same) to support the inventory buildup
required for anticipated record sales in the fourth quarter.
Income before income taxes for 1998 was $9.2 million ($24.2 million
before the provision for the expected U.S. customs settlement), a 22.4% increase
over the $7.5 million reported in 1997. Net income for 1998 was $4.3 million
($19.1 million before the provision for the expected U.S. customs settlement), a
68.1% decrease over the $13.6 million in 1997. The results of operations for
1998 also include a charge of $881,000 related to a loan repayment extension in
the fourth quarter. In 1998, income before income taxes, unallocated expenses
and the expected U.S. customs settlement was $27.4 million for the video and
computer game business, $14.3 million for the accessories business and a loss of
$884,000 for the RAC business, which includes a loss before income taxes of the
U.S. home audio division of RAC of $8.7 million. The consolidation of the
domestic home audio business under the Recoton Home Audio subsidiary (RHA) and
the formation of the Recoton Mobile Electronics Division allowed this segment to
foster the profitable growth of the car stereo operations, as well as integrate
and reposition the home audio business to take advantage of the forthcoming
digital age. New management teams have been put in place, lead by talented
industry professionals, and investments are being made in RHA.
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% (16.5% in 1997). 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. This tax rate is higher in 1998 than
in 1997 because of the expiration of one half of the 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. The Company's 1998 pretax income of $9.2 million is comprised of a
combination of foreign earnings and domestic losses. In addition, since no
determination has been made as to what portion of the expected settlement with
the U.S. Customs Service might be deductible for income tax purposes, no
deduction has been made for this item in the computation of income taxes for
1998. This resulted in a net income tax expense of $4.8 million or 52.8% of
pretax income in 1998. In 1997, the Company reported an income tax credit of
$6.1 on pretax income of $7.5 million, primarily because the tax credits
attributable to domestic tax losses were at higher tax rates than the income tax
expense attributable to earnings at foreign subsidiaries. Also, in 1997 the
Company reported the benefit of a $1.3 million nonrecurring tax credit in
Germany relating to the Company's decision to declare dividends from that
subsidiary to its U.S. parent.
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
and foreign currency translation adjustments (which adjustments were a positive
$2.2 million in 1998 and a negative $5.3 million in 1997) 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 years ended 1998 and 1997, and the related foreign
currency translation adjustments recorded by the Company, in addition to the
changes in net income, comprehensive income for the year ended December 31, 1998
was $6.5 million as compared to $8.3 million for the year ended December 31,
1997. (See Note A of the Notes to the Consolidated Financial Statements.)
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement, effective for financial statements for periods
beginning after December 15, 1997, requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments. Generally, financial information is required to be reported on the
basis that is used internally for evaluating operating performance and deciding
how to allocate resources. The Company's reportable operating business segments
are described in Note P to the Notes to Consolidated Financial Statements
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. The
after tax effect on net income in 1998 was approximately $221,000 or $.02 per
diluted share.
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," which establishes revised standards for
computing and presenting earnings per share ("EPS"). In accordance with this
standard, all prior period EPS data was restated. There was no material change
to EPS for the year ended December 31, 1997 as a result of the adoption of this
standard. For the year ended December 31, 1998, basic EPS was $.37/share and
diluted EPS was $.36/share based on average shares of 11,656,000 (basic) and
12,179,000 (diluted). In 1997, basic EPS for the year was $1.19/share and
diluted EPS was $1.18/share based on average shares of 11,414,000 (basic) and
11,546,000 (diluted).
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net sales in 1997 increased from 1996 by $170.3 million or 51.4%, to
$502.0 million. The sales increase was primarily attributable to three factors.
The first factor is the inclusion of a full year's sales of the speaker and
related product lines of RAC acquired in late August 1996. The second factor is
growth in the video game and multi-media product lines. The video and multi-
media product lines contributed $126.3 million to gross sales in 1997 as
compared to $79.0 million in 1996. The third factor is the acquisitions of Heco
Audio Produkte GmbH, a German manufacturer and marketer of home loudspeakers
acquired in December 1996, and Tambalan Limited, an English seller of headphones
and other consumer products under the name ROSS in the United Kingdom and to
other European and Asian markets, acquired in February 1997, and AAMP of
America, Inc., a direct marketer of car audio installation products acquired in
November 1997. These increases were partially offset by slight declines in sales
of certain other accessory product lines. In 1997, net sales for the video and
computer game business increased by $47.3 million or 59.9%, to $126.3 million
due mainly to the increase in sales of the video and multi-media products, the
RAC business increased by $117.4 million to $182.0 million due to the inclusion
of a full year's sales of the speaker and related product lines of RAC, acquired
in late August 1996. The accessories business increased by $5.7 million or 3.0%,
to $193.7 million mainly due to the inclusion of sales from AAMP of America,
Inc. acquired in November 1997. These increases were partially offset by slight
declines in sales of certain other accessory product lines.
Gross profit in 1997 increased $70.3 million to $195.3 million and
increased as a percentage of net sales to 38.9% from 37.7% in 1996. The dollar
increase resulted from increased sales, of which the RAC and video and computer
game businesses were the primary contributors. The increase in gross margin
percentage was attributable primarily to a higher margin product mix. In 1997,
gross margin for the video and computer business increased to 51.1% from 43.9%
in 1996 mainly due to a higher margin product mix on video game products. The
RAC business increased to 36.0% from 32.7% due primarily to certain cost of
goods and purchasing synergies. The accessories business decreased to 33.7% from
36.8% in 1996 due to the inclusion of PC products which sold at lower gross
margin; in 1998 such products were sold by the video and computer game business
segment.
Selling, general and administrative expenses increased in 1997 by
$66.7 million to $175.9 million, and increased as a percentage of net sales from
32.9% to 35.0% in 1997. The primary portion of the dollar increase was
attributable to the inclusion of a full year of the RAC operations, acquired in
late August 1996, and the other 1996-1997 acquisitions. The percentage increase
was attributable to several factors, including increases in bad debt expense as
a result of the bankruptcy of three customers and increases in market
development expenses.
Interest expense increased by $7.5 million to $12.5 million in 1997.
This was primarily attributable to the increased debt associated with the RAC
acquisition, which was carried for a full year in 1997 as compared to four
months in 1996. In addition, the Company incurred debt to finance the growth in
sales of the video and computer product lines.
The Company's income taxes and effective consolidated income tax rate
were affected by changes in the proportion of domestic and foreign earnings and
losses. While earnings from North America and Western Europe were primarily
taxed at or above United States income tax rates, earnings from the Company's
Asian operations were taxed at a maximum rate of 16.5%. The actual tax rate from
Asian operations was dependent on the proportion of earnings from mainland
China. The Company's 1997 pretax income of $7.5 million was comprised of a
combination of foreign earnings and domestic losses. This resulted in a net
income tax credit of $6.1 million, primarily because the tax credits
attributable to domestic tax losses were at higher tax rates than the income tax
expense attributable to earnings at foreign subsidiaries. Also in 1997 the
Company recorded the benefit of a $1.3 million nonrecurring tax credit in
Germany relating to the Company's decision to declare dividends from that
subsidiary to its U.S. parent. Under German law, the German corporate income tax
rate can be reduced by approximately 15% when income is distributed instead of
being transferred to retained earnings. Recoton's decision to declare stock
dividends from its German subsidiary triggered Germany's ability to receive a
refund of taxes previously paid at the higher corporate tax rate. This compares
to 1996 pretax income of $11.1 million and corresponding income tax expense of
$2.7 million.
As restated in accordance with Statement of Financial Accounting
Standards No. 128, for 1997 basic EPS was $1.19/share and diluted EPS was
$1.18/share as compared with basic EPS of $0.74/share and diluted EPS of
$0.73/share for 1996. Outstanding shares in 1997 were 11,414,000 (basic) and
11,546,000 (diluted) as compared to 11,300,000 (basic) and 11,542,000 (diluted)
in 1996.
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 in each of the 1996, 1997
and 1998 fiscal years has been 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 December 31, 1998, the Company had cash and cash
equivalents of $21.4 million compared with $17.2 million at December 31, 1997.
At December 31, 1998, the Company had working capital of approximately
$178.3 million as compared to approximately $222.4 million at December 31, 1997.
The Company's ratio of current assets to current liabilities was 1.8 to 1 at
December 31, 1998 and 3.3 to 1 at December 31, 1997. The decreases in working
capital and the working capital ratio are primarily the result of the
classification of the loans under the Company's revolving line of credit, which
expires in December 1999, as a current liability at December 31, 1998. At
December 31, 1997, these loans were classified as a noncurrent liability as a
result of extension in their terms and the elimination of a provision for an
annual "clean up." Trade receivables increased $53.4 million to $183.2 million
at December 31, 1998 as compared to December 31, 1997 as a result of the
increase in the Company's sales volume. Inventories increased from December 31,
1997 levels by $18.9 million to $161.3 million at December 31, 1998. The
increase in the inventory levels was substantially attributable to the Company's
video and computer game and mobile electronics product lines. Accounts payable
and accrued expenses increased $24.4 million to $104.3 million at December 31,
1998. The increase is primarily attributable to increases in inventories and
certain accrued performance bonuses payable in March 1999, which bonuses were
classified as noncurrent liabilities at December 30, 1997.
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. As of March 29, 1999 the
Company 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 letters of credit under the revolving facility were
approximately $93.2 million at December 31, 1998 as compared to $65.5 million at
December 31, 1997. The Company also has a $15.0 million term loan, repayable in
12 quarterly installments with the last installment due in May 2001 ($12.5
million balance as of December 31, 1998). The Credit Facility was modified in
March 1999 to accommodate the expected U.S. customs settlement. 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 December 31, 1998 loans tied to the LIBOR rate
bore interest at approximately 9.32% to 9.38% 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.
There can be no assurance that the revolving credit facility will be extended or
replaced at the time of its expiration in December 1999.
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 8.75% 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. As noted below, the proceeds of the
1997 Notes were utilized to reduce borrowings under a previous version of the
Credit Facility. 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 8.52%, 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 note should the Company receive
certain stipulated minimum proceeds from the public sale of either or both of
its common shares or subordinated debt indentures.
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 share 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 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.
At December 31, 1998 and at various times prior to such date, the
Company was not in compliance with certain financial covenants 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. At December 31, 1998, the Company was in compliance with the amended
covenants under the notes and the Credit Facility.
The Company also has outstanding borrowings from one member of the
multibank credit lenders aggregating approximately $10.7 million at December 31,
1998, 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 $2.7 million of such indebtedness. Interest rates on such loans
range between 6.6% and 8.4%.
Certain of the Company's foreign subsidiaries have lines of credit
aggregating $18.8 million with foreign banks, primarily for import facilities.
The banks have security interests to the extent of merchandise purchased under
these lines. Borrowings under these lines at December 31, 1998 aggregated
approximately $2.3 million. Outstanding letters of credit, which aggregated
approximately $11 million at December 31, 1998, reduce the amounts available
under the domestic and foreign lines.
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 purchased for approximately $.7 million; no shares were repurchased
pursuant to such authorization in 1996,1997 or 1998. In June 1996, the Board of
Directors authorized, under certain circumstances, the purchase from time to
time of additional shares from certain officers. In July 1996, the Company
purchased 65,000 shares from an officer for approximately $1.2 million. Any
future repurchases may be limited by the terms of the Company's loan and note
purchase agreements.
In August 1996, Recoton acquired the branded product lines of RAC, a
leading marketer of home and automotive loudspeakers and automotive electronics,
for a total cost of approximately $61.6 million. In connection with the
acquisition, Recoton assumed approximately $34.0 million in notes and loans
payable. In December 1996, the Company acquired selected assets of Heco GmbH and
Heco Electronics GmbH (both in Germany) for a cost of approximately $1.3
million. Heco is a leading brand of home speakers in Germany.
In February 1997, Recoton acquired the outstanding stock of Recoton UK
(formally known as Tambalan Limited) at a cost of approximately $285,000 plus
closing costs and assumed certain outstanding debt of approximately $2.9
million. Recoton UK markets headphones and other consumer electronics products
in the United Kingdom and other European countries under the trade name ROSS and
has a branch operation in Hong Kong. In November 1997, the Company acquired AAMP
at a cost of approximately $2.4 million paid by the issuance of 169,706 common
shares. In conjunction with the acquisition, the Company assumed approximately
$4.5 million in debt, which was repaid in November 1997 from the proceeds of a
$5 million loan referred to below. AAMP is a leading car audio accessories
company based in Clearwater, Florida whose business includes the STINGER and
PERIPHERAL brands.
In November 1997, the Company borrowed $5.0 million under a demand
note agreement to finance the acquisition of AAMP. The note was paid in January
1998. In May 1998, the Company borrowed an additional $10 million, under a
demand note agreement due no later than July 31, 1998, to provide additional
working capital. Such demand note was repaid with the proceeds of the increased
Credit Facility.
In December 1997, the Company acquired, out of bankruptcy, selected
assets of Capa Industries, Inc. at a cost of approximately $1.1 million. The
acquisition provided expanded manufacturing and electronic engineering capacity
to enhance the home and car audio products line.
In May 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 on-going turmoil in the Asian currency markets, 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 increased by a foreign currency translation adjustment
of approximately $2.2 million for the year ended December 31, 1998. During the
year ended December 31, 1997, the Company's shareholders' equity was reduced by
a foreign currency translation adjustment of approximately $5.3 million, of
which approximately $3.2 million occurred in the first quarter of 1997. The
changes in the exchange rates of the German and Italian currencies, which were
the principal causes of the foreign translation adjustment, had no material
impact on the Company's results of operations.
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.
BACKGROUND
This issue has arisen because many existing computer programs use only
two digits instead of four (e.g., "98" instead of "1998") to identify a year in
the date field. This is a holdover from the days when businesses first started
using computers and electronic memory was limited and storage was expensive.
These programs were designed and developed without considering the impact of the
upcoming change in the century. Accordingly, some computers can not determine if
the reference to the year "02" means 2002 or 1902. The failure of such
applications or systems to properly recognize the dates beginning in the year
2000 could result in miscalculations or even system failures.
The Company, through a team including its Vice President-Information
Systems and its Vice President-Compliance, is assessing its Y2K compliance
situation.
INTERNAL SYSTEMS
The Company's Vice President-Information Systems has the
responsibility to have the Company's entire computer and computer-dependent
systems tested and, if necessary, modified or replaced to ensure Y2K compliance.
Based on its analysis to date, including tests run on the Company's backup
computer system and analysis of the in-place systems, the Company believes that
all of its domestic and substantially all of its foreign internal computer
systems (hardware, system software and applications software) and
computer-dependent systems, including technology embedded in the Company's
machinery and other equipment to the extent that it is date sensitive, are
currently Y2K compliant and that the foreign operations which are not currently
compliant will, through the replacement or modification of existing hardware and
software, be made compliant in a timely manner. This process was completed in
the first quarter of 1999. The Company has not retained any outside service
provider to conduct independent verification of the Company's compliance status
and does not at this time intend to hire any such service provider.
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 vendors, service providers and customers and the
Company is in the process of sending similar letters to most key foreign
vendors, service providers and customers. Returns from such persons are being
received. 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.
While the Company believes that the efforts which it has taken and
plans to take should be sufficient to identify and correct any Y2K problems
before December 31, 1999, there can be no assurance that the Company will be
fully Y2K compliant in a timely manner.
FINANCIAL RAMIFICATIONS
The expenses incurred to date to achieve year 2000 compliance have not
had a material impact on the Company's results of operations or financial
condition. Based on the Company's current status of internal Y2K compliance
review and other preliminary information, the Company does not anticipate that
any expenses yet to be incurred to achieve year 2000 compliance will have any
material impact on the Company's results of operations or financial condition or
that its business will be adversely affected by the Y2K issue in any material
respect. (The Company preliminarily estimates that the costs of achieving Y2K
compliance, including costs of personnel devoting significant effort on Y2K
matters, will be immaterial). The costs associated with any new computers or
computer programs, which are year 2000 compliant, have been and will be
capitalized and amortized over the computer's and/or software's expected useful
life. Any system modifications or maintenance costs necessary to make the
Company's existing computer programs Y2K compliant have been and will be
expensed as incurred.
Achieving Y2K compliance, however, is dependent on multiple factors,
many of which are not within the Company's sole control. Accordingly, should one
or more of the internal systems of the Company or key customers or key vendors
exhibit significant Y2K problems, the Company's business and its results of
operations could be materially adversely affected.
No information technology projects have been deferred due to Y2K
efforts.
RISKS
Until it has completed its Y2K assessment, and attempted to fix any
problems which such assessment may disclose, the Company can not be in a
position to determine what would be its most reasonably likely worst case Y2K
scenario or any plan for handling such scenario. The Company has not devised any
back-up plans should it suffer any internal Y2K problems or should any of its
vendors' or customers' Y2K problems affect the Company. After completion of its
Y2K assessment, including review of queries sent to such vendors and customers,
the Company will assess the need for any contingency plans.
The failure to correct a material Y2K problem could result in an
interruption of, or inability to perform on a timely fashion, a necessary
business activity or operation. Such failures could materially adversely affect
the Company's results of operations, liquidity and/or financial condition.
Because of the general uncertainty which companies face regarding the year 2000
issue, in part due to the fact that actions of third-parties could affect the
Company's compliance, it is not possible to determine at this time whether any
actual failures will have any material adverse impact on the Company.
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 most recently competed fiscal year, 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
adoption of such common currency is being phased in over a three-year period,
which started in January 1999. During such phase-in period, both the Euro and
the historical currency of a country will be valid, although new
Euro-denominated currency will not be issued until 2002. Each member-country
will decide when its legacy currency will cease to be legal tender, which will
occur during the period January 1 through June 30, 2002. Until the introduction
of Euro-denominated currency, the paying party will have the option to decide
whether to pay in the legacy currency or in Euro converted to the legacy
currency.
Among other possible economic implications, it is expected that the
adoption of such common currency will lead to greater price transparency and
thereby increased competition within such common currency zone. For instance,
with a single currency applicable to the entire region, consumers may be able to
more easily discern any material price differences for the Company's products
between different countries and modify their buying practices accordingly. This
may require adjustments in the Company's marketing and pricing strategies.
Whether any such price differentials will lead to significant changes in
purchasing practices by the Company's customers depends on factors such as
convenience and language-related matters as well as other factors which may
determine where a consumer will purchase products. The Company is not able at
this time to gauge whether the likelihood of increased competition arising from
the introduction of the Euro would have any significant long-term adverse impact
on the pricing for the Company's products.
The adoption of a common currency may require a significant
modification to the Company's accounting systems. Among other things, it will be
necessary to operate in each country with dual currencies until the three-year
phase-in period has passed. Management believes, however, that any necessary
changes can be rapidly and inexpensively implemented using "off-the-shelf"
systems if the Company's internal systems are not sufficient.
The Company does not believe that the adoption of a common currency
will give any parties to material contracts with the Company the right to
terminate or modify such contracts on the grounds of "frustration,"
"impossibility" or "impracticability".
Other risks associated with such currency conversion include possible
currency exchange and tax risks, neither of which the Company believes will have
a significant affect.
While 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,
its analysis of this issue has only commenced recently and the Company has not
yet fully evaluated the implications of the Euro's adoption. The Company has not
adopted, nor is at this time contemplating the adoption of, any contingency
plans regarding this issue.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
All of the Company's borrowings are denominated in U.S. dollars, its
functional currency. A substantial portion (over 90%) 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 ($12.5 million balance as
of December 31, 1998), 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 or rates which are tied to the greater of
prime or a Federal Funds based rate (as defined).
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 and total
comprehensive income), 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 December 31, 1998 (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
$35.3 million. These loans have no fixed due dates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(a)(1) INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report F-1
Recoton Corporation and Subsidiaries --
Consolidated Balance Sheets as
at December 31, 1997 and 1998 F-2
Consolidated Statements of Operations for
the years ended December 31, 1996, 1997
and 1998 F-3
Consolidated Statements of Shareholders'
Equity for the years ended December 31, 1996,
1997 and 1998 F-4 to F-6
Consolidated Statements of Cash Flows for
the years ended December 31, 1996, 1997
and 1998 F-7 to F-8
Notes to Financial Statements F-9 to F-32
(a)(2) INDEX TO FINANCIAL STATEMENT SCHEDULE
Independent Auditor's Report on
Supplemental Schedule F-33
Recoton Corporation and Subsidiaries --
Schedule II -- Valuation and
Qualifying Accounts F-34
Other financial statement schedules have not been filed because the
conditions requiring the filing do not exist or the required information is
provided in the consolidated financial statements, including the notes thereto.
The individual financial statements of the Company have been omitted
because the requirements for omission have been met.
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
RECOTON CORPORATION
We have audited the accompanying consolidated balance sheets of
RECOTON CORPORATION AND SUBSIDIARIES as at December 31, 1997 and 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Recoton
Corporation and Subsidiaries as at December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/S/ CORNICK, GARBER & SANDLER, LLP
CERTIFIED PUBLIC ACCOUNTANTS
NEW YORK, NEW YORK
FEBRUARY 26, 1999
<PAGE>
<TABLE>
<CAPTION>
RECOTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(TABULAR AMOUNTS IN THOUSANDS)
ASSETS AS AT DECEMBER 31,
1997 1998
CURRENT ASSETS: --------- ---------
<S> <C> <C>
Cash and cash equivalents $ 17,247 $ 21,385
Accounts receivable (less allowance for doubtful accounts
of $3,797,000 in 1997 and $4,940,000 in 1998) 129,852 183,230
Inventories 142,362 161,294
Prepaid, refundable and deferred income taxes 18,220 12,931
Prepaid expenses and other current assets 9,484 12,629
--------- ---------
TOTAL CURRENT ASSETS 317,165 391,469
PROPERTY AND EQUIPMENT (at cost, less accumulated
depreciation and amortization) 36,184 40,693
TRADEMARKS AND PATENTS (less accumulated amortization) 5,126 4,777
GOODWILL (less accumulated amortization) 38,554 37,233
DEFERRED INCOME TAXES 6,724 8,070
OTHER ASSETS 3,509 4,428
--------- ---------
T O T A L $407,262 $486,670
========= ========
LIABILITIES
CURRENT LIABILITIES:
Bank loans and drafts payable $ 5,000 $ 95,526
Current portion of long-term debt 9,570 9,359
Accounts payable 53,231 63,848
Accrued expenses 26,588 40,418
Income taxes payable 388 4,023
-------- --------
TOTAL CURRENT LIABILITIES 94,777 213,174
LONG-TERM DEBT (less current portion above) 161,427 114,186
OTHER NONCURRENT LIABILITIES 11,775 11,315
------- ---------
TOTAL LIABILITIES 267,979 338,675
-------- ---------
COMMITMENTS AND CONTINGENCIES (Notes B, N and 0)
SHAREHOLDERS' EQUITY
PREFERRED SHARES - $1.00 par value each - authorized
10,000,000 shares; none issued -- --
COMMON SHARES - $.20 par value each - authorized
40,000,000 shares; issued 12,797,601 shares in
1997 and 12,933,704 shares in 1998 2,560 2,587
ADDITIONAL PAID-IN CAPITAL 78,376 80,867
RETAINED EARNINGS 70,758 75,088
ACCUMULATED OTHER COMPREHENSIVE INCOME (6,295) (4,090)
-------- ---------
TOTAL 145,399 154,452
TREASURY SHARES - 1,225,167 shares in 1997 and
1,235,367 shares in 1998, at cost (6,116) (6,457)
------- --------
TOTAL SHAREHOLDERS' EQUITY 139,283 147,995
-------- ---------
T O T A L $407,262 $486,670
======== ========
The notes to financial statements are made a part hereof.
</TABLE>
<PAGE>
RECOTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT INCOME PER SHARE DATA)
<TABLE>
YEAR ENDED DECEMBER 31,
1996 1997 1998
----------- ----------- ---------
<S> <C> <C> <C>
NET SALES $331,700 $502,048 $700,408
COST OF SALES 206,715 306,725 429,334
----------- ----------- -----------
GROSS PROFIT 124,985 195,323 271,074
----------- ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 109,194 175,873 229,452
INTEREST EXPENSE 4,946 12,496 17,920
INVESTMENT INCOME (271) (534) (464)
PROVISION FOR EXPECTED U.S. CUSTOMS
SETTLEMENT (Note O) 15,000
----------- ----------- -----------
T O T A L 113,869 187,835 261,908
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 11,116 7,488 9,166
INCOME TAX PROVISION (CREDIT) 2,736 (6,093) 4,836
----------- ----------- -----------
NET INCOME $ 8,380 $ 13,581 $ 4,330
=========== =========== ==========
INCOME PER SHARE:
BASIC $.74 $1.19 $.37
==== ===== ====
DILUTED $.73 $1.18 $.36
==== ===== ====
NUMBER OF SHARES USED IN COMPUTING
PER SHARE AMOUNTS:
BASIC 11,300 11,414 11,656
====== ====== ======
DILUTED 11,542 11,546 12,179
====== ====== ======
The notes to financial statements are made a part hereof.
</TABLE>
<PAGE>
RECOTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPRE- TREASURY STOCK TOTAL
--------------------- PAID-IN RETAINED HENSIVE ------------------- SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME SHARES AMOUNT EQUITY
---------- -------- -------- -------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1996 12,296,160 $ 2,459 $72,926 $48,797 $ (300) 1,132,770 $(4,485) $119,397
--------
COMPREHENSIVE INCOME:
Net income 8,380 8,380
Foreign currency translation
adjustments (net of income
taxes) (721) (721)
----------
TOTAL COMPREHENSIVE INCOME 7,659
---------
EXERCISE OF STOCK OPTIONS 301,822 61 2,987 27,297 (476) 2,572
REPURCHASES OF STOCK 65,000 (1,154) (1,154)
-------------- --------- ---------- ----------- --------- ---------- ---------- ----------
BALANCE - DECEMBER 31, 1996 12,597,982 2,520 75,913 57,177 (1,021) 1,225,067 (6,115) 128,474
-------------- --------- ---------- ----------- ------- ---------- ---------- ----------
COMPREHENSIVE INCOME:
Net income 13,581 13,581
Foreign currency translation
adjustments (net of income
taxes) (5,274) (5,274)
----------
TOTAL COMPREHENSIVE INCOME 8,307
----------
EXERCISE OF STOCK OPTIONS 24,602 5 126 131
REPURCHASES OF STOCK 100 (1) (1)
STOCK ISSUED AS PAYMENT OF BONUS 5,311 1 80 81
STOCK ISSUED FOR ACQUISITION
OF AAMP OF FLORIDA, INC. 169,706 34 2,257 2,291
----------- ------- -------- ----------- ------- ----------- --------- ----------
BALANCE - DECEMBER 31, 1997 12,797,601 2,560 78,376 70,758 (6,295) 1,225,167 (6,116) 139,283
----------- ------- ------- ----------- ------- ----------- --------- ----------
--------
COMPREHENSIVE INCOME:
Net income 4,330 4,330
Foreign currency translation
adjustments (net of income
taxes) 2,205 2,205
--------
TOTAL COMPREHENSIVE INCOME 6,535
---------
EXERCISE OF STOCK OPTIONS 136,103 27 2,312 6,000 (213) 2,126
REPURCHASES OF STOCK 4,200 (128) (128)
ISSUANCE OF STOCK OPTIONS AT LESS
THAN FAIR MARKET VALUE 179 179
------------ ----------- --------- --------- -------- --------- --------- ----------
BALANCE - DECEMBER 31, 1998 12,933,704 $2,587 $80,867 $75,088 $(4,090) 1,235,367 $(6,457) $147,995
============ =========== ========= ========== ======== ========= ========= ==========
The notes to financial statements are made part hereof.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RECOTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(TABULAR AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN CASH AND 1996 1997 1998
CASH EQUIVALENTS ----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,380 $ 13,581 $ 4,330
---------- --------- ---------
Adjustments to reconcile results of operations to net cash provided by
operating activities:
Depreciation 5,194 7,953 9,122
Amortization of intangibles 3,045 3,002 3,141
Provision for losses on accounts receivable 1,259 4,932 2,743
Deferred income taxes (312) (2,578) 833
Expense applicable to stock options granted at
prices less than fair market value 55
Change in asset and liability accounts (net
of effects of acquisitions):
Accounts receivable (12,210) (34,339) (54,446)
Inventory (6,039) (33,812) (18,015)
Prepaid and refundable income taxes (1,242) (6,061) 3,595
Prepaid expenses and other current assets 3,305 (588) (2,862)
Other assets (347) (625) (1,296)
Accounts payable and accrued expenses 586 28,890 14,369
Income taxes payable (2,124) (911) 2,012
Other noncurrent liabilities 1,751 7,987 9,038
----------- ----------- ---------
TOTAL ADJUSTMENTS (7,134) (26,150) (31,711)
----------- ---------- --------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 1,246 (12,569) (27,381)
----------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions of businesses (net of
cash acquired of approximately $3,014,000 in
1996 and $932,000 in 1997) (55,909) (755)
Expenditures for trademarks, patents and
intellectual property (195) (216) (196)
Expenditures for property and equipment (7,383) (12,937) (13,566)
----------- --------- --------
NET CASH USED FOR INVESTING ACTIVITIES (63,487) (13,908) (13,762)
---------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under credit
agreements and other bank debt $(10,368) $ 29,639 $ 27,526
Net proceeds from (repayments of) bridge loans 129,364 (75,000)
Net proceeds from sale of senior notes 75,000 25,000
Repayment of bank loans assumed upon
acquisitions of businesses (36,173) (7,336)
Repayment of long-term bank borrowings (5,206) (7,456) (9,438)
Proceeds from exercise of stock options 1,387 39 1,639
Purchases of treasury stock (1,154) (1) (128)
Income tax benefit applicable to exercise
of stock options 1,185 92 487
--------- --------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 79,035 14,977 45,086
--------- --------- -------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES
ON CASH OF FOREIGN SUBSIDIARIES (57) (383) 195
--------- --------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 16,737 (11,883) 4,138
CASH AND CASH EQUIVALENTS - JANUARY 1 12,393 29,130 17,247
--------- --------- -------
CASH AND CASH EQUIVALENTS -
DECEMBER 31 $ 29,130 $ 17,247 $ 21,385
========= ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 4,451 $ 10,913 $ 17,995
========= ======== ========
Net income taxes paid (refunded) $ 5,686 $ 1,513 $ (2,512)
========= ========= ========
The notes to financial statements are made a part hereof.
</TABLE>
<PAGE>
RECOTON CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Recoton
Corporation (Company) and its subsidiaries, which are wholly-owned.
All material intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
TRANSLATION OF FOREIGN SUBSIDIARY FINANCIAL STATEMENTS:
The assets and liabilities of the Company's foreign subsidiaries are
translated into United States dollars at year end rates of exchange.
Operating accounts are translated at average rates of exchange during
the year. Gains and losses on translation are reflected as a separate
component (accumulated other comprehensive income) of stockholders'
equity on the consolidated balance sheet. Also included in accumulated
other comprehensive income are the effects of exchange rate changes on
certain intercompany balances with foreign subsidiaries which are not
intended to be settled on a current basis.
CASH AND CASH EQUIVALENTS:
Cash equivalents on the balance sheet and statement of cash flows are
comprised of certificates of deposit with a maturity of three months
or less. Due to the nature and size of the Company and the volume of
its transactions, it maintains certain domestic cash accounts in
excess of FDIC insured limits and cash accounts in foreign banks which
are not insured by the FDIC.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
In management's opinion, the carrying value at December 31, 1998 and
December 31, 1997 of the Company's financial instruments approximates
their fair values because they either have short maturities, bear
variable interest rates or for the majority of long- term debt, there
has been no significant changes in the market rates for such debt
since it was incurred.
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out
method) or market, representing estimated net realizable value.
DEPRECIATION OF PROPERTY AND EQUIPMENT:
For financial accounting purposes, depreciation is computed over the
estimated useful lives of the assets on the straight-line method. For
income tax purposes, accelerated depreciation methods are utilized for
certain assets.
AMORTIZATION OF TRADEMARKS AND PATENTS:
Trademarks are being amortized over terms of 5 to 40 years. Patents
are being amortized over the terms of the related patent, or a shorter
period, based on the estimated commercial life of the related product.
GOODWILL:
Goodwill, representing the excess of the purchase price over the fair
value of the net identifiable assets acquired in business combinations
treated as purchases, is being charged to operations on a
straight-line basis over periods of 15 to 30 years. At each balance
sheet date, the Company reviews for impairment the unamortized
goodwill balance from each of its acquisitions. If it appears that
there has been a change in events or circumstances which indicates
that the unamortized balance may not be fully recoverable, an
evaluation is made using undiscounted estimated future cash flows and
estimated current values of the acquired businesses or related assets,
as appropriate.
INCOME PER SHARE:
Basic income per share is computed by dividing the net income by the
weighted average common shares outstanding for the period, without
regard to outstanding stock options, warrants or other potentially
dilutive securities or contingent stock issuances. Diluted earnings
per share reflects the dilution that would have occurred if potential
dilutive securities were exercised (after application of the treasury
stock method) and contingent stock issuances were made.
A reconciliation of the number of shares used in computing the per
share amounts is as follows:
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------ ------ ------
Weighted average common shares
outstanding 11,300 11,414 11,656
Dilutive effect of stock options 242 132 523
------ ------ -------
Adjusted common shares used for
dilutive computation 11,542 11,546 12,179
====== ====== ======
The above excludes outstanding options to purchase approximately
406,000 shares in 1996, 565,000 shares in 1997 and 8,000 shares in
1998 because these options are considered anti-dilutive based on the
relationship of their exercise price to the average market prices of
the Company's common shares.
COMPREHENSIVE INCOME:
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" and has elected to
report the components of comprehensive income and total comprehensive
income in the consolidated statements of shareholders' equity.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner 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 and foreign currency
translation adjustments included in the consolidated statements of
shareholders' equity.
The (charges) credits to comprehensive income for foreign currency
translation adjustments and the related tax effects are as follows:
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
Foreign currency translation ----- ----- ------
adjustments $(807) $(5,692) $2,081
Income tax effect 86 418 124
------ -------- ------
Other comprehensive income (loss) $(721) $(5,274) $2,205
====== ======= ======
OTHER RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
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. The after tax effect on net income in
1998 was approximately $221,000 or $.02 per dilutive share.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." This statement, effective for financial
statements for periods beginning after December 15, 1997, requires
that a public business enterprise report financial and descriptive
information about its reportable operating segments. Generally,
financial information is required to be reported on the basis that is
used internally for evaluating operating performance and deciding how
to allocate resources. The Company's reportable operating business
segments are described in Note P.
NOTE B - ACQUISITIONS:
The results of operations of the following acquisitions of businesses
during the three years ended December 31, 1998 are included in the
attached consolidated statements of operations from their respective
dates of acquisition.
On August 28, 1996, the Company acquired for cash, in a purchase
transaction, all of the outstanding stock of International Jensen
Incorporated ("Jensen"). The total purchase price, including closing
costs and estimated income tax liabilities and relocation, severance
and other costs to eliminate duplicate facilities and consolidate
certain of Jensen's operations into the Company's Lake Mary, Florida
facilities, was approximately $61.6 million of which approximately
$60.2 million was recorded in 1996 and $1.4 million was recorded in
1997. The $17.8 million excess of the total cost of the Jensen
purchase over the fair market value of the net identifiable assets
acquired has been recorded as goodwill, which is being amortized to
operations over 30 years.
In December 1996, the Company acquired for approximately $1.3 million
the Heco brand of home speakers in Germany through a purchase of
selected assets from the receiver in bankruptcy of Heco GmbH.
In February 1997, the Company acquired, in a purchase transaction, the
outstanding stock of Tambalan Limited (Tambalan) at a cost of
approximately $285,000, plus closing costs and the assumption of
certain outstanding bank and other loans of approximately $2.9
million. Tambalan sells headphones and other consumer products in the
United Kingdom and other European countries trading under the name
Ross Consumer Products. It also has branch operations in Hong Kong.
In November 1997, the Company acquired, in a purchase transaction, the
outstanding stock of AAMP of Florida, Inc.("AAMP"), a manufacturer and
marketer of automotive audio accessories. The purchase price was
approximately $2.4 million, which included the issuance of 169,706
shares of the Company's common shares, with a market value of
approximately $2.3 million. Goodwill of approximately $4.1 million,
comprised of the purchase price and the excess of liabilities assumed
over the fair value of assets acquired, is being amortized to
operations over 15 years.
In December 1997, the Company acquired, for approximately $1.1
million, from the receiver in bankruptcy, substantially all the assets
of CAPA Industries, Inc. ("CAPA"). CAPA is a designer and manufacturer
of electronic components which are used in certain home and car audio
accessories. The excess of the purchase price over the fair value of
the assets acquired, aggregating approximately $797,000, has been
recorded as goodwill and is being amortized to operations over 15
years.
The operations of Heco, Tambalan and CAPA prior to acquisition were
immaterial in relation to those of the Company. If the AAMP
acquisition had occurred on January 1, 1997, the Company's
consolidated 1997 pro forma net sales and net earnings would have been
approximately $518,000,000 and $15,070,000 and its pro forma earnings
per diluted share should have been $1.31.
NOTE C - INVENTORIES:
Inventories are summarized as follows:
(IN THOUSANDS)
DECEMBER 31,
---------------------
1997 1998
------ -------
Raw materials and work-in-process $ 38,188 $ 34,176
Finished goods 93,602 117,606
Merchandise in-transit 10,572 9,512
-------- --------
T O T A L $142,362 $161,294
======== ========
NOTE D - PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
(IN THOUSANDS) ESTIMATED
DECEMBER 31 USEFUL LIFE
1997 1998 (YEARS)
------ ----- -----------
Land $ 3,144 $ 3,144
Buildings, leaseholds
and improvements * 18,952 21,017 15 - 40
Machinery and equipment 8,648 13,683 3 - 10
Furniture, fixtures and
office equipment 10,790 16,597 2 - 7
Tools and dies 13,428 18,636 2 - 5
-------- -------
TOTALS 54,962 73,077
Less accumulated depreciation
and amortization 18,778 32,384
------- --------
BALANCE $ 36,184 $ 40,693
======== ========
*Includes interest costs capitalized of approximately $118,000 during
1997 and $147,000 during 1998.
NOTE E - BANK LOANS AND DRAFTS PAYABLE:
In 1996, the Company entered into a multi-bank, $135 million bridge
loan facility. On January 6, 1997, the Company sold to institutional
investors in a private placement $75 million of ten-year senior notes,
the proceeds of which were used to reduce the bridge loan facility,
which was then converted to a $50 million revolving credit facility
and a four-year $15 million term loan. The $15 million term loan was
used to refinance at lower rates certain debt assumed in the Jensen
acquisition. Interest on borrowings under the revolving credit
facility is payable at rates negotiated with banks at the time
borrowings are made. Additionally, the banks require the maintenance
of various financial ratios (see Note F (3)).
In September 1997, the credit agreement was amended and the credit
facility was increased to approximately $71.5 million to January 30,
1998 at which time it was replaced by a $5 million four year term loan
and a revolving credit facility of approximately $66.5 million
expiring in December 1999. The balance sheet at December 31, 1997 gave
effect to this transaction and, accordingly, the $5 million term loan
and the $63 million of outstanding borrowings under the revolving
credit facility were classified as long-term debt (see Note F).
In June 1998, the credit agreement was further modified to provide a
revolving loan facility of $101.5 million through November 1998 at
which time the line was to be reduced to $86.5 million through
December 1999. In addition, two existing term loans, which were
payable through January 2001 and January 2002, were converted into a
single three year $15 million term loan (see Note F). On November 30,
1998, the loan agreement was again amended to extend the $15 million
pay down of the revolving credit facility to January 22, 1999, which
payment was made before the due date. As a result of this amendment,
the Company paid approximately $881,000 in fees to the bank, which
were charged to operations in 1998.
The revolving credit loans and the term loan bear interest at rates
which vary depending on elections made by the Company. The Company may
elect rates which are tied to LIBOR or rates which are tied to the
greater of prime or a federal funds based rate (as defined).
Additionally, the rates may change based on certain of the companies
financial ratios. The weighted average interest rate on the $93.2
million outstanding borrowings under the credit agreement at December
31, 1998 was approximately 9.3%.
Certain of the Company's foreign subsidiaries have lines-of-credit
with banks aggregating approximately $18.8 million for short-term
borrowings, primarily for import facilities. The banks have security
interests to the extent of merchandise purchased under these lines.
Borrowings under these lines at December 31, 1998 aggregated
approximately $2.3 million.
Outstanding letters of credit, which aggregated approximately $11
million at December 31, 1998, reduce the amounts available under the
domestic and foreign lines.
NOTE F - LONG-TERM DEBT:
Long-term debt included in the consolidated balance sheets is
summarized as follows:
(IN THOUSANDS)
AS AT DECEMBER 31,
-----------------------
1997 1998
---- ----
Senior ten-year notes payable (1) $ 75,000 $100,000
Notes and loans payable - banks (2)(3):
Bank credit facility loans (see Note E) 63,000
Due in quarterly installments of
$649,150 through December 2000,
plus interest at 7.80% a year 7,790 5,193
Due in monthly installments of
$116,670 through December 2000,
plus interest at 6.60% a year 4,200 2,800
Due in quarterly installments of
$1,250,000 through May 2001, plus
interest at variable rates
(8.97% at December 31, 1998)
(see Note E) 17,188 12,500
Mortgages collateralized by certain land
and building in Lake Mary, Florida
payable in monthly installments of
$36,368 to June 2001 with a final
installment aggregating approximately
$2 million due in July 2001. The
payments include interest
at 7.99% to 8.40% a year $ 2,868 $ 2,659
Other debt 951 393
-------- --------
Total long-term debt 170,997 123,545
Less current portion 9,570 9,359
-------- --------
Noncurrent portion $ 161,427 $ 114,186
========== =========
(1) Senior notes with a principal balance of $75 million are payable in
equal annual principal installments of $10,714,286 beginning in
January 2001. Interest on these notes was payable quarterly at 8.75%
through December 31, 1998. In September 1998, the Company sold an
additional $25 million of adjustable rate senior notes to an
institutional investor. These notes are payable in seven equal annual
principal installment of $3,571,429 beginning in September 2002.
Interest was payable quarterly at 8.52% a year through December 31,
1998.
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 loans, respectively, subject to a 50 basis
point reduction should the Company receive certain stipulated minimum
proceeds from the public sale of either or both of its common shares
and subordinated debt securities.
The note agreements provide for, among other things, the maintenance
of various specified financial ratios and minimum tangible net worth
requirements (as defined), contain limitations and restrictions on
additional borrowings, the payment of dividends, repurchases of the
Company's common stock, engaging in business not directly related to
the consumer electronics industry, investments, mergers and sales of
the Company's assets, other than in the ordinary course of business
(as defined). The agreements also provide, under certain
circumstances, for the acceleration of the payment of all or a portion
of the notes in the event of a sale of the Company's assets (as
defined) or in the event the Company should request a waiver of the
restrictions on mergers or consolidations with other entities.
(2) The bank loan agreements contain covenants and restrictions similar to
the senior notes payable.
(3) At December 31, 1997 and 1998, the Company was not in compliance with
certain financial covenants under the note and bank loan agreements.
However, both the senior loan holders and the bank lenders have
modified these covenants to place the Company in compliance with them.
The noncurrent portion of long-term debt outstanding at December 31,
1998 is payable as follows:
YEAR ENDING DECEMBER 31: (IN THOUSANDS)
2000 $ 9,383
2001 15,517
2002 14,286
2003 14,286
Subsequent to December 31, 2003 60,714
--------
T O T A L $114,186
========
In February 1999, the Company sold to institutional investors for $35
million, $35 million face amount of senior subordinated notes and
310,000 common stock purchase warrants. The proceeds were used to
reduce outstanding borrowings under the Company's revolving credit
facility (see Note E). The notes are payable in February 2004 but are
subject to required prepayment from the proceeds received by the
Company from the sale of either equity interests or subordinated
indebtedness. Interest is payable quarterly at 11.5% a year to
November 4, 1999 increasing to 12.5% a year on November 4, 1999 and by
.5% a year on each of the next five interest payment dates.
The common share purchase warrants, which are exercisable at $18.26 a
share to February 4, 2004, have been valued at approximately
$2,490,000. The note agreements also provide that if any of the notes
are outstanding on May 4, 2001 the Company will issue to the
purchasers additional warrants in the proportion that the principal
amount of notes outstanding bears to $35 million. The pricing of the
additional warrants would be based on market values for the Company's
common shares at that time.
NOTE G - SHAREHOLDERS' EQUITY:
The Recoton Corporation Stock Bonus Plan provides for the issuance to
officers and key employees an aggregate of up to 300,000 shares of
stock held in treasury, of which 261,396 shares are available for
future grants at December 31, 1998. Such plan is administered by a
committee of the Board of Directors. Awards under the plan are charged
to operations based on the fair market value of the shares at the date
of issuance.
In 1994, the Board of Directors authorized the repurchase by the
Company of up to 500,000 of its outstanding common shares. Through
December 31, 1998 the Company has repurchased 48,352 shares. Future
repurchases of shares may be limited under the terms of the Company's
loan agreements (see Note F).
The Company's shareholders' rights plan becomes operative in certain
events involving the acquisition of 20% or more of the Company's
common shares or the commencement of a tender or exchange offer by any
person or group in a transaction not approved by the Company's Board
of Directors. Upon the occurrence of such an event, each right, unless
redeemed by the Board at a redemption price of $0.01 per right,
entitles its holder to purchase for $100 an amount of common shares of
the Company, or in certain circumstances the acquirer, having a market
value of twice the purchase price. The Company has reserved 250,000
Series A Junior Participating Preferred Shares in connection with the
rights plan.
In connection with the exercise of incentive stock options, in 1996,
161,368 common shares were issued in exchange for 27,297 previously
issued common shares with a market value of approximately $475,000 and
in 1998, 15,500 common shares were issued in exchange for 6,000
previously issued common shares with a market value of approximately
$213,000, plus cash of approximately $15,000. Other transactions with
respect to stock options are described in Note H.
In 1996, the Company purchased from an officer 65,000 previously
issued common shares for approximately $1,154,000, representing the
fair market value of the shares on the date of the purchase.
In 1997, the Company issued 5,311 common shares with a market value of
approximately $81,000 to an employee as payment for a bonus which was
earned and charged to operations in 1996.
In 1997, the Company issued 169,706 common shares in connection with
the purchase of AAMP of Florida, Inc. (see Note B).
In 1998, the amount of authorized common shares was increased to 40
million shares.
NOTE H - STOCK OPTIONS:
At December 31, 1998, the Company has four stock option plans.
Options are outstanding to purchase 11,200 shares under the Company's
1982 Incentive Stock Option Plan, 21,334 shares under the Nonqualified
Plan and 1,726,284 shares under the 1991 Stock Option Plan. No
additional options are available for grant under these plans.
The Company's 1998 Stock Option Plan provides for the granting of
options to purchase up to 1,500,000 common shares, such options may be
either incentive stock options (as defined in the Internal Revenue
Code) or nonqualified options. At December 31, 1998, options to
purchase 1,460,000 shares are available for future grants under this
plan.
An employment agreement with Mr. Robert Borchardt, the Company's
President, Chairman of the Board and Chief Executive Officer, provides
for the granting of nonqualified options each year for the duration of
the agreement, based on a formula related to annual increases in
consolidated net income, as defined. Pursuant to the agreement,
options to purchase 79,741 shares were granted in 1996 applicable to
the Company's 1995 operations and options to purchase 130,975 shares
were granted in 1998 applicable to the Company's 1997 operations. No
options are to be granted in connection with the Company's 1998
operations.
Also, at December 31, 1998 there are non-plan nonqualified options
outstanding to purchase an aggregate of 35,750 shares of common stock,
of which options to purchase 7,500 shares at $20.67 a share were
granted to a director of the Company. The non-plan options also
include options to purchase 17,500 common shares granted at a price of
$13.50 a share to certain non-U.S. employees in 1998. The $55,000
difference between the aggregate option price and the fair market
value of the Company's shares at the date of issuance of the options
has been charged to operations and credited to additional paid-in
capital. Additionally, in 1998 the Company issued to a consulting firm
a non-plan option to purchase 10,000 common shares for $25.50 a share.
The $124,000 fair value of the options at the date of grant has been
credited to additional paid-in capital in 1998 and is being amortized
to operations over the term of the consulting agreement which expires
in January 2001.
The length, vesting schedule, option price and other terms of the
options are determined at the time each option is granted, although
the term of plan options cannot exceed 10 years and incentive stock
option prices may not be less than the fair market value of the stock
on date of grant. Since all outstanding plan options to officers and
employees were granted for at least the fair market value of the
Company's shares at the dates of grant and are considered fixed plan
options, no charge has been made to operations for these options. No
income tax benefit is received by the Company upon the granting or
exercise of incentive stock options but it may receive income tax
benefits from nonqualified stock options when they are exercised and
from certain incentive stock options if the shares are resold within
one year of exercise. Such income tax benefits are credited to
additional paid-in capital when realized.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock
Based Compensation", for stock options granted to employees, officers
and directors and, therefore, continues to apply Accounting Principles
Board Opinion No. 25 and related interpretations in its accounting for
stock option plans. Accordingly, no compensation cost has been
recognized for options granted under its stock option plans. If the
Company had elected to recognize compensation cost for options granted
under these plans based on their fair values at the grant dates,
consistent with the method of SFAS No. 123, net income and income per
share would have been reduced to the pro forma amounts indicated
below:
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
---- ---- ----
(In thousands, except per
share information)
Net income:
As reported $ 8,380 $13,581 $4,330
Pro forma 5,539 12,016 1,245
Income per share:
Basic:
As reported $.74 $1.19 $.37
Pro forma .49 1.05 .11
As diluted:
As reported $.73 $1.18 $.36
Pro forma .48 1.04 .10
The fair values of the Company's stock options used to compute the pro
forma net income and income per share disclosures are their estimated
present values at grant date using the Black-Scholes option pricing
model based on the following assumptions:
1996 1997 1998
----- ------ ------
Expected volatility 46.3% 46.9% 47.2%
Average risk-free interest rate 6.0% 6.5% 5.6%
Average expected holding period,
in years 9 7 7
A summary of the status of the Company's outstanding stock options as
of December 31, 1996, 1997 and 1998 and changes during the years then
ended is presented below:
<TABLE>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1996 1997 1998
---------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
STOCK OPTIONS (000'S) Per Share (000'S) Per Share (000'S) Per Share
-------- --------- -------- ---------- ------- ----------
Outstanding at beginning
of year 1,315 $ 12.23 1,269 $ 14.62 1,346 $ 13.26
Granted 285 17.05 424* 13.55 662 15.92
Exercised (302) 6.17 (25) 1.60 (136) 13.61
Forfeited/expired (29) 18.03 (322) 19.91 (37) 19.75
----- ------- ----- ------- ------- -------
Outstanding at end of year 1,269 $ 14.62 1,346 $ 13.26 1,835 $ 14.06
===== ======= ===== ======== ===== ========
Exercisable at year end 848 $ 13.88 929 $ 12.84 1,075 $ 13.25
===== ======= ===== ======= ===== =======
Weighted-average fair
value of options granted
during the year $ 10.88 $ 7.56 $ 8.95
======= ======= ========
</TABLE>
*Excludes options for 130,975 shares at $14.06 a share earned in 1997
but issued in 1998 pursuant to the terms of the executive employment
agreement with the Company's President, Chairman of the Board and
Chief Executive Officer.
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
Options Outstanding Options Exercisable
------------------------ ---------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Shares Contractual Price Shares Price
Exercise Prices (000'S) Life Per Share (000'S) Per Share
--------------- -------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 1.13 to $ 3.33 190 2.6 years $ 2.96 190 $ 2.96
12.25 to 16.75 1,406 7.4 years 14.35 775 14.83
18.07 to 21.00 239 8.1 years 21.17 110 19.83
----- -----
Totals 1,835 1,075
===== =====
</TABLE>
NOTE I - CONCENTRATIONS:
In 1997 and 1998, sales to one customer represented approximately 11%
and 17%, respectively, of consolidated net sales. Sales to this
customer were made by each of the Company's reportable business
segments (see Note P). No single customer accounted for sales in
excess of 10% of consolidated net sales in 1996. Revenue from export
sales from the United States was less than 10% of consolidated net
sales in each of the three years ended December 31, 1998. The Company
currently sources certain products from single suppliers. However, to
lessen the risks of off-shore manufacturing, the Company maintains
substantial inventories of long-lead-time items and continually
evaluates alternative supply sources.
NOTE J - RESEARCH AND DEVELOPMENT:
Research and development costs for new products aggregated
approximately $2,897,000 in 1996, $4,245,000 in 1997 and $6,034,000 in
1998.
NOTE K - ADVERTISING COSTS:
Advertising costs aggregated approximately $2,768,000 in 1996,
$5,141,000 in 1997 and $5,847,000 in 1998.
NOTE L - INCOME TAXES:
Income taxes on the statements of operations are comprised of the
following:
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
Currently payable (refundable): ---- ---- ----
Federal $ 467 $ (4,163) $ 273
State and local (28) 162 (61)
Foreign 2,609 486 3,791
------- --------- -------
Totals 3,048 (3,515) 4,003
Deferred (312) (2,578) 833
------- -------- ------
NET PROVISION (CREDIT) $ 2,736 $ (6,093) $4,836
======= ======== ======
Pretax income (loss) was derived from foreign and domestic sources as
follows:
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
---- ---- ----
Foreign $14,598 $ 29,313 $34,344
Domestic (3,482) (21,825) (25,178)
-------- -------- --------
TOTALS $11,116 $ 7,488 $ 9,166
======== ========= ========
The following table reconciles statutory U.S. federal income taxes on
the Company's income before income taxes to the Company's actual
income tax provision (credit):
<TABLE>
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1997 1998
---------------- ----------------- -------------------
RATE AMOUNT RATE AMOUNT RATE AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. federal income
taxes 34.0% $ 3,779 34.0% $ 2,546 34.0% $ 3,116
Effect of:
State and local income
tax provision (credit)
(net of federal effect) (.9) (105) (6.4) (480) 2.1 187
Difference between U.S.
and foreign income tax
rates on earnings of
foreign subsidiaries (9.6) (1,080) (101.2) (7,591) (59.6) (5,463)
Provision for expected U.S.
Customs settlement 53.3 4,889
Valuation reserves on
deferred tax assets 15.5 1,419
German tax benefit
relating to dividend
distribution deduction (17.4) (1,300)
Other items (net) 1.1 142 10.0 732 7.5 688
----- ------ -------- -------- ----- --------
Actual income tax
provision (credit) 24.6% $2,736 (81.0)% $(6,093) 52.8% $ 4,836
===== ====== ======== ======== ===== ========
</TABLE>
The earnings from the Company's Asian operations are taxed at a
current maximum tax rate of 16% (16.5% in 1997 and 1996). Effective
January 1996, a subsidiary of the Company commenced manufacturing
operations in mainland China and was granted a five year "tax
holiday," comprised of a full exemption from income taxes for the
first two years and a 50% reduction from the statutory 15% tax rate
for the next three years. During the first three years of the tax
holiday the Company has saved an aggregate of $7,432,000 in income
taxes. This savings on a diluted per share basis was $.01, $.42 and
$.20 for the years 1996, 1997 and 1998, respectively. The effective
tax rate from Asian operations is dependent on the proportion of
earnings from mainland China.
No determination has been made as to what portion of the expected
settlement with the U.S. Customs Service might be deductible for
income tax purposes (see Note O). Accordingly, no deduction has been
made for this item in the computation of income taxes for 1998.
Through December 31, 1998, 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. Such additional
taxes would aggregate approximately $23 million based on the
subsidiaries' undistributed earnings which aggregate approximately
$88.5 million for income tax purposes at December 31, 1998. The
foregoing amounts are stated net of U.S. Sub-Part F taxes paid, or
payable, which are considered the equivalent of repatriated earnings.
The Company's effective income tax rate on future earnings from Hong
Kong and additional U.S. income taxes on the Hong Kong retained
earnings at December 31, 1998 are, in part, dependent upon the
Company's future domestic cash requirements. While the Company
currently projects that its Hong Kong retained earnings at December
31, 1998 will remain indefinitely invested, such estimate is subject
to future revision based upon general economic conditions and market
conditions in the consumer electronics industry.
Deferred tax assets and liabilities and the principal temporary
differences from which they arise are:
(IN THOUSANDS)
DECEMBER 31,
------------------
1997 1998
---- ----
Deferred tax assets:
Allowance for estimated doubtful accountsand
estimated sales returns, allowances and discounts $ 1,967 $ 2,209
Tax basis adjustments to inventory 3,418 6,452
Deferred compensation accruals 513 565
Difference in basis and amortization periods
of patents, trademarks and package design costs 1,075 1,172
Cumulative foreign translation adjustment 666 790
Estimated Jensen consolidation costs 545 213
Net operating loss and tax credit carryforwards 9,598 9,647
Other 885 1,367
------ ------
TOTAL 18,667 22,415
Less valuation allowance (2,424) (3,220)
-------- ---------
TOTAL DEFERRED TAX ASSETS 16,243 19,195
-------- ---------
Deferred tax liabilities:
Accelerated depreciation of property
and equipment 538 1,057
Tax basis adjustments to prepaid catalog costs 186 257
-------- --------
TOTAL DEFERRED TAX LIABILITIES 724 1,314
-------- --------
NET DEFERRED TAX ASSETS $15,519 $17,881
======== ========
As a result of the Jensen acquisition in 1996, the Company has
acquired domestic net operating loss carryforwards of approximately
$9.1 million and tax credit carryforwards of approximately $1.2
million, which expire from 1999 through 2011. Utilization of the loss
carryforwards is subject to an annual limitation of approximately $3
million as a result of the provisions of Section 382 of the Internal
Revenue Code. As a result of the Ross acquisition in 1997, the Company
has available approximately $2,500,000 of net operating loss
carryforwards in the United Kingdom, which are available to be applied
against future United Kingdom earnings. Additionally, at December 31,
1998, the Company has domestic net operating loss carryforwards of
approximately $1.4 million which expire in 2012 and tax credit
carryforwards of approximately $1.7 million which primarily expire
from 2001 through 2003. The Company has recorded a deferred tax asset
for the tax benefit of the foregoing carryforwards and a valuation
allowance for the tax benefit of such carryforwards which it estimates
are not likely to be realized prior to expiration. If the amounts
subject to the valuation allowance attributable to the Jensen and Ross
acquisitions are subsequently realized, their income tax benefit will
be recorded as a reduction of the then unamortized goodwill related to
the acquisition. In 1997, goodwill was reduced by approximately
$600,000 from the realization of such benefits.
The 1998 change in the valuation allowance is analysed as follows:
INCREASE/(DECREASE)
-------------------
(IN THOUSANDS)
Foreign tax credit carryforwards $567
State net operating loss carryforwards 182
Net adjustment of loss carryforwards and
other items related to 1996 Jensen
acquisition (34)
Other 81
-----
TOTAL $796
=====
NOTE M - EMPLOYEE BENEFIT PLANS:
The Company's profit sharing plans for eligible domestic nonunion
employees provide for annual contributions as authorized by the Board
of Directors of up to the maximum allowable as a tax deduction by the
Treasury Department. Profit sharing expense was approximately $363,000
in 1996, $562,000 in 1997 and $400,000 in 1998.
NOTE N - COMMITMENTS:
The Company leases certain facilities under long-term operating leases
which expire at various dates through March 2008. Additionally,
certain warehouse space and sales offices are leased on a
month-to-month basis.
Aggregate minimum rental payments under long-term leases for premises
are as follows:
YEAR ENDING DECEMBER 31: (IN THOUSANDS)
1999 $ 5,474
2000 4,410
2001 3,086
2002 2,296
2003 1,759
Subsequent to December 31, 2003 6,172
-------
T O T A L $23,197
=======
Rent expense was approximately $1,827,000 in 1996, $5,576,000 in 1997
and $6,312,000 in 1998.
The Company's employment agreement with Mr. Robert Borchardt, the
Company's President, Chairman of the Board and Chief Executive Officer
provides for a base annual salary ($1,012,000 for 1998) which is to be
increased annually by the greater of 6% or the change in the consumer
price index, and annual bonuses and nonqualified stock option grants
based on formulas related to annual increases in the consolidated net
income of the Company. Additionally, in connection with the signing of
the agreement, the Company granted Mr. Borchardt nonqualified options
for 150,000 shares in 1996. The agreement terminates on December 31,
2004 and is automatically renewable for successive two year periods.
If an election is made not to renew the agreement, Mr. Borchardt may
thereafter be retained as a consultant to the Company for life.
In connection with certain business acquisitions and the formation of
new subsidiaries in prior years, the Company entered into employment
agreements with certain key employees, which expire at various times
through November 2002. The agreements provide for specified annual
salaries. Certain agreements include provisions for annual increases
based on changes in consumer price indexes and provide for performance
based bonuses relating to the results of operations of the acquired
entity or newly formed subsidiary, which are payable in either cash,
stock or a combination thereof at the Company's option.
NOTE O - EXPECTED U.S. CUSTOMS SETTLEMENT:
The Company is the subject of an investigation being conducted by the
United States Customs Service and the United States Attorney's Office
in Orlando, Florida. In July 1994, agents of the United States Customs
Service, working with the United States Attorney's Office in Orlando,
Florida, seized property and business records from the Company's
facility pursuant to a search warrant. The investigation has focused
on country of origin marking, duty undervaluation, duty-free
eligibility under the Caribbean Basin Initiative, duties with respect
to dies, molds and tooling used overseas, commissions paid to agents,
importation of merchandise subject to textile quota, other instances
of undervaluation and other miscellaneous matters, during the period
1989 through mid-1995. The Company has held extensive discussions with
the U.S. Customs Service and the U.S. Attorney's Office with a view
towards reaching a settlement of this matter. The Company expects to
soon reach agreements with the U.S. Attorney's Office and the U.S.
Customs Service to settle all outstanding criminal and civil matters
involved in the 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. The Company has recorded
a provision of $14 million for this global settlement, which, together
with related fees and costs of approximately $1 million is separately
reflected in the attached 1998 consolidated statement of operations.
The classification of the accrual on the 1998 consolidated balance
sheet is based on the expected periods of payment, subject to approval
by the government. Neither the U.S. Attorney's office nor the U.S.
Customs Service has been asked to approve the above description of
this matter.
NOTE P - SEGMENT INFORMATION AND GEOGRAPHICAL DATA:
The Company is a developer, manufacturer and marketer of consumer
electronic products generally for aftermarket use. The Company's
products are sold primarily to retailers located in the United States
and Europe. In addition to its domestic facilities, the Company
maintains office and warehouse facilities in Asia, Canada, Western
Europe and manufacturing and assembly facilities in the People's
Republic of China.
The Company classifies its business into three principal segments,
which have been identified on the basis of certain recent business
acquisitions. 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 are allocated to each segment on the basis used for
internal management decision making purposes; certain interest
expense, the provision for the expected U.S. Customs settlement and
assets jointly utilized by more than one business segment are
reflected as "unallocated corporate" in the following presentation.
The three segments are as follows:
VIDEO AND COMPUTER GAME BUSINESS - Consists of the manufacturing
operations of STD Holdings Limited and its Hong Kong and other Chinese
subsidiaries and the sale and distribution of peripherals and other
accessories to enhance the enjoyment of playing video and computer
games. The profit on products produced for and sold by the Company's
other business segments has been allocated to them.
RECOTON AUDIO CORPORATION BUSINESS - Consists of the home and mobile
audio business of Recoton Audio Corporation and its United States and
European subsidiaries ("RAC"). Products sold include high-performance
and home theater loudspeaker systems and mobile audio products.
ACCESSORIES BUSINESS - Consists of the accessories' operations of
Recoton Corporation and certain other subsidiaries. Products sold
include 900 MHz and other wireless technology products and other
consumer electronic accessories.
The following table presents certain operating segment information:
<TABLE>
(IN THOUSANDS)
VIDEO AND
COMPUTER
GAME RAC ACCESSORIES UNALLOCATED
BUSINESS BUSINESS BUSINESS CORPORATE TOTAL
------------ ---------- ---------- ------------ ------
<S> <C> <C> <C> <C> <C>
1998:
Net sales:
External customers $243,923 $234,123 $222,362 $700,408
Intersegment 34,962 1,748 343 37,053
Interest expense 303 490 525 $ 16,602 17,920
Depreciation and
amortization 3,687 4,091 4,485 12,263
Provision for expected
U.S. Customs
settlement 15,000 15,000
Income (loss) before
income taxes 27,368 (884) 14,284 (31,602) 9,166
Identifiable assets 157,476 175,107 104,293 49,794 486,670
Property and equip-
ment additions 4,586 4,200 1,639 3,141 13,566
</TABLE>
Because each of the above business segments include U.S. operations
which are reportable in the consolidated U.S. income tax returns of
the Company, it is not practicable to allocate income taxes between
segments. Also, because the Company did not maintain records of
certain shared assets, costs and expenses in prior years, it is not
practicable to provide comparable data for 1996 and 1997. However,
external customer sales information by business segment for 1996 and
1997 is as follows:
VIDEO AND
COMPUTER
GAME RAC ACCESSORIES
BUSINESS BUSINESS BUSINESS TOTAL
-------- -------- ----------- -------
1996 $ 79,053 $ 64,587* $188,060 $331,700
1997 126,251 182,028 193,764 502,048
*From date of acquisition on August 28, 1996.
Net sales to external customers and long-lived tangible assets by
geographic area are as follows:
(IN THOUSANDS) YEAR ENDED DECEMBER 31,
1996 1997 1998
----- ---- -----
Net sales to external customers in:
United States $254,947 $375,483 $548,374
Europe 36,819 90,177 102,243
Other 39,934 36,388 49,791
------- -------- --------
TOTALS $331,700 $502,048 $700,408
======== ======== ========
(IN THOUSANDS) AS AT DECEMBER 31,
1996 1997 1998
------- ---------- -------
Long-lived tangible assets:
United States $ 27,913 $ 32,488 $ 35,488
Europe 2,177 2,470 3,723
Other 3,634 4,735 5,910
-------- -------- --------
TOTALS $ 33,724 $ 39,693 $ 45,121
========= ======== ========
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE
BOARD OF DIRECTORS
RECOTON CORPORATION
In connection with our audits of the consolidated financial statements
of RECOTON CORPORATION AND SUBSIDIARIES at December 31, 1997 and 1998 and for
each of the three years in the period ended December 31, 1998, we have also
audited Schedule II for each of the three years ended December 31, 1998,
included in this annual report on Form 10-K. In our opinion, such schedule
presents fairly the information required to be set forth therein.
/s/ CORNICK, GARBER & SANDLER, LLP
--------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
NEW YORK, NEW YORK
FEBRUARY 26, 1999
<PAGE>
SCHEDULE II
RECOTON CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- ---------------------------- -------- -------
Additions
----------------------------
Balance at Charged to Charged to Balance
beginning costs and other at end
Description of Period Expenses Accounts Deductions* of Period
---------- ---------- ---------- ---------- ---------
Allowance for possible
losses:
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996 $ 1,587 $ 1,259 $ 1,627** $ 1,354 $ 3,119
======== ======== ======== ======== =======
Year ended December 31,
1997 $ 3,119 $ 4,932 $ 4,254 $ 3,797
======== ======== ======== =======
YEAR ENDED DECEMBER 31,
1998 $ 3,797 $ 2,743 $ 1,600 $ 4,940
======== ======== ======== =======
</TABLE>
* Represents write-offs of uncollectible accounts, net of recoveries.
** Represents allowance recorded upon acquisition of Jensen.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
That portion of Recoton's definitive 1999 Proxy Statement appearing
under the caption "Election of Directors," is hereby incorporated by reference.
The information regarding the executive officers of Recoton is contained under
"Directors and Executive Officers of Recoton" under Item 1 to this Report.
ITEM 11. EXECUTIVE COMPENSATION.
That portion of Recoton's definitive 1999 Proxy Statement appearing
under the caption "Compensation of Executive Officers" is hereby incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
That portion of Recoton's definitive 1999 Proxy Statement appearing
under the caption "Security Ownership of Certain Beneficial Owners and
Management" is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
That portion of Recoton's definitive 1999 Proxy Statement appearing
under the caption "Certain Relationships and Related Transactions" is hereby
incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2). FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES:
See "Index to Financial Statements" set forth in Item 8, "Financial
Statements and Supplementary Data" of this Report.
(a)(3). EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K:
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
3.1A Restated Certificate of Incorporation of
Recoton Corporation, as filed January 28,
1997 (incorporated by reference to Exhibit
3.1 to the Registrant's Form 10-K for the
year ended December 31, 1996)
3.1B Amendment to Restated Certificate of
Incorporation of Recoton Corporation, as
filed June 25, 1998 (incorporated by
reference to Exhibit 3.3 to the
Registrant's Form 10-Q for the quarter
ended June 30, 1998)
3.2 By-Laws of Recoton as amended October 19,
1995 (incorporated by reference to Exhibit
3(ii) to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended
September 30, 1995)
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES:
4.1 Form of Common Stock Certificate
(incorporated by reference to Exhibit 4.1
to the Registrant's Form 10-K for the year
ended December 31, 1996)
4.2 Rights Agreement, dated as of October 27,
1995, between Recoton Corporation and
ChaseMellon Shareholder Services, L.L.C.
as Rights Agent (incorporated by
reference to Exhibit 4 to the
Registrant's Current Report on Form 8-K
dated October 27, 1995)
(10) MATERIAL CONTRACTS (an asterisk indicates management
contracts and compensatory plans or arrangements):
10.1A Consulting Agreement, effective as of May
18, 1987, between Recoton and Herbert
Borchardt (incorporated by reference to
Exhibit 10(F) to the Registrant's Form
10-K for the year ended December 31,
1987)*
10.1B Amendment dated March 20, 1997 to
Consulting Agreement between Recoton
Corporation and Herbert Borchardt dated
August 28, 1996 (incorporated by reference
to Exhibit 10.2 to the Registrant's Form
10-K for the year ended December 31,
1996)*
10.2 Employment Agreement between Recoton
Corporation and Robert L. Borchardt,
dated October 25, 1995 (incorporated by
reference to Exhibit (10)(1) to the
Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30,
1995)*
10.3 Deferred Compensation Agreement, effective
as of July 1, 1982, between Recoton and
Robert Borchardt (incorporated by
reference to Exhibit 10(C) to the
Registrant's Registration Statement on
Form S-2, filed on October 12, 1983, File
No. 2-87097)*
10.4 Deferred Compensation Agreement, effective
as of October 1, 1982, between Recoton and
Peter Wish (incorporated by reference to
Exhibit 10(E) to the Registrant's
Registration Statement on Form S- 2, filed
on October 12, 1983, File No. 2-87097)*
10.5A Split Dollar Life Insurance Agreements,
effective as of February 24, 1989, among
Recoton and Trudi Borchardt and Marvin
Schlacter and Robert Borchardt in the
aggregate face amount of $2,750,000
(incorporated by reference to Exhibit
10(G) to the Registrant's Form 10-K for
the year ended December 31, 1988)*
10.5B Split Dollar Life Insurance Agreements,
effective as of December 17, 1993, among
Recoton, the Robert and Trudi Borchardt
1993 Family Trust and Robert L. Borchardt
in the face amounts of $6,500,000 ("First
Policy"); $3,500,000 ("Second Policy");
and $1,300,000 ("Third Policy")
(incorporated by reference to Exhibit
10(G) to the Registrant's Annual Report on
Form 10-K for the year ended December 31,
1993)*
10.5C Amendment to Split Dollar Life Insurance
Agreements Dated as of December 17, 1993,
dated as of November 6, 1998, to amend
principal amount of First Policy to
$10,000,000 and to terminate Second Policy
(filed herewith) *
10.5D Split Dollar Life Insurance Agreement,
effective as of November 8, 1998, among
Recoton, the Robert and Trudi Borchardt
1993 Family Trust and Robert L. Borchardt
in the face amount of $2,250,000 (filed
herewith) *
10.5E Split Dollar Life Insurance Agreement,
effective as of November 8, 1998, among
Recoton, the Robert and Trudi Borchardt
1993 Family Trust and Robert L. Borchardt
in the face amount of $2,000,000 (filed
herewith) *
10.6 Recoton Corporation 1982 Stock Option
Plan, as revised October 23, 1991
(incorporated by reference to Exhibit
10(J) to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended
September 30, 1991)*
10.7 Recoton Corporation 1991 Stock Option
Plan, as revised March 23, 1998, and form
of option agreement (incorporated by
reference to Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997)*
10.8 Recoton Corporation Nonqualified Stock
Option Plan, as revised March 23, 1998
(incorporated by reference to Exhibit
10.10 to the Registrant's Annual Report on
Form 10-K for the year ended December
31, 1997)*
10.9 Recoton Corporation Stock Bonus Plan, as
revised September 15, 1993 (incorporated
by reference to Exhibit 10(K) to the
Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993)*
10.10 Recoton Corporation 1998 Stock Option Plan
and form of option certificate, as adopted
March 23, 1998 (incorporated by reference
to Exhibit 10.29 to the Registrant's
Annual Report on Form 10-K for the year
ended December 31, 1997)*
10.11 Recoton Corporation Code Section 401(K)
Profit Sharing Plan and Trust Agreement,
as amended and restated December 29, 1994
(incorporated by reference to Exhibit
10(K) to the Registrant's Annual Report
on Form 10-K for the year ended December
31, 1994)*
10.12 Option Agreement, dated May 5, 1994, with
I. Friedman Equities, Inc. (incorporated
by reference to Exhibit 10(L) to the
Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994)
10.13 Common Stock Purchase Option, as of April
7, 1998, with the Equity Group, Inc.
(incorporated by reference to Exhibit
10.34 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1998)
10.14 Stock Purchase Agreement dated as of
August 31, 1995, among Recoton
Corporation, Recoton (Far East) Limited,
STD Holding Limited (STD) and the other
shareholders of STD including, as
exhibits, employment agreements with
Stephen Chu (as President of STD),* David
Chu (as Vice President of STD)* and
Patrick Ho (as Vice President, Marketing
of STD)* (incorporated by reference to
Exhibit 1 to the Registrant's Current
Report of Form 8-K dated September 5,
1995)
10.15 Asset Purchase Agreement dated as of
August 31, 1995 among Recoton
Corporation, InterAct Accessories, Inc.,
STD Holding Limited, Stephen Chu and
others (including, as an exhibit, an
employment agreement with Todd Hays (as
President and Chief Operating Officer of
InterAct Accessories, Inc.)* (incorporated
by reference to Exhibit 2 to the
Registrant's Current Report of Form 8- K
dated September 5, 1995)
10.16 Fourth Amended and Restated Agreement and
Plan of Merger between Recoton
Corporation, RC Acquisition Sub, Inc. and
International Jensen Incorporated dated as
of January 3, 1996 (incorporated by
reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K
dated June 23, 1996)
10.17 Third Amended and Restated Agreement for
Purchase and Sale of the Assets of the
OEM Business of International Jensen
Incorporated ("Jensen") (now Recoton
Audio Corporation) by and to IJI
Acquisition Corp. dated as of January 3,
1996 (incorporated by reference to Exhibit
2.2. to Jensen's Current Report on Form
8-K dated June 23, 1996)
10.18A Second Amended and Restated Credit
Agreement among Recoton Corporation, The
Chase Manhattan Bank and the lenders made
party thereto dated as of June 18, 1998
(incorporated by reference to Exhibit
10.32 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June
30, 1998)
10.18B Amendment and Waiver to Second Amended and
Restated Credit Agreement with The Chase
Manhattan Bank, et. al, dated as of June
18, 1998 (incorporated by reference to
Exhibit 10.33 to the Registrant's
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998)
10.18C Amendment, dated as of November 30, 1998,
to Second Amended and Restated Credit
Agreement dated as of June 18, 1998
between Recoton Corporation and The
Chase Manhattan Bank, et. al
(incorporated by reference to Exhibit 1 to
the Registrant's Current Report on Form
8-K dated November 30, 1998)
10.18D Amendment dated as of December 31, 1998
(but executed on February 4, 1999)
between Recoton Corporation and The Chase
Manhattan Bank (for itself and as
Administrative Agent) amending the Second
Amended and Restated Credit Agreement
dated as of June 18, 1998 (incorporated by
reference to Exhibit 6 to the
Registrant's Current Report on Form 8-K
dated February 4, 1999)
10.18E Amendment dated as of December 31, 1998
(but executed in March 1999) between
Recoton Corporation and The Chase
Manhattan Bank (for itself and as
Administrative Agent) amending the Second
Amended and Restated Credit Agreement
dated as of June 18, 1998 (filed herewith)
10.19A Note Purchase Agreement dated January 6,
1997 between Recoton Corporation and the
several purchasers (incorporated by
reference to Exhibit 10.31 to the
Registrant's Form 10-K for the year ended
December 31, 1996)
10.19B Amendment to Note Purchase Agreement dated
January 6, 1997 between Recoton
Corporation and the several purchasers,
dated May 13, 1997 (incorporated by
reference to Exhibit 10.32 to the
Registrant's Form 10-Q for the quarter
ended March 30, 1997)
10.19C Amendment to Note Purchase Agreement dated
January 6, 1997 between Recoton
Corporation and the several purchasers ,
dated August 13, 1997 (incorporated by
reference to Exhibit 10.33 to the
Registrant's Form 10-Q for the quarter
ended June 30, 1997)
10.19D Amendment to Note Purchase Agreement dated
January 6, 1997 between Recoton
Corporation and the several purchasers ,
dated March 25, 1998 (incorporated by
reference to Exhibit 10.28 to the
Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997)*
10.19E Waiver of Certain Terms of the Note
Purchase Agreement dated January 6, 1997
between Recoton Corporation and the
several purchasers, dated June 29, 1998
(incorporated by reference to Exhibit
10.31 to the Registrant's Form 10-Q for
the quarter ended June 30, 1998)
10.19F Amendment Agreement dated as of
December 31, 1998 (but executed on
February 4, 1999) between Recoton
Corporation and the Holders of the
Company's Notes Issued January 6, 1997
(incorporated by reference to Exhibit 4 to
the Registrant's Current Report on Form
8-K dated February 4, 1999)
10.19G Amendment Agreement dated as of December
31, 1998 (but executed in March 1999,
1999) between Recoton Corporation and the
Holders of the Company's Notes Issued
January 6, 1997 (filed herewith)
10.20A Note Purchase Agreement dated as of
September 1, 1998 for $25 million
principal amount of adjustable rate senior
notes due September 1, 2008 with The
Prudential Insurance Company of North
America (incorporated by reference to
Exhibit 10.35 to the Registrant's Form
10-Q for the quarter ended September 30,
1998)
10.20B Amendment Agreement dated as of December
31, 1998 (but executed on February 4,
1999) between Recoton Corporation and the
Holder of the Company's Notes Issued
September 1, 1998 (incorporated by
reference to Exhibit 5 to the Registrant's
Current Report on Form 8-K dated February
4, 1999)
10.20C Amendment Agreement dated as of December
31, 1998 (but executed in March 1999)
between Recoton Corporation and the Holder
of the Company's Notes Issued September 1,
1998 (filed herewith)
10.21A Securities Purchase Agreement between
Recoton Corporation, The Prudential
Insurance Company of America and ING
(U.S.) Capital LLC dated February 4, 1999
(incorporated by reference to Exhibit 5 to
the Registrant's Current Report on Form
8-K dated February 4, 1999)
10.21B Form of warrants issued to The Prudential
Insurance Company of America and ING
(U.S.) Investments Corporation dated
February 4, 1999 and sheet detailing
variable information (incorporated by
reference to Exhibit 5 to the Registrant's
Current Report on Form 8- K dated February
4, 1999)
10.21C Registration Rights Agreement with The
Prudential Insurance Company of America
and ING (U.S.) Investments Corporation
dated February 4, 1999 (incorporated by
reference to Exhibit 5 to the Registrant's
Current Report on Form 8-K dated February
4, 1999)
10.22D Amendment Agreement dated as of December
31, 1998 (but executed in March 1999)
between Recoton Corporation and The
Prudential Insurance Company of America
and ING (U.S.) Capital regarding the notes
issued February 4, 1999 (filed herewith)
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS: not
applicable
(12) STATEMENT COMPUTATION OF RATIOS: not applicable
(13) ANNUAL REPORT TO SECURITY HOLDERS, FORM 10-Q OR
QUARTERLY REPORT TO SECURITYHOLDERS: not applicable
(16) LETTER RE CHANGE IN CERTIFYING ACCOUNTANT: not
applicable
(18) LETTER RE CHANGE IN ACCOUNTING PRINCIPLES: not
applicable
(21) SUBSIDIARIES OF THE REGISTRANT [filed herewith]
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF
SECURITY HOLDERS: not applicable
(23) CONSENT OF EXPERTS AND COUNSEL: Consent of the
Independent Public Accountants [filed herewith]
(24) POWER OF ATTORNEY: not applicable
(27) FINANCIAL DATA SCHEDULE: [filed herewith]
(28) INFORMATION FROM REPORTS FURNISHED TO STATE
INSURANCE REGULATORY AUTHORITIES: not applicable
(29) ADDITIONAL EXHIBITS: not applicable
(b) REPORTS ON FORM 8-K: The Registrant filed Forms 8-K on November
30, 1998 and December 11, 1998 reporting under Item 5 (Other Events) certain
transactions pursuant to the Company's senior bank credit facility.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the 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
By: /S/ ROBERT L. BORCHARDT
----------------------------------
Robert L. Borchardt, Chairman,
Chief Executive Officer and
President
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE POSITION DATE
/S/ ROBERT L. BORCHARDT President, Chairman, March 29, 1999
- ------------------------- Chief Executive Officer
Robert L. Borchardt (Principal Executive
Officer) and Director
/S/ STUART MONT Chief Operating
- ------------------------- Officer, March 29, 1999
Stuart Mont Chief Financial Officer
(Principal Financial Officer)
and Director
/S/ GEORGE CALVI Director March 29, 1999
- -------------------------
George Calvi
/S/ PETER WISH Director March 29, 1999
- -------------------------
Peter Wish
/S/ JOSEPH H. MASSOT Treasurer (Principal March 29, 1999
- ------------------------- Accounting Officer)
Joseph H. Massot and Director
/S/ IRWIN S. FRIEDMAN Director March 29, 1999
- -------------------------
Irwin S. Friedman
/S/ JOSEPH M. IDY Director March 29, 1999
- -------------------------
Joseph M. Idy
/S/ RONALD E. MCPHERSON Director March 29, 1999
- -------------------------
Ronald E. McPherson
/S/ PAUL FEFFER Director March 29, 1999
- -------------------------
Paul Feffer
/S/ STEPHEN CHU Director March 29, 1999
- -------------------------
Stephen Chu
<PAGE>
EXHIBIT INDEX
EXHIBIT NO.
10.5C Amendment to Split Dollar Life Insurance Agreements Dated as
of December 17, 1993, dated as of November 6, 1998, to amend
principal amount of First Policy to $10,000,000 and to
terminate Second Policy
10.5D Split Dollar Life Insurance Agreement, effective as of
November 8, 1998, among Recoton, the Robert and Trudi
Borchardt 1993 Family Trust and Robert L. Borchardt in the
face amount of $2,250,000
10.5E Split Dollar Life Insurance Agreement, effective as of
November 8, 1998, among Recoton, the Robert and Trudi
Borchardt 1993 Family Trust and Robert L. Borchardt in the
face amount of $2,000,000
10.18E Amendment dated as of December 31, 1998 (but executed in
March 1999) between Recoton Corporation and The Chase
Manhattan Bank (for itself and as Administrative Agent)
amending the Second Amended and Restated Credit Agreement
dated as of June 18,
1998
10.19G Amendment Agreement dated as of December 31, 1998 (but
executed in March 1999) between Recoton Corporation and the
Holders of the Company's Notes Issued January 6, 1997
10.20C Amendment Agreement dated as of December 31, 1998 (but
executed in March 1999) between Recoton Corporation and the
Holder of the Company's Notes Issued September 1, 1998
10.22D Amendment Agreement dated as of December 31, 1998 (but
executed in March 1999) between Recoton Corporation and The
Prudential Insurance Company of America and ING (U.S.)
Capital regarding the notes issued February 4, 1999
21 Subsidiaries of the registrant
23 Consent of the Independent Public Accountants
26 Financial Data Schedule
Exhibit 10.5C
AMENDMENT TO SPLIT DOLLAR LIFE INSURANCE AGREEMENTS DATED AS OF
DECEMBER 17, 1993
THIS AMENDMENT is made as of the 6th day of November, 1998, by and
among RECOTON CORPORATION, a New York corporation with its principal offices at
2950 Lake Emma Road, Lake Mary, Florida 32746 (the "Corporation"); Robert L.
Borchardt, residing at 802 Georgia Avenue, Winter Park, Florida ("Borchardt");
and THEODORE S. LYNN and MARVIN SCHLACTER, as trustees of the ROBERT AND TRUDI
BORCHARDT 1993 FAMILY TRUST dated November 5, 1993 (the "Trustees").
WHEREAS, the parties hereto have entered into three agreements dated
as of December 17, 1993 regarding a split-dollar insurance program (the
"Program"), one related to a John Hancock policy in the principal amount of $
6,500,000 (the "First Policy Agreement"), another related to a Chubb Life
American policy in the principal amount of $3,500,000 (the "Second Policy
Agreement") and the third related to a Hartford Life Insurance Company policy in
the principal amount of $1,300,000 (the "Third Policy Agreement" and, with the
First Policy Agreement and the Second Policy Agreement, the "Agreements");
WHEREAS, Borchardt continues to be employed by the Corporation and has
continued to render competent efforts on behalf of the Corporation; and
WHEREAS, Borchardt and the Trustees have requested that the Program be
revised to increase the principal amount of the coverage and make certain
changes in carriers and the Company has agreed with such request.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficient of which is hereby
acknowledged, the parties hereto agree as follows:
1. All references in the First Policy Agreement to "John Hancock",
"$6,500,000" and "Policy No. 08006960-2" are hereby changed to "Lincoln Life
Insurance Company," "$10,000,000" and "Policy No. 4802506," respectively and
Article IV of the First Policy Agreement is hereby amended to read as set forth
on Attachment I to this Amendment.
2. The Second Policy Agreement is hereby terminated.
3. The Third Policy Agreement remains unchanged.
4. The parties have herewith entered into two new agreements (the
"Fourth Policy Agreement" and the "Fifth Policy Agreement") in substantially the
form of the other Agreements with respect to a life insurance policy from The
Travelers Insurance Company in the principal amount of $2,250,000 (for the
Fourth Policy Agreement) and a life insurance policy from Transamerica
Occidental Life Insurance Company in the principal amount of $2,000,000 (for the
Fifth Policy Agreement).
5. The parties acknowledge that the policy issued by Lincoln Life
Insurance Company ("Lincoln") is a variable universal life policy through
Trudi's age 91 and the policies issued by The Travelers Insurance Company and
Transamerica Occidental Life Insurance Company are interest sensitive universal
life policies through Trudi's age 92, whereas the policy issued by John Hancock
was a whole life policy and the policy issued by Chubb Life Insurance Company of
America was a universal life policy.
6. The parties consent to the surrender of the policies issued by John
Hancock and Chubb Life Insurance Company of America with the cash surrender
value being used to purchase the policy issued by Lincoln.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
RECOTON CORPORATION
ATTESTED:
/S/ Joseph W. Massot
- ---------------------- By: /s/ Stuart Mont
Assistant Secretary ---------------------------
Name: Stuart Mont
Title:
/s/ Robert L. Borchardt
----------------------------
Robert L. Borchardt
THE ROBERT AND TRUDI
BORCHARDT 1993 FAMILY TRUST
DATED NOVEMBER 5, 1993
By:/s/ Theodore S. Lynn
---------------------------
Theodore S. Lynn, Trustee
/s/ Marvin Schlacter
---------------------------
Marvin Schlacter, Trustee
STATE OF Florida )
: ss.:
COUNTY OF Seminole )
On this 8th day of December, 1998, before me personally came Joseph
Massot, to me known, who, being by me duly sworn, did depose and say that he
resides in Seminole County; that he is the Assistant Secretary of Recoton
Corporation, the corporation described in and which executed the above
instrument; and that he signed his name thereto by order of the Board of
Directors of such corporation.
/s/ Mary Ellen Noiseux
-------------------------
Notary Public
STATE OF Florida )
: ss.:
COUNTY OF Seminole )
On this 8th day of December, 1998, before me personally came Robert
L. Borchardt, to me known to be the individual described in and who executed the
foregoing instrument, and he duly acknowledged to me that he executed the same.
/s/ Mary Ellen Noiseux
-------------------------
Notary Public
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On this 10th day of December, 1998, before me personally came
Theodore S. Lynn, to me known to be the individual described in and who executed
the foregoing instrument, and he duly acknowledged to me that he executed the
same.
/s/ Maureen C. Marry
-------------------------
Notary Public
STATE OF New York )
: ss.:
COUNTY OF New York )
On this 8th day of December, 1998, before me personally came Marvin
Schlacter, to me known to be the individual described in and who executed the
foregoing instrument, and he duly acknowledged to me that he executed the same.
/s/ Joseph H. Massot
-------------------------
Notary Public
<PAGE>
ATTACHMENT I
ARTICLE IV
SELECTION OF INVESTMENTS
The Trustees and their successors, as the Owner of the Policy, shall
have the sole and absolute discretion to select, and to change from time to
time, the fund or funds or other investments through which the Policy is funded
without the consent of any other person. The Trustees may consult with any
registered investment advisors or any other persons whom they select, but they
shall not be obligated to follow any instructions from any such individuals in
determining or changing the investments or in taking any other actions with
respect to the investments.
Exhibit 10.5D
SPLIT DOLLAR LIFE INSURANCE AGREEMENT
REGARDING THE TRAVELERS INSURANCE COMPANY POLICY
THIS AGREEMENT made as of this 8th day of November, 1998, by and among
RECOTON CORPORATION, a New York corporation, having its principal office at 2950
Lake Emma Road, Lake Mary, Florida 32746 (hereinafter referred to as the
"Corporation"); ROBERT L. BORCHARDT, residing at 802 Georgia Avenue, Winter
Park, Florida 32789 (hereinafter referred to as "Borchardt"); and THEODORE S.
LYNN and MARVIN SCHLACHTER, as Trustees of the ROBERT AND TRUDI BORCHARDT 1993
FAMILY TRUST dated November 5, 1993 (hereinafter referred to as the "Trustees").
WHEREAS, Borchardt is employed by the Corporation and has rendered
competent efforts on behalf of the Corporation and the Corporation wishes to
give recognition to Borchardt for such efforts; and
WHEREAS, in recognition of the foregoing, the Corporation wishes to
help Borchardt provide for the security of his family through participation in a
split-dollar insurance program; and
WHEREAS, Borchardt and the Trustees agree to participate in such
program to the extent hereafter provided.
NOW, THEREFORE, it is mutually agreed as follows:
ARTICLE I
APPLICATION FOR LIFE INSURANCE
1. In furtherance of the purposes of this Agreement, the Trustees have
purchased a policy of life insurance insuring Borchardt's life and the life of
his wife Gertrude Borchardt (hereinafter referred to as "Trudi") with The
Travelers Insurance Company (hereinafter referred to as "the Insurer"), in the
total face amount of $2,250,000 (hereinafter referred to as the "Policy"), which
is described in Exhibit A attached hereto and by this reference made a part
hereof.
2. The parties hereby agree that the Policy shall be subject to the
terms and conditions of this Agreement.
ARTICLE II
OWNERSHIP OF LIFE INSURANCE
The Trustees, and their successors, shall be the sole and absolute
owner of the Policy and may exercise all ownership rights granted to the owner
thereof by the terms of the Policy, without the consent of any other person,
except as may otherwise be provided herein.
ARTICLE III
PAYMENT OF PREMIUMS ON POLICY
1. The Corporation, within a reasonable time after the Insurer under
the policy has issued its notice of premium due, shall notify Borchardt and the
Trustees of the exact amount due from the Trustees. If the notice from the
Insurer of premium due is sent to the Trustees, the Trustees shall promptly
deliver a copy thereof to the Corporation. The amount due from the Trustees
shall be an amount equal to the annual cost of the value of the economic benefit
attributable to the insurance protection on the joint lives of Borchardt and his
wife Trudi, provided by such Policy in accordance with this Agreement, measured
by the lower of (i) the U.S. Life Table 38 (or the corresponding applicable rate
or other measure set forth in any applicable Revenue Ruling or Treasury
Regulation or other Treasury notice), while both are alive and thereafter
measured by the PS 58 Rate, set forth in Revenue Ruling 55-747 (or the
corresponding applicable rate or other measure set forth in any Revenue Ruling
or Treasury Regulation or other Treasury notice modifying or revoking Revenue
Ruling 55-747), or (ii) the Insurer's current published premium rate for
annually renewable term insurance for standard risks. The Trustees shall pay
such required portion of the premium to the Insurer of the Policy on or prior to
the premium due date. If the Trustees fail to make such timely payment, the
Corporation, in its sole and absolute discretion, may elect to make the
Trustees' portion of the premium payment, which payment shall be recovered by
the Corporation as provided herein.
2. On or before the due date of each premium payable on the Policy, or
within the grace period provided therein, the Corporation shall pay to the
Insurer a portion of the premium equal to (a) the gross premium, less (b) the
portion of the premium payable by the Trustees in accordance with the preceding
paragraph 1, and shall, upon request, promptly furnish Borchardt and/or the
Trustees evidence of timely payment of such premium.
ARTICLE IV
ELECTION OF DIVIDEND OPTION
The Trustees, as the Owner of the Policy, may elect, in their sole and
absolute discretion, to have all dividends, if any, declared by the Insurer on
the Policy applied:
A. to reduce the premium payable on the Policy; or
B. to purchase paid-up additional insurance on the
life of Borchardt and his wife Trudi; or
C. to purchase one-year term insurance on the lives
of Borchardt and his wife Trudi; or
D. for any other purpose allowable by the Policy.
Notwithstanding the foregoing provisions of this Article IV, until this
Agreement has terminated, no such dividend election by the Trustees may be made
if the cash value of the Policy would be reduced below the amount it would
otherwise have been in the absence of such election.
ARTICLE V
COLLECTION AND PAYMENT OF DEATH BENEFIT
1. Within 30 days after the death of the survivor of Borchardt and his
wife Trudi, the Corporation and the Trustees shall apply to the Insurer for the
death benefit and take all action necessary to obtain such payment. The
Corporation and the Trustees shall cooperate in giving instructions to the
Insurer for the issuance of two checks to bring about the following results. The
proceeds shall be divided into two parts. The First Part shall be an amount
equal to (a) the total amount of the premiums which the Corporation, its
successors and assigns, have paid with respect to the Policy, reduced by (b) any
prior reimbursements therefor. The Second Part, if any, shall be the balance of
the proceeds.
(a) The First Part shall be paid to the Corporation, its
successors or assigns. The parties hereby confirm that in no event shall the
amount payable to the Corporation exceed the Policy proceeds payable as a result
of the maturity of the Policy as a death claim.
(b) The Second Part shall be paid to the beneficiary
designated by the Trustees, or their successors. No portion of the proceeds
shall be paid to the beneficiary designated by the Trustees until the First Part
of the proceeds has been paid fully to the Corporation.
2. The Insurer may rely upon a sworn statement in form satisfactory to
the Insurer furnished by the Corporation, its successors or assigns, as to the
amount of the First Part, and any payment made on account of such statement
shall discharge the Issuer accordingly.
ARTICLE VI
COLLATERAL ASSIGNMENT
1. To secure repayment to the Corporation of the amount of the
premiums on the Policy paid by it, upon maturity of the policy as provided in
the preceding Article V of this Agreement or upon termination of this Agreement
as provided in the succeeding Article VII of this Agreement, the Trustees have
assigned, contemporaneously herewith, the Policy to the Corporation as
collateral. The parties hereby confirm that the Policy shall be subject to the
terms and conditions of the collateral assignment filed with the Insurer
relating to the Policy. The collateral assignment of the Policy to the
Corporation hereunder shall not be terminated, altered or amended by the
Trustees, without the written consent of the Corporation.
2. Except as otherwise provided herein, the Trustees shall not sell,
assign, transfer, borrow against, surrender or cancel the Policy nor change the
beneficiary designation provisions thereof, without the written consent of the
Corporation.
ARTICLE VII
TERMINATION OF AGREEMENT AND OPTION ON TERMINATION
1. This Agreement shall terminate upon the occurrence of any one of
the following events:
(a) The insolvency or dissolution of the Corporation,
PROVIDED, HOWEVER, that under no circumstances shall the creditors of the
Corporation have any claim to the Policy or proceeds thereunder. For the
purposes of this Agreement, the term "insolvency" shall mean (i) the filing of a
voluntary petition in bankruptcy or for an arrangement, reorganization or other
relief from creditors under the Federal Bankruptcy Code or any similar law, (ii)
the appointment of a receiver for a substantial part of the assets of the
Corporation which appointment has not been vacated within 90 days, or (iii) the
failure, within 90 days, to obtain dismissal of any involuntary petition in
bankruptcy or for reorganization filed against the Corporation.
(b) The termination of Borchardt's employment by the
Corporation for cause. For purposes of this Agreement, the term "cause" shall
mean willful malfeasance or the commission of a felony.
(c) The death of the survivor of Borchardt and his wife
Trudi, subject to the provisions of Article V which shall continue in full force
and effect following the death of Borchardt and his wife Trudi. The parties
hereby confirm that this Agreement and the respective rights and obligations
hereunder shall continue in full force and effect upon the termination of
Borchardt's employment because of his disability or for any other reason other
than for cause.
(d) Upon (1) payment by the Trustees of the remaining
premium payments due on the Policy or upon an Agreement entered into by the
Trustees and the Corporation under which the Trustees agree to assume payment of
such remaining premiums (either of which the Trustees may do in their sole
discretion) and (2) repayment to the Corporation of an amount equal to the total
amount of the premiums which the Corporation, its successors and assigns, have
paid with respect to the Policy less any prior reimbursements therefor.
2. Upon termination of this Agreement, the obligation of the
Corporation to make payments on account of policy premiums shall cease.
3. For ninety (90) days after termination of this Agreement, the
Trustees shall have the option of obtaining the release of the collateral
assignment of the Policy to the Corporation. To obtain such release, with
respect to termination pursuant to subparagraphs (a), (b) or (c) of paragraph 1
of this Article VII, the Trustees shall repay to the Corporation an amount equal
to the total amount of the premiums which the Corporation, its successors and
assigns, have paid with respect to the Policy. Upon receipt of such amount, or
upon termination pursuant to subparagraph (d) of paragraph 1 of this Article
VII, the Corporation shall release the collateral assignment of the Policy, by
the execution and delivery to the Trustees of an appropriate instrument of
release in form satisfactory to the Insurer and Trustees.
4. If the Trustees fail to exercise the option provided for in the
preceding paragraph 3 of this Article VII, within 90 days after the date of
termination of the Agreement, then, the Corporation may enforce its right to be
repaid an amount equal to the total amount of the premiums which the
Corporation, its successors and assigns, have paid with respect to the Policy;
provided that in the event the cash surrender value of the Policy exceeds the
amount due the Corporation, such excess shall be paid to the Trustees.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
1. This Agreement is governed by the laws of the State of New York.
2. The parties to this Agreement agree that this Agreement is among
the Corporation, Borchardt and the Trustees to the exclusion of all other
persons or entities herein mentioned. The filing of copies of this Agreement
with the Insurer in no way operates to make the Insurer a party to this
Agreement, or any modification or amendment hereof. No provision of this
Agreement nor any modification hereof, shall in any way be construed as
enlarging, changing, varying, or in any other way affecting the obligations of
the Insurer as expressly provided in the Policy, except insofar as the
provisions are made a part of the Policy by the collateral assignment executed
by the Trustees and filed with the Insurer in connection herewith. The Insurer
shall be fully discharged from its obligations under the Policy by payment of
the Policy death benefit to the beneficiary named in the Policy, subject to the
terms and conditions of the Policy.
3. This split-dollar insurance plan is a small welfare plan under the
Employment Retirement Security Act of 1974 (ERISA). Under this Act, an employee
has certain rights and protection. His rights are set forth in this Agreement
and in the insurance contracts issued in his name.
In making a claim for benefits, the employee must make his claim on a
form acceptable to the Corporation. The plan administrator will supply him with
the claim forms. The request will set forth the basis of the employee's claim
and authorize the plan administrator and the Corporation to investigate the
claim and take the necessary steps to facilitate payment of benefits.
If the Corporation denies the employee's claim, it must provide him
with the following information in a written reply:
(a) The specific reason or reasons for the denial;
(b) A reference to the specific provisions of the
split-dollar agreement on which the denial is based;
(c) A description of any additional material or information
necessary for him to perfect his claim; and
(d) An explanation of the procedure for review of claims.
Within 60 days of a claim denial from the Corporation, or some later
date that is reasonable, the employee may request in writing a review of the
denied claim by the Corporation.
The employee may, in asking for the review: (a) pertinent documents,
and (b) submit issues and comments in writing.
On receipt of the request for review, the Corporation, as the case may
be, shall promptly, within 60 days, deny or grant the claim. The decision shall
be made in writing and in a manner calculated to be understood by the employee.
It also shall include specific reference to pertinent provisions on which the
denial is based.
After review, if the employee feels he has been improperly denied a
claim for benefits, he has the right to file suit in federal or state court. If
he is successful in his lawsuit, the court may, if it so decides, require the
other party to pay legal costs, including attorney's fees.
4. The parties to this Agreement shall execute such documents as are
necessary to carry out this Agreement.
5. This Agreement may not be amended or revoked, except by an
instrument in writing signed by the parties hereto or their respective
successors or assigns, before a notary and mutually acknowledged expressly
modifying or revoking the provisions hereof.
6. The article headings and numbers and the paragraph numbers are
included herein for convenience only and in no way are to be considered to be a
part of this Agreement.
7. In the event that any provisions of this Agreement shall be held
illegal, unenforceable or in conflict with the laws of New York or the United
States, such provisions shall be deemed separable from the other provisions of
this Agreement and all the other provisions shall continue in full force and
effect.
8. This Agreement and all obligations and covenants hereunder shall
bind the parties hereto, their successors and assigns.
9. Any waiver by a party of any of the provisions of this Agreement or
any right or rights hereunder, shall not be deemed to be a continuing waiver and
shall not prevent or estop such parties from thereafter enforcing such
provisions or rights as to the future and the failure of any party to insist in
one or more instances upon the strict performance of any one or more of the
terms of the provisions of this Agreement by the other parties shall not be
construed as a waiver or relinquishment of any such terms or provisions, but the
same shall continue in full force and effect.
10. Any notice, consent or demand required or permitted under this
Agreement shall be in writing and shall be signed by the party giving or making
the same. If such notice, consent or demand is mailed to a party hereto, it
shall be sent by United States certified mail, postage prepaid, addressed to
such party's last known address as shown on the records of the Corporation. The
date of such mailing shall be deemed the date of notice, consent or demand. 11.
This Agreement may be executed in three counterparts which together shall
constitute one Agreement with the same effect as if the parties executing the
counterparts had all executed this Agreement as of the day and year first above
written.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
RECOTON CORPORATION
By: /s/ Joseph H. Massot
ATTESTED: -----------------------
/s/ Stuart Mont
- -------------------
Secretary /s/ Robert L Borchardt
------------------------
Robert L. Borchardt
THE ROBERT AND TRUDI BORCHARDT
1993 FAMILY TRUST
DATED NOVEMBER 5, 1993
By: /s/ Theodore S. Lynn
--------------------------
Theodore S. Lynn, Trustee
/s/ Marvin Schlachter
--------------------------
Marvin Schlachter, Trustee
<PAGE>
EXHIBIT A
The following insurance policy is subject to the annexed Agreement:
The Travelers Insurance Company
Policy No. 736692
RECOTON CORPORATION
By: /s/ Joseph H. Massot
ATTESTED: -----------------------
/s/ Stuart Mont
- -------------------
Secretary
/s/ Robert L. Borchardt
----------------------------
Robert L. Borchardt
THE ROBERT AND TRUDI BORCHARDT
1993 FAMILY TRUST
DATED NOVEMBER 5, 1993
By: /s/ Theodore S. Lynn
--------------------------
Theodore S. Lynn, Trustee
/s/ Marvin Schlachter
--------------------------
Marvin Schlachter, Trustee
Exhibit 10.5E
SPLIT DOLLAR LIFE INSURANCE AGREEMENT
REGARDING THE TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY POLICY
THIS AGREEMENT made as of this 8th day of November, 1998, by and among
RECOTON CORPORATION, a New York corporation, having its principal office at 2950
Lake Emma Road, Lake Mary, Florida 32746 (hereinafter referred to as the
"Corporation"); ROBERT L. BORCHARDT, residing at 802 Georgia Avenue, Winter
Park, Florida 32789 (hereinafter referred to as "Borchardt"); and THEODORE S.
LYNN and MARVIN SCHLACHTER, as Trustees of the ROBERT AND TRUDI BORCHARDT 1993
FAMILY TRUST dated November 5, 1993 (hereinafter referred to as the "Trustees").
WHEREAS, Borchardt is employed by the Corporation and has rendered
competent efforts on behalf of the Corporation and the Corporation wishes to
give recognition to Borchardt for such efforts; and
WHEREAS, in recognition of the foregoing, the Corporation wishes to
help Borchardt provide for the security of his family through participation in a
split-dollar insurance program; and
WHEREAS, Borchardt and the Trustees agree to participate in such
program to the extent hereafter provided.
NOW, THEREFORE, it is mutually agreed as follows:
ARTICLE I
APPLICATION FOR LIFE INSURANCE
1. In furtherance of the purposes of this Agreement, the Trustees have
purchased a policy of life insurance insuring Borchardt's life and the life of
his wife Gertrude Borchardt (hereinafter referred to as "Trudi") with
Transamerica Occidental Life Insurance Company (hereinafter referred to as "the
Insurer"), in the total face amount of $2,000,000 (hereinafter referred to as
the "Policy"), which is described in Exhibit A attached hereto and by this
reference made a part hereof.
2. The parties hereby agree that the Policy shall be subject to the
terms and conditions of this Agreement.
ARTICLE II
OWNERSHIP OF LIFE INSURANCE
The Trustees, and their successors, shall be the sole and absolute
owner of the Policy and may exercise all ownership rights granted to the owner
thereof by the terms of the Policy, without the consent of any other person,
except as may otherwise be provided herein.
ARTICLE III
PAYMENT OF PREMIUMS ON POLICY
1. The Corporation, within a reasonable time after the Insurer under
the policy has issued its notice of premium due, shall notify Borchardt and the
Trustees of the exact amount due from the Trustees. If the notice from the
Insurer of premium due is sent to the Trustees, the Trustees shall promptly
deliver a copy thereof to the Corporation. The amount due from the Trustees
shall be an amount equal to the annual cost of the value of the economic benefit
attributable to the insurance protection on the joint lives of Borchardt and his
wife Trudi, provided by such Policy in accordance with this Agreement, measured
by the lower of (i) the U.S. Life Table 38 (or the corresponding applicable rate
or other measure set forth in any applicable Revenue Ruling or Treasury
Regulation or other Treasury notice), while both are alive and thereafter
measured by the PS 58 Rate, set forth in Revenue Ruling 55-747 (or the
corresponding applicable rate or other measure set forth in any Revenue Ruling
or Treasury Regulation or other Treasury notice modifying or revoking Revenue
Ruling 55-747), or (ii) the Insurer's current published premium rate for
annually renewable term insurance for standard risks. The Trustees shall pay
such required portion of the premium to the Insurer of the Policy on or prior to
the premium due date. If the Trustees fail to make such timely payment, the
Corporation, in its sole and absolute discretion, may elect to make the
Trustees' portion of the premium payment, which payment shall be recovered by
the Corporation as provided herein.
2. On or before the due date of each premium payable on the Policy, or
within the grace period provided therein, the Corporation shall pay to the
Insurer a portion of the premium equal to (a) the gross premium, less (b) the
portion of the premium payable by the Trustees in accordance with the preceding
paragraph 1, and shall, upon request, promptly furnish Borchardt and/or the
Trustees evidence of timely payment of such premium.
ARTICLE IV
ELECTION OF DIVIDEND OPTION
The Trustees, as the Owner of the Policy, may elect, in their sole and
absolute discretion, to have all dividends, if any, declared by the Insurer on
the Policy applied:
A. to reduce the premium payable on the Policy; or
B. to purchase paid-up additional insurance on the
life of Borchardt and his wife Trudi; or
C. to purchase one-year term insurance on the lives
of Borchardt and his wife Trudi; or
D. for any other purpose allowable by the Policy.
Notwithstanding the foregoing provisions of this Article IV, until this
Agreement has terminated, no such dividend election by the Trustees may be made
if the cash value of the Policy would be reduced below the amount it would
otherwise have been in the absence of such election.
ARTICLE V
COLLECTION AND PAYMENT OF DEATH BENEFIT
1. Within 30 days after the death of the survivor of Borchardt and his
wife Trudi, the Corporation and the Trustees shall apply to the Insurer for the
death benefit and take all action necessary to obtain such payment. The
Corporation and the Trustees shall cooperate in giving instructions to the
Insurer for the issuance of two checks to bring about the following results. The
proceeds shall be divided into two parts. The First Part shall be an amount
equal to (a) the total amount of the premiums which the Corporation, its
successors and assigns, have paid with respect to the Policy, reduced by (b) any
prior reimbursements therefor. The Second Part, if any, shall be the balance of
the proceeds.
(a) The First Part shall be paid to the Corporation, its
successors or assigns. The parties hereby confirm that in no event shall the
amount payable to the Corporation exceed the Policy proceeds payable as a result
of the maturity of the Policy as a death claim.
(b) The Second Part shall be paid to the beneficiary designated
by the Trustees, or their successors. No portion of the proceeds shall be paid
to the beneficiary designated by the Trustees until the First Part of the
proceeds has been paid fully to the Corporation.
2. The Insurer may rely upon a sworn statement in form satisfactory to
the Insurer furnished by the Corporation, its successors or assigns, as to the
amount of the First Part, and any payment made on account of such statement
shall discharge the Issuer accordingly.
ARTICLE VI
COLLATERAL ASSIGNMENT
1. To secure repayment to the Corporation of the amount of the
premiums on the Policy paid by it, upon maturity of the policy as provided in
the preceding Article V of this Agreement or upon termination of this Agreement
as provided in the succeeding Article VII of this Agreement, the Trustees have
assigned, contemporaneously herewith, the Policy to the Corporation as
collateral. The parties hereby confirm that the Policy shall be subject to the
terms and conditions of the collateral assignment filed with the Insurer
relating to the Policy. The collateral assignment of the Policy to the
Corporation hereunder shall not be terminated, altered or amended by the
Trustees, without the written consent of the Corporation.
2. Except as otherwise provided herein, the Trustees shall not sell,
assign, transfer, borrow against, surrender or cancel the Policy nor change the
beneficiary designation provisions thereof, without the written consent of the
Corporation.
ARTICLE VII
TERMINATION OF AGREEMENT AND OPTION ON TERMINATION
1. This Agreement shall terminate upon the occurrence of any one of
the following events:
(a) The insolvency or dissolution of the Corporation, PROVIDED,
HOWEVER, that under no circumstances shall the creditors of the Corporation have
any claim to the Policy or proceeds thereunder. For the purposes of this
Agreement, the term "insolvency" shall mean (i) the filing of a voluntary
petition in bankruptcy or for an arrangement, reorganization or other relief
from creditors under the Federal Bankruptcy Code or any similar law, (ii) the
appointment of a receiver for a substantial part of the assets of the
Corporation which appointment has not been vacated within 90 days, or (iii) the
failure, within 90 days, to obtain dismissal of any involuntary petition in
bankruptcy or for reorganization filed against the Corporation.
(b) The termination of Borchardt's employment by the Corporation
for cause. For purposes of this Agreement, the term "cause" shall mean willful
malfeasance or the commission of a felony.
(c) The death of the survivor of Borchardt and his wife Trudi,
subject to the provisions of Article V which shall continue in full force and
effect following the death of Borchardt and his wife Trudi. The parties hereby
confirm that this Agreement and the respective rights and obligations hereunder
shall continue in full force and effect upon the termination of Borchardt's
employment because of his disability or for any other reason other than for
cause.
(d) Upon (1) payment by the Trustees of the remaining premium
payments due on the Policy or upon an Agreement entered into by the Trustees and
the Corporation under which the Trustees agree to assume payment of such
remaining premiums (either of which the Trustees may do in their sole
discretion) and (2) repayment to the Corporation of an amount equal to the total
amount of the premiums which the Corporation, its successors and assigns, have
paid with respect to the Policy less any prior reimbursements therefor.
2. Upon termination of this Agreement, the obligation of the
Corporation to make payments on account of policy premiums shall cease.
3. For ninety (90) days after termination of this Agreement, the
Trustees shall have the option of obtaining the release of the collateral
assignment of the Policy to the Corporation. To obtain such release, with
respect to termination pursuant to subparagraphs (a), (b) or (c) of paragraph 1
of this Article VII, the Trustees shall repay to the Corporation an amount equal
to the total amount of the premiums which the Corporation, its successors and
assigns, have paid with respect to the Policy. Upon receipt of such amount, or
upon termination pursuant to subparagraph (d) of paragraph 1 of this Article
VII, the Corporation shall release the collateral assignment of the Policy, by
the execution and delivery to the Trustees of an appropriate instrument of
release in form satisfactory to the Insurer and Trustees.
4. If the Trustees fail to exercise the option provided for in the
preceding paragraph 3 of this Article VII, within 90 days after the date of
termination of the Agreement, then, the Corporation may enforce its right to be
repaid an amount equal to the total amount of the premiums which the
Corporation, its successors and assigns, have paid with respect to the Policy;
provided that in the event the cash surrender value of the Policy exceeds the
amount due the Corporation, such excess shall be paid to the Trustees.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
1. This Agreement is governed by the laws of the State of New York.
2. The parties to this Agreement agree that this Agreement is among
the Corporation, Borchardt and the Trustees to the exclusion of all other
persons or entities herein mentioned. The filing of copies of this Agreement
with the Insurer in no way operates to make the Insurer a party to this
Agreement, or any modification or amendment hereof. No provision of this
Agreement nor any modification hereof, shall in any way be construed as
enlarging, changing, varying, or in any other way affecting the obligations of
the Insurer as expressly provided in the Policy, except insofar as the
provisions are made a part of the Policy by the collateral assignment executed
by the Trustees and filed with the Insurer in connection herewith. The Insurer
shall be fully discharged from its obligations under the Policy by payment of
the Policy death benefit to the beneficiary named in the Policy, subject to the
terms and conditions of the Policy.
3. This split-dollar insurance plan is a small welfare plan under the
Employment Retirement Security Act of 1974 (ERISA). Under this Act, an employee
has certain rights and protection. His rights are set forth in this Agreement
and in the insurance contracts issued in his name.
In making a claim for benefits, the employee must make his claim on a
form acceptable to the Corporation. The plan administrator will supply him with
the claim forms. The request will set forth the basis of the employee's claim
and authorize the plan administrator and the Corporation to investigate the
claim and take the necessary steps to facilitate payment of benefits.
If the Corporation denies the employee's claim, it must provide him
with the following information in a written reply:
(a) The specific reason or reasons for the denial;
(b) A reference to the specific provisions of the
split-dollar agreement on which the denial is based;
(c) A description of any additional material or information
necessary for him to perfect his claim; and
(d) An explanation of the procedure for review of claims.
Within 60 days of a claim denial from the Corporation, or some later
date that is reasonable, the employee may request in writing a review of the
denied claim by the Corporation.
The employee may, in asking for the review: (a) pertinent documents,
and (b) submit issues and comments in writing.
On receipt of the request for review, the Corporation, as the case may
be, shall promptly, within 60 days, deny or grant the claim. The decision shall
be made in writing and in a manner calculated to be understood by the employee.
It also shall include specific reference to pertinent provisions on which the
denial is based.
After review, if the employee feels he has been improperly denied a
claim for benefits, he has the right to file suit in federal or state court. If
he is successful in his lawsuit, the court may, if it so decides, require the
other party to pay legal costs, including attorney's fees.
4. The parties to this Agreement shall execute such documents as are
necessary to carry out this Agreement.
5. This Agreement may not be amended or revoked, except by an
instrument in writing signed by the parties hereto or their respective
successors or assigns, before a notary and mutually acknowledged expressly
modifying or revoking the provisions hereof.
6. The article headings and numbers and the paragraph numbers are
included herein for convenience only and in no way are to be considered to be a
part of this Agreement.
7. In the event that any provisions of this Agreement shall be held
illegal, unenforceable or in conflict with the laws of New York or the United
States, such provisions shall be deemed separable from the other provisions of
this Agreement and all the other provisions shall continue in full force and
effect.
8. This Agreement and all obligations and covenants hereunder shall
bind the parties hereto, their successors and assigns.
9. Any waiver by a party of any of the provisions of this Agreement or
any right or rights hereunder, shall not be deemed to be a continuing waiver and
shall not prevent or estop such parties from thereafter enforcing such
provisions or rights as to the future and the failure of any party to insist in
one or more instances upon the strict performance of any one or more of the
terms of the provisions of this Agreement by the other parties shall not be
construed as a waiver or relinquishment of any such terms or provisions, but the
same shall continue in full force and effect.
10. Any notice, consent or demand required or permitted under this
Agreement shall be in writing and shall be signed by the party giving or making
the same. If such notice, consent or demand is mailed to a party hereto, it
shall be sent by United States certified mail, postage prepaid, addressed to
such party's last known address as shown on the records of the Corporation. The
date of such mailing shall be deemed the date of notice, consent or demand. 11.
This Agreement may be executed in three counterparts which together shall
constitute one Agreement with the same effect as if the parties executing the
counterparts had all executed this Agreement as of the day and year first above
written.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
RECOTON CORPORATION
By: /s/ Joseph H. Massot
ATTESTED: -----------------------
Stuart Mont
- -------------------
Secretary /s/ Robert L. Borchardt
------------------------------
Robert L. Borchardt
THE ROBERT AND TRUDI BORCHARDT
1993 FAMILY TRUST
DATED NOVEMBER 5, 1993
By: /s/ Theodore S. Lynn
---------------------------
Theodore S. Lynn, Trustee
/s/ Marvin Schlachter
--------------------------
Marvin Schlachter, Trustee
<PAGE>
EXHIBIT A
The following insurance policy is subject to the annexed Agreement:
Transamerica Occidental Life Insurance Company
Policy No. 60032304
RECOTON CORPORATION
By: /s/ Joseph H. Massot
-------------------------------
ATTESTED:
Stuart Mont
- -------------------
Secretary
/s/ Robert L. Borchardt
----------------------------
Robert L. Borchardt
THE ROBERT AND TRUDI BORCHARDT
1993 FAMILY TRUST
DATED NOVEMBER 5, 1993
By: /s/ Theodore S. Lynn
------------------------------
Theodore S. Lynn, Trustee
/s/ Marvin Schlachter
--------------------------
Marvin Schlachter, Trustee
Exhibit 10.18E
AMENDMENT
AMENDMENT, dated as of March 12, 1999 (this "Amendment"), to the
Second Amended and Restated Credit Agreement, dated as of June 18, 1998 (as
heretofore amended, the "CREDIT AGREEMENT") among RECOTON CORPORATION, a New
York corporation (the "BORROWER"), the several banks and other financial
institutions from time to time parties thereto (the "LENDERS") and THE CHASE
MANHATTAN BANK, as Administrative Agent for the Lenders (in such capacity, the
"ADMINISTRATIVE AGENT").
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to
make, and have made, certain loans and other extensions of credit to the
Borrower; and
WHEREAS, the Borrower has requested, and, upon this Amendment becoming
effective, the Lenders have agreed, that certain provisions of the Credit
Agreement be amended in the manner provided for in this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in consideration of the
premises contained herein, the parties hereto hereby agree as follows:
SECTION I. AMENDMENTS
1.1. AMENDMENTS TO SUBSECTION 1.1. The definition of "EBITDA" in
subsection 1.1 of the Credit Agreement is hereby amended by inserting, at the
end thereof, the following:
"; PROVIDED, HOWEVER, that, for purposes of calculations
pursuant to subsection 7.1 only, if for any period prior to December
31, 1999 Net Income shall be reduced as a result of the establishment
by the Borrower of a reserve for the eventual resolution of the
customs investigation disclosed in the Borrower's Form 10-K for the
year ended December 31, 1997 referred to in subsection 4.6, there
shall be added to Net Income for such period an amount equal to such
reduction (provided that the aggregate of the amounts added to Net
Income for all such periods pursuant to this proviso shall not exceed
$15,000,000)"
1.2. AMENDMENT TO SUBSECTION 7.2. Subsection 7.2 of the Credit
Agreement is hereby amended by inserting, at the end thereof, the following new
clause (j):
"(j) Indebtedness of the Borrower in an amount not to exceed
$15,000,000 evidenced by a promissory note payable to the United
States of America or an agency thereof delivered in settlement of
obligations of the Borrower arising out of the customs investigation
disclosed in the Borrowers Form 10-K for the year ended Decemer 31,
1997 referred to in subsection 4.6."
SECTION II. MISCELLANEOUS
2.1. REPRESENTATIONS AND WARRANTIES. On and as of the date hereof and
after giving effect to this Amendment, the Borrower hereby confirms, reaffirms
and restates the representations and warranties set forth in Section 4 of the
Credit Agreement MUTATIS MUTANDIS, except to the extent that such
representations and warranties expressly relate to a specific earlier date in
which case the Borrower hereby confirms, reaffirms and restates such
representations and warranties as of such earlier date, PROVIDED that the
references to the Credit Agreement in such representations and warranties shall
be deemed to refer to the Credit Agreement as amended prior to the date hereof
and pursuant to this Amendment.
2.2 EFFECTIVENESS. This Amendment shall become effective as of
December 31, 1998 upon:
(a) receipt by the Administrative Agent of counterparts of
this Amendment duly executed and delivered by each of the Borrower,
each Guarantor, the Administrative Agent and the Required Lenders; and
(b) receipt by the Administrative Agent of amendments or
waivers to the Note Purchase Agreements with respect to the Senior
Notes in form and substance satisfactory to the Required Lenders.
2.3. CONTINUING EFFECT; NO OTHER AMENDMENTS. Except as expressly set
forth in this Amendment, all of the terms and provisions of the Credit Agreement
are and shall remain in full force and effect and the Borrower shall continue to
be bound by all of such terms and provisions. The amendments provided for herein
are limited to the specific subsections of the Credit Agreement specified herein
and shall not constitute an amendment of, or an indication of the Administrative
Agent's or the Lenders' willingness to amend or waive, any other provisions of
the Credit Agreement or the same subsections for any other date or purpose.
2.4. SEVERABILITY. Any provision of this Amendment which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
2.5. INTEGRATION. This Amendment represents the agreement of the
Borrower and the Administrative Agent with respect to the subject matter hereof
and thereof, and there are no promises, undertakings, representations or
warranties by the Administrative Agent relative to the subject matter hereof and
thereof not expressly set forth or referred to herein.
2.6. EXPENSES. The Borrower agrees to pay and reimburse the
Administrative Agent for all its reasonable costs and expenses incurred in
connection with the preparation and delivery of this Amendment, including,
without limitation, the reasonable fees and disbursements of counsel to the
Administrative Agent.
2.7. COUNTERPARTS. This Amendment may be executed by one or more of
the parties to this Amendment on any number of separate counterparts (including
by telecopy), and all of said counterparts taken together shall be deemed to
constitute one and the same instrument. A set of the copies of this Amendment
signed by the parties hereto shall be delivered to the Borrower and the
Administrative Agent.
2.8. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
RECOTON CORPORATION
By: /s/ Arnold Kezsbom
--------------------------
Name: Arnold Kezsbom
Title: Vice President
THE CHASE MANHATTAN BANK,
as Administrative Agent and as a Lender
By: /s/ C. F. Matthiessen
--------------------------
Name: C. F. Matthiessen
Title: Vice President
SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL
ASSOCIATION
By: /s/ William C. Barr III
---------------------------
Name: William C. Barr
Title: First Vice President
HARRIS TRUST AND SAVINGS BANK
By: /s/ Raymond Whitacre
---------------------------
Name: Raymond Whitacre
Title: Managing Director
MARINE MIDLAND BANK
By: /s/ Thomas Dionian
-------------------------------
Name: Thomas Dionian
Title: Vice President
FIRST UNION NATIONAL BANK
By: /s/ Timothy N. Hyslop
-------------------------------
Name: Timoth N. Hyslop
Title: Senior Vice President
THE UNDERSIGNED GUARANTORS HEREBY CONSENT AND AGREE TO THE FOREGOING
AGREEMENT AS OF THE DATE HEREOF:
Christie Design Corporation, a Delaware corporation
InterAct Accessories, Inc., a Delaware corporation
Recoton Audio Corporation, a Delaware corporation
ReCone, Inc., a Delaware corporation
Recoton Home Audio, Inc., a California corporation
Recoton Japan, Inc., an Illinois corporation
Recoton International Holdings, Inc., a Delaware
corporation
Recoton European Holdings, Inc., a Delaware
corporation
AAMP of Florida, Inc., a Florida corporation
By: /s/ Stuart Mont
------------------------
Name: Stuart Mont
Title: Vice President
Recoton German Holdings GmbH, a
German corporation Mac Audio
Electronic GmbH, a German
corporation Magnat Audio-Produkte
GmbH, a German corporation Heco
Audio-Produkte GmbH, a German
corporation Recoton Italia s.r.l.,
an Italian corporation
By: /s/ Jeremy Mermagen
-------------------------------
Name: Jeremy Mermagen
Title: Director
Recoton Canada Ltd., a Canadian corporation
By: /s/ Stuart Mont
-------------------------------
Name: Stuart Mont
Title: President
Recoton (Far East) Limited, a Hong Kong corporation
STD Holding Limited, a Hong Kong corporation
STD Electronic International Limited, a Hong Kong
corporation
STD Manufacturing Limited, a Hong Kong corporation
STD Plastic Industrial Limited, a Hong Kong
corporation
STD Trading Limited, a Hong Kong corporation
Peak Hero Limited, a Hong Kong corporation
Ever Smart Management Limited, a Hong Kong
corporation
By: /S/ Robert L. Borchardt
-------------------------------------
Name: Robert L. Borchardt
Title: Director
Exhibit 18G
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT (this "AGREEMENT"), dated as of December 31, 1998,
to the several Note Purchase Agreements (collectively, as amended and in effect
prior to the amendment effected hereby, the "EXISTING NOTE AGREEMENT" and,
immediately after giving effect to the such amendment, the "AMENDED NOTE
AGREEMENT"), each dated as of January 6, 1997, between Recoton Corporation, a
New York corporation (the "COMPANY"), and each of the purchasers (collectively,
together with their respective successors and assigns, the "NOTEHOLDERS") of the
Adjustable Rate Senior Notes Due January 6, 2007 issued thereunder, is entered
into as of December 31, 1998 by the Company and each of the Noteholders.
PRELIMINARY STATEMENT:
The Company has requested that the Noteholders consent to the
amendment of the Existing Note Agreement (to become retroactively effective as
of December 31, 1998) set forth herein. Subject to the terms and conditions of
this Agreement, the Noteholders are willing to amend the Existing Note Agreement
as set forth herein.
AGREEMENT:
1. DEFINED TERMS.
All capitalized terms used but not specifically defined in this
Agreement have the respective meanings assigned to them in, or pursuant to the
provisions of, the Existing Note Agreement. As used in this Agreement, the term
"TRANSACTION DOCUMENTS" means, collectively, each of this Agreement, the Amended
Note Agreement, the Notes and the Subsidiary Guaranty.
2. REPRESENTATIONS AND WARRANTIES.
The Company warrants and represents to each Noteholder that as of the
Effective Date (as defined below):
2.1 AUTHORIZATION, ETC. This Agreement has been duly authorized by all
necessary corporate action on the part of the Company, and each of the
Transaction Documents constitutes a legal, valid and binding obligation of the
Company and each of the Subsidiaries party thereto, enforceable against the
Company and such Subsidiaries, as the case may be, in accordance with its terms,
except as such enforceability may be limited by (a) applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and (b) general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
2.2 DISCLOSURE. None of the written statements, documents or other
written materials (including, without limitation, the financial statements and
related certificates most recently provided to the Noteholders pursuant to
paragraph 5A of the Existing Note Agreement) furnished by, or on behalf of, the
Company to the Noteholders in connection with the negotiation, execution and
delivery of this Agreement contain any untrue statement of a material fact or
omit a material fact necessary to make the statements contained therein or
herein not misleading in light of the circumstances in which they were made.
There is no fact which the Company has not disclosed to the Noteholders which
materially affects adversely or, so far as the Company can now foresee, will
materially affect adversely the business, prospects, profits, Properties or
condition (financial or otherwise) of the Company and its Subsidiaries, taken as
a whole, or the ability of the Company to perform its obligations set forth in
the Transaction Documents.
2.3 GOVERNMENTAL AUTHORIZATIONS, ETC. No consent, approval or
authorization of, or registration, filing or declaration with, any court or
administrative or governmental body is required in connection with the
execution, delivery or performance by the Company of this Agreement.
2.4 LITIGATION; OBSERVANCE OF AGREEMENTS, STATUTES AND ORDERS.
(a) Except for the investigation by the United States Customs
Service and United States Attorney's office in Tampa, Florida
disclosed in the Company's Form 10-K for the year ended December 31,
1997, there are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company
or any Subsidiary or any Property of the Company or any Subsidiary in
any court or before any arbitrator of any kind or before or by any
governmental body that, individually or in the aggregate, could
reasonably be expected to have a material adverse effect on the
business, condition (financial or otherwise) or operations of the
Company and the Subsidiaries taken as a whole.
(b) After giving effect to the amendment to be effected by
Section 4, neither the Company nor any Subsidiary is in default under
any term of any agreement or instrument to which it is a party or by
which it is bound, or any order, judgment, decree or ruling of any
court, arbitrator or governmental body or is in violation of any
applicable law, ordinance, rule or regulation (including, without
limitation, all federal, state, local and regional statutes, laws,
ordinances and judicial or administrative orders, judgments, rulings
and regulations relating to the protection of the environment) of any
court or administrative or governmental body, which default or
violation, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on the business, condition
(financial or otherwise) or operations of the Company and the
Subsidiaries taken as a whole.
2.5 NO DEFAULTS. No event has occurred and is continuing and no
condition exists which, upon the effectiveness of the amendments provided for in
this Agreement, would constitute a Default or Event of Default.
3. CONDITIONS PRECEDENT
The amendment to be effected by Section 4 shall become retroactively
effective, as of December 31, 1998, at such time as the Company and each of the
Noteholders shall have executed and delivered this Agreement (the time and date
of such execution and delivery is referred to herein as the "EFFECTIVE DATE");
the willingness of the Noteholders to execute and deliver this Agreement is
contingent on the satisfaction of each of the following conditions (which shall
be deemed to have been satisfied upon such execution and delivery; however, no
such deemed satisfaction shall affect the provisions of Section 6.3):
3.1 CONSENT OF NOTEHOLDERS. The Company and each Noteholder shall have
executed and delivered a counterpart of this Agreement.
3.2 WARRANTIES AND REPRESENTATIONS TRUE; COMPLIANCE WITH THIS
AGREEMENT.
(A) WARRANTIES AND REPRESENTATIONS TRUE. The warranties and
representations contained in Section 2 shall be true on the Effective
Date with the same effect as though made on and as of that date.
(B) COMPLIANCE WITH THIS AGREEMENT. The Company shall have
performed and complied with all agreements and conditions contained
herein that are required to be performed or complied with by the
Company on or prior to the Effective Date, and such performance and
compliance shall remain in effect on the Effective Date.
3.3 BANK AGREEMENT. The Company shall have delivered to each
Noteholder a true and correct copy of an amendment to the Bank Credit Agreement,
which amendment shall be in form and substance satisfactory to each Noteholder,
and pursuant to which the defined term "EBITDA" therein contained shall have
been amended substantially in conformity with the amendment to the term
"Consolidated EBITDA" set forth in Section 4. No "Default" or "Event of Default"
under, and as defined in, the Bank Credit Agreement shall exist on the Effective
Date.
3.4 1998 NOTE PURCHASE AGREEMENT. The Company shall have delivered to
each Noteholder a true and correct copy of an amendment to the Company's Note
Purchase Agreement, dated as of September 1, 1998 (as amended, the "1998 NOTE
PURCHASE AGREEMENT"), pursuant to which it issued $25,000,000 in aggregate
principal amount of its Adjustable Rate Senior Notes Due September 1, 2008,
which amendment shall be in form and substance satisfactory to each Noteholder,
and pursuant to which the defined term "Consolidated EBITDA" therein contained
shall have been amended substantially in conformity with the amendment to the
term "Consolidated EBITDA" set forth in Section 4. No "Default" or "Event of
Default" under, and as defined in, the 1998 Note Purchase Agreement shall exist
on the Effective Date.
3.5 SUBORDINATED DEBT ISSUANCE. The Company shall have delivered to
each Noteholder a true and correct copy of an amendment to the Company's
Securities Purchase Agreement, dated as of February 4, 1999 (as amended, the
"SENIOR SUBORDINATED NOTE AGREEMENT"), pursuant to which it issued $35,000,000
in aggregate principal amount of its Senior Subordinated Notes Due February 4,
2004, which amendment shall be in form and substance satisfactory to each
Noteholder, and pursuant to which the defined term "Consolidated EBITDA" therein
contained shall have been amended substantially in conformity with the amendment
to the term "Consolidated EBITDA" set forth in Section 4. No "Default" or "Event
of Default" under, and as defined in, the Senior Subordinated Note Agreement
shall exist on the Effective Date.
3.6 EXPENSES. All fees and disbursements required to be paid pursuant
to Section 6.2 shall have been paid in full, including, but not limited to, the
statement for reasonable fees and disbursements of Hebb & Gitlin, the
Noteholders' special counsel, presented to the Company on or prior to the
Effective Date.
3.7 PROCEEDINGS SATISFACTORY. All proceedings taken in connection with
the execution and delivery of this Agreement and the transactions contemplated
hereby shall be satisfactory to the Noteholders and their special counsel; and
the Noteholders and their special counsel shall have received copies of such
documents and papers as they may reasonably request in connection therewith.
4. AMENDMENT TO EXISTING NOTE AGREEMENT.
Each of the Company and the Noteholders hereby consents and agrees
that the defined terms "Consolidated Adjusted Cash Flow" and "Consolidated
EBITDA" in paragraph 10B of the Existing Note Agreement are hereby amended and
restated in their entirety to read, respectively, as follows:
"CONSOLIDATED ADJUSTED CASH FLOW" shall mean, for any period,
(i) Consolidated Operating Income for such period, PLUS
(ii) to the extent, and only to the extent, that such amount
was deducted in the computation of Consolidated Net Income for
such period, the aggregate amount of depreciation and
amortization of the Company and the Restricted Subsidiaries,
determined on a consolidated basis for such Persons;
PROVIDED, HOWEVER, that, if for any period prior to December
31, 1999 Consolidated Net Income shall be reduced as a result of the
establishment by the Company of a reserve for the eventual resolution
of the investigation by the United States Customs Service and United
States Attorney's office in Tampa, Florida disclosed in the Company's
Form 10-K for the year ended December 31, 1997, there shall be added to
Consolidated Net Income for such period an amount equal to such
reduction (provided that the aggregate of the amounts added to
Consolidated Net Income for all such periods pursuant to this proviso
shall not exceed $15,000,000)."
"CONSOLIDATED EBITDA" shall mean, for any period,
(i) Consolidated Net Income for such period, PLUS
(ii) without duplication and only to the extent deducted
from revenues in the determination of Consolidated Net Income for
such period, the sum of (a) income tax expense, (b) interest
expense, amortization or writeoffs of debt discount and debt
issuance costs and commissions, discounts and other fees and
charges associated with the issuance of Debt (including the
Notes), (c) depreciation and amortization expense and (d)
amortization of intangibles (including, but not limited to,
goodwill) and organization costs, MINUS
(iii) only to the extent included in the determination of
Consolidated Net Income for such period, the sum of (a) interest
income and (b) income tax credits, all determined on a
consolidated basis;
PROVIDED, HOWEVER, that, if for any period prior to December
31, 1999 Consolidated Net Income shall be reduced as a result of the
establishment by the Company of a reserve for the eventual resolution
of the investigation by the United States Customs Service and United
States Attorney's office in Tampa, Florida disclosed in the Company's
Form 10-K for the year ended December 31, 1997, there shall be added to
Consolidated Net Income for such period an amount equal to such
reduction (provided that the aggregate of the amounts added to
Consolidated Net Income for all such periods pursuant to this proviso
shall not exceed $15,000,000)."
5. AFFIRMATION OF OBLIGATIONS.
Except as expressly amended by this Agreement, (a) no terms or
provisions of any agreement are modified or changed by this Agreement, (b) the
terms and provisions of the Transaction Documents shall continue in full force
and effect and (c) the terms and provisions of the Transaction Documents are
hereby ratified, confirmed and approved in all respects.
6. MISCELLANEOUS.
6.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
shall inure to the benefit of, the successors and assigns of the parties hereto
and the holders from time to time of the Notes.
6.2 FEES AND EXPENSES. On the Effective Date, the Company shall pay
all reasonable costs and expenses of the Noteholders relating to this Agreement,
including, but not limited to, the statement for reasonable fees and
disbursements of the Noteholders' special counsel presented to the Company on or
prior to the Effective Date. The Company will also pay, upon receipt of any
statement thereof, each additional statement for reasonable fees and
disbursements of the Noteholders' special counsel rendered after the Effective
Date in connection with this Agreement. The obligations of the Company under
this Section 6.2 shall survive the termination of this Agreement.
6.3 SURVIVAL. All warranties, representations, certifications and
covenants made by the Company in this Agreement or in any certificate or other
instrument delivered by it or on its behalf under this Agreement shall be
considered to have been relied upon by the Noteholders and shall survive the
execution of this Agreement, regardless of any investigation made by or on
behalf of any Noteholder. All such statements made herein or in any such
certificate or other instrument shall constitute warranties and representations
of the Company under this Agreement and the Amended Note Agreement.
6.4 GOVERNING LAW. This Agreement shall be construed, interpreted and
enforced in accordance with, and governed by, the laws of the State of New York,
excluding choice-of-law principles of the law of such State that would require
the application of the laws of a jurisdiction other than such State.
6.5 SECTION HEADINGS, ETC. The titles of the Sections hereof appear as
a matter of convenience only, do not constitute a part hereof and shall not
affect the construction hereof. The words "herein," "hereof," "hereunder" and
"hereto" refer to this Agreement as a whole and not to any particular Section or
other subdivision. References to Sections are, unless otherwise specified,
references to Sections of this Agreement.
6.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts and shall be effective when at least one counterpart shall have
been executed by each party hereto, and each set of counterparts which,
collectively, show execution by each such party hereto shall constitute one
duplicate original. Any party hereto may execute and deliver a counterpart of
this Agreement by delivering by facsimile transmission a signature page of this
Agreement signed by such party, and such facsimile signature shall be treated in
all respects as having the same effect as an original signature.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. NEXT PAGE IS SIGNATURE PAGE]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed on their behalf by a duly authorized officer or agent thereof, as
the case may be, as of the date first above written.
RECOTON CORPORATION
By /s/ Arnold Kezsbom
------------------------
Name: Arnold Kezsbom
Title: Vice President
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By /s/ Kevin J. Kraska
-----------------------------
Name: Kevin J. Kraska
Title: Vice President
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By /s/ Daniel C. Budde
----------------------------
Name: Daniel C. Budde
Title: Authorized Officer
JOHN HANCOCK VARIABLE LIFE
INSURANCE COMPANY
By /s/ Daniel C. Budde
-----------------------------
Name: Daniel C. Budde
Title: Authorized Officer
The decision to participate MELLON BANK, N.A., solely in its capacity
in this investment, as Trustee for THE LONG-TERM INVESTMENT
any representations made herein TRUST, (as directed by John Hancock
by the participant, and any Mutual Life Insurance Company),
actions taken hereunder and not in its individual capacity
by the participant has/have been
made solely at the direction of
the investment fiduciary
who has sole investment discretion
with respect to this investment.
By /s/ Bernadette Rist
------------------------------
Name: Bernadette Rist
Title: Authorized Signatory
INVESTORS PARTNER LIFE INSURANCE COMPANY
By /s/ Daniel C. Budde
-----------------------------
Name: Daniel C. Budde
Title: Authorized Officer
The decision to participate in
this investment, MELLON BANK, N.A., solely in its capacity
any representations as Trustee for BELL ATLANTIC MASTER
made herein by the TRUST, (as directed by John Hancock
participant, and any Mutual Life Insurance Company),
actions taken hereunder and not in its individual capacity
by the participant has/have
been made solely
at the direction of the
investment fiduciary
who has sole investment discretion with
respect to this investment.
By /s/ Bernadette Rist
---------------------------
Name: Bernadette Rist
Title: Authorized Signatory
THE NORTHERN TRUST COMPANY,
AS TRUSTEE FOR LUCENT TECHNOLOGIES INC.
MASTER PENSION TRUST
By: JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY, as Investment
Manager
By /s/ Daniel C. Budde
-----------------------------
Name: Daniel C. Budde
Title: Authorized Officer
JOHN HANCOCK REASSURANCE COMPANY LTD.
By /s/ Francis X. Felcon
----------------------------
Name: Francis X. Felcon
Title: Second Vice President
Exhibit 10.20C
RECOTON CORPORATION
AMENDMENT AGREEMENT
DATED AS OF DECEMBER 31, 1998
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT (this "AGREEMENT"), dated as of December 31, 1998,
to the Note Purchase Agreement (as amended and in effect prior to the amendment
effected hereby, the "EXISTING NOTE AGREEMENT" and, immediately after giving
effect to the such amendment, the "AMENDED NOTE AGREEMENT"), dated as of
September 1, 1998, between Recoton Corporation, a New York corporation (the
"COMPANY"), and the purchaser (together with its successors and assigns, the
"NOTEHOLDER") of the Adjustable Rate Senior Notes Due September 1, 2008 issued
thereunder, is entered into as of December 31, 1998 by the Company and the
Noteholder.
PRELIMINARY STATEMENT:
The Company has requested that the Noteholder consent to the amendment
of the Existing Note Agreement (to become retroactively effective as of December
31, 1998) set forth herein. Subject to the terms and conditions of this
Agreement, the Noteholder is willing to amend the Existing Note Agreement as set
forth herein.
AGREEMENT:
1. DEFINED TERMS.
All capitalized terms used but not specifically defined in this
Agreement have the respective meanings assigned to them in, or pursuant to the
provisions of, the Existing Note Agreement. As used in this Agreement, the term
"TRANSACTION DOCUMENTS" means, collectively, each of this Agreement, the Amended
Note Agreement, the Notes and the Subsidiary Guaranty.
2. REPRESENTATIONS AND WARRANTIES.
The Company warrants and represents to the Noteholder that as of the
Effective Date (as defined below):
2.1 AUTHORIZATION, ETC. This Agreement has been duly authorized by all
necessary corporate action on the part of the Company, and each of the
Transaction Documents constitutes a legal, valid and binding obligation of the
Company and each of the Subsidiaries party thereto, enforceable against the
Company and such Subsidiaries, as the case may be, in accordance with its terms,
except as such enforceability may be limited by (a) applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and (b) general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
2.2 DISCLOSURE. None of the written statements, documents or other
written materials (including, without limitation, the financial statements and
related certificates most recently provided to the Noteholder pursuant to
paragraph 5A of the Existing Note Agreement) furnished by, or on behalf of, the
Company to the Noteholder in connection with the negotiation, execution and
delivery of this Agreement contain any untrue statement of a material fact or
omit a material fact necessary to make the statements contained therein or
herein not misleading in light of the circumstances in which they were made.
There is no fact which the Company has not disclosed to the Noteholder which
materially affects adversely or, so far as the Company can now foresee, will
materially affect adversely the business, prospects, profits, Properties or
condition (financial or otherwise) of the Company and its Subsidiaries, taken as
a whole, or the ability of the Company to perform its obligations set forth in
the Transaction Documents.
2.3 GOVERNMENTAL AUTHORIZATIONS, ETC. No consent, approval or
authorization of, or registration, filing or declaration with, any court or
administrative or governmental body is required in connection with the
execution, delivery or performance by the Company of this Agreement.
2.4 LITIGATION; OBSERVANCE OF AGREEMENTS, STATUTES AND ORDERS.
(a) Except for the investigation by the United States
Customs Service and United States Attorney's office in Tampa, Florida
disclosed in the Company's Form 10-K for the year ended December 31,
1997, there are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company
or any Subsidiary or any Property of the Company or any Subsidiary in
any court or before any arbitrator of any kind or before or by any
governmental body that, individually or in the aggregate, could
reasonably be expected to have a material adverse effect on the
business, condition (financial or otherwise) or operations of the
Company and the Subsidiaries taken as a whole.
(b) After giving effect to the amendment to be effected by
Section 4, neither the Company nor any Subsidiary is in default under
any term of any agreement or instrument to which it is a party or by
which it is bound, or any order, judgment, decree or ruling of any
court, arbitrator or governmental body or is in violation of any
applicable law, ordinance, rule or regulation (including, without
limitation, all federal, state, local and regional statutes, laws,
ordinances and judicial or administrative orders, judgments, rulings
and regulations relating to the protection of the environment) of any
court or administrative or governmental body, which default or
violation, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on the business, condition
(financial or otherwise) or operations of the Company and the
Subsidiaries taken as a whole.
2.5 NO DEFAULTS. No event has occurred and is continuing and no
condition exists which, upon the effectiveness of the amendments provided for in
this Agreement, would constitute a Default or Event of Default.
3. CONDITIONS PRECEDENT
The amendment to be effected by Section 4 shall become retroactively
effective, as of December 31, 1998, at such time as the Company and the
Noteholder shall have executed and delivered this Agreement (the time and date
of such execution and delivery is referred to herein as the "EFFECTIVE DATE");
the willingness of the Noteholder to execute and deliver this Agreement is
contingent on the satisfaction of each of the following conditions (which shall
be deemed to have been satisfied upon such execution and delivery; however, no
such deemed satisfaction shall affect the provisions of Section 6.3):
3.1 CONSENT OF NOTEHOLDER. The Company and the Noteholder shall have
executed and delivered a counterpart of this Agreement.
3.2 WARRANTIES AND REPRESENTATIONS TRUE; COMPLIANCE WITH THIS
AGREEMENT.
(a) WARRANTIES AND REPRESENTATIONS TRUE. The warranties and
representations contained in Section 2 shall be true on the Effective
Date with the same effect as though made on and as of that date.
(b) COMPLIANCE WITH THIS AGREEMENT. The Company shall have
performed and complied with all agreements and conditions contained
herein that are required to be performed or complied with by the
Company on or prior to the Effective Date, and such performance and
compliance shall remain in effect on the Effective Date.
3.3 BANK AGREEMENT. The Company shall have delivered to the Noteholder
a true and correct copy of an amendment to the Bank Credit Agreement, which
amendment shall be in form and substance satisfactory to the Noteholder, and
pursuant to which the defined term "EBITDA" therein contained shall have been
amended substantially in conformity with the amendment to the term "Consolidated
EBITDA" set forth in Section 4. No "Default" or "Event of Default" under, and as
defined in, the Bank Credit Agreement shall exist on the Effective Date.
3.4 1997 NOTE PURCHASE AGREEMENT. The Company shall have delivered to
the Noteholder a true and correct copy of an amendment to the Company's several
Note Purchase Agreements, each dated as of January 6, 1997 (as amended, the
"1997 NOTE PURCHASE AGREEMENT"), pursuant to which it issued $75,000,000 in
aggregate principal amount of its Adjustable Rate Senior Notes Due January 6,
2007, which amendment shall be in form and substance satisfactory to the
Noteholder, and pursuant to which the defined term "Consolidated EBITDA" therein
contained shall have been amended substantially in conformity with the amendment
to the term "Consolidated EBITDA" set forth in Section 4. No "Default" or "Event
of Default" under, and as defined in, the 1997 Note Purchase Agreement shall
exist on the Effective Date.
3.5 SUBORDINATED DEBT ISSUANCE. The Company shall have delivered to
the Noteholder a true and correct copy of an amendment to the Company's
Securities Purchase Agreement, dated as of February 4, 1999 (as amended, the
"SENIOR SUBORDINATED NOTE AGREEMENT"), pursuant to which it issued $35,000,000
in aggregate principal amount of its Senior Subordinated Notes Due February 4,
2004, which amendment shall be in form and substance satisfactory to the
Noteholder, and pursuant to which the defined term "Consolidated EBITDA" therein
contained shall have been amended substantially in conformity with the amendment
to the term "Consolidated EBITDA" set forth in Section 4. No "Default" or "Event
of Default" under, and as defined in, the Senior Subordinated Note Agreement
shall exist on the Effective Date.
3.6 EXPENSES. All fees and disbursements required to be paid pursuant
to Section 6.2 shall have been paid in full, including, but not limited to, the
statement for reasonable fees and disbursements of Hebb & Gitlin, the
Noteholder's special counsel, presented to the Company on or prior to the
Effective Date.
3.7 PROCEEDINGS SATISFACTORY. All proceedings taken in connection with
the execution and delivery of this Agreement and the transactions contemplated
hereby shall be satisfactory to the Noteholder and its special counsel; and the
Noteholder and its special counsel shall have received copies of such documents
and papers as they may reasonably request in connection therewith.
4. AMENDMENT TO EXISTING NOTE AGREEMENT.
Each of the Company and the Noteholder hereby consents and agrees that
the defined terms "Consolidated Adjusted Cash Flow" and "Consolidated EBITDA" in
paragraph 10B of the Existing Note Agreement are hereby amended and restated in
their entirety to read, respectively, as follows:
"CONSOLIDATED ADJUSTED CASH FLOW" shall mean, for any period,
(i) Consolidated Operating Income for such period, PLUS
(ii) to the extent, and only to the extent, that such amount
was deducted in the computation of Consolidated Net Income for such
period, the aggregate amount of depreciation and amortization of the
Company and the Restricted Subsidiaries, determined on a consolidated
basis for such Persons;
PROVIDED, HOWEVER, that, if for any period prior to December
31, 1999 Consolidated Net Income shall be reduced as a result of the
establishment by the Company of a reserve for the eventual resolution
of the investigation by the United States Customs Service and United
States Attorney's office in Tampa, Florida disclosed in the Company's
Form 10-K for the year ended December 31, 1997, there shall be added to
Consolidated Net Income for such period an amount equal to such
reduction (provided that the aggregate of the amounts added to
Consolidated Net Income for all such periods pursuant to this proviso
shall not exceed $15,000,000)."
"CONSOLIDATED EBITDA" shall mean, for any period,
(i) Consolidated Net Income for such period, PLUS
(ii) without duplication and only to the extent deducted
from revenues in the determination of Consolidated Net Income for such
period, the sum of (a) income tax expense, (b) interest expense,
amortization or writeoffs of debt discount and debt issuance costs and
commissions, discounts and other fees and charges associated with the
issuance of Debt (including the Notes), (c) depreciation and
amortization expense and (d) amortization of intangibles (including,
but not limited to, goodwill) and organization costs, MINUS
(iii) only to the extent included in the determination of
Consolidated Net Income for such period, the sum of (a) interest
income and (b) income tax credits, all determined on a consolidated
basis;
PROVIDED, HOWEVER, that, if for any period prior to December
31, 1999 Consolidated Net Income shall be reduced as a result of the
establishment by the Company of a reserve for the eventual resolution
of the investigation by the United States Customs Service and United
States Attorney's office in Tampa, Florida disclosed in the Company's
Form 10-K for the year ended December 31, 1997, there shall be added to
Consolidated Net Income for such period an amount equal to such
reduction (provided that the aggregate of the amounts added to
Consolidated Net Income for all such periods pursuant to this proviso
shall not exceed $15,000,000)."
5. AFFIRMATION OF OBLIGATIONS.
Except as expressly amended by this Agreement, (a) no terms or
provisions of any agreement are modified or changed by this Agreement, (b) the
terms and provisions of the Transaction Documents shall continue in full force
and effect and (c) the terms and provisions of the Transaction Documents are
hereby ratified, confirmed and approved in all respects. 6. MISCELLANEOUS.
6.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
shall inure to the benefit of, the successors and assigns of the parties hereto
and the holders from time to time of the Notes.
6.2 FEES AND EXPENSES. On the Effective Date, the Company shall pay
all reasonable costs and expenses of the Noteholder relating to this Agreement,
including, but not limited to, the statement for reasonable fees and
disbursements of the Noteholder's special counsel presented to the Company on or
prior to the Effective Date. The Company will also pay, upon receipt of any
statement thereof, each additional statement for reasonable fees and
disbursements of the Noteholder's special counsel rendered after the Effective
Date in connection with this Agreement. The obligations of the Company under
this Section 6.2 shall survive the termination of this Agreement.
6.3 SURVIVAL. All warranties, representations, certifications and
covenants made by the Company in this Agreement or in any certificate or other
instrument delivered by it or on its behalf under this Agreement shall be
considered to have been relied upon by the Noteholder and shall survive the
execution of this Agreement, regardless of any investigation made by or on
behalf of the Noteholder. All such statements made herein or in any such
certificate or other instrument shall constitute warranties and representations
of the Company under this Agreement and the Amended Note Agreement.
6.4 GOVERNING LAW. This Agreement shall be construed, interpreted and
enforced in accordance with, and governed by, the laws of the State of New York,
excluding choice-of-law principles of the law of such State that would require
the application of the laws of a jurisdiction other than such State.
6.5 SECTION HEADINGS, ETC. The titles of the Sections hereof appear as
a matter of convenience only, do not constitute a part hereof and shall not
affect the construction hereof. The words "herein," "hereof," "hereunder" and
"hereto" refer to this Agreement as a whole and not to any particular Section or
other subdivision. References to Sections are, unless otherwise specified,
references to Sections of this Agreement.
6.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts and shall be effective when at least one counterpart shall have
been executed by each party hereto, and each set of counterparts which,
collectively, show execution by each such party hereto shall constitute one
duplicate original. Any party hereto may execute and deliver a counterpart of
this Agreement by delivering by facsimile transmission a signature page of this
Agreement signed by such party, and such facsimile signature shall be treated in
all respects as having the same effect as an original signature.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. NEXT PAGE IS SIGNATURE PAGE]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed on their behalf by a duly authorized officer or agent thereof, as
the case may be, as of the date first above written.
RECOTON CORPORATION
By /s/ Arnold Kezsbom
-------------------------
Name: Arnold Kezsbom
Title: Vice President
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By /s/ Kevin J. Kraska
---------------------------
Name: Kevin J. Kraska
Title: Vice President
Exhibit 10.22D
RECOTON CORPORATION
AMENDMENT AGREEMENT
DATED AS OF DECEMBER 31, 1998
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT (this "AGREEMENT"), dated as of February 4, 1999,
to the Securities Purchase Agreement (as in effect prior to the amendment
effected hereby, the "EXISTING NOTE AGREEMENT" and, immediately after giving
effect to such amendment, the "AMENDED NOTE AGREEMENT"), dated as of February 4,
1999, among Recoton Corporation, a New York corporation (the "COMPANY"), and
each of the purchasers (collectively, together with their respective successors
and assigns, the "NOTEHOLDERS") of the Senior Subordinated Notes Due February 4,
2004 issued thereunder, is entered into as of February 4, 1999 by the Company
and each of the Noteholders.
PRELIMINARY STATEMENT:
The Company has requested that the Noteholders consent to the
amendment of the Existing Note Agreement set forth herein. Subject to the terms
and conditions of this Agreement, the Noteholders are willing to amend the
Existing Note Agreement as set forth herein.
AGREEMENT.
1. DEFINED TERMS.
All capitalized terms used but not specifically defined in this
Agreement have the respective meanings assigned to them in, or pursuant to the
provisions of, the Existing Note Agreement. As used in this Agreement, the term
"TRANSACTION DOCUMENTS" means, collectively, each of this Agreement, the Amended
Note Agreement and the Notes.
2. REPRESENTATIONS AND WARRANTIES.
The Company warrants and represents to each Noteholder that as of the
Effective Date (as defined below):
2.1. AUTHORIZATION, ETC. This Agreement has been duly authorized by
all necessary corporate action on the part of the Company, and each of the
Transaction Documents constitutes a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except as
such enforceability may be limited by (a) applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and (b) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
2.2. DISCLOSURE. None of the written statements, documents or other
written materials (including, without limitation, the financial statements and
related certificates most recently provided to Noteholders pursuant to paragraph
5A of the Existing Note Agreement) furnished by, or on behalf of, the Company to
the Noteholders in connection with the negotiation, execution and delivery of
this Agreement contain any untrue statement of a material fact or omit a
material fact necessary to make the statements contained therein or herein not
misleading in light of the circumstances in which they were made, There is no
fact which the Company has not disclosed to the Noteholders which materially
affects adversely or, so far as the Company can now foresee, will materially
affect adversely the business, prospects, profits, Properties or condition
(financial or otherwise) of the Company and its Subsidiaries, taken as a whole,
or the ability of the Company to perform its obligations set forth in the
Transaction Documents.
2.3. GOVERNMENTAL AUTHORIZATIONS, ETC. No consent, approval or
authorization of, or registration, filing or declaration with, any court or
administrative or governmental body is required in connection With the
execution, delivery or performance by the Company of this Agreement.
2.4. LITIGATION; OBSERVANCE OF AGREEMENTS, STATUTES AND ORDERS.
(a) Except for the investigation by the United States
Customs Service and United States Attorney's office in Tampa, Florida
disclosed in the Company's Form 10-K for the year ended December 31,
1997, there are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company
or any Subsidiary or any Property of the Company or any Subsidiary in
any court or before any arbitrator of any kind or before or by any
governmental body that, individually or in the aggregate, could
reasonably be expected to have a material adverse effect on the
business, condition (financial or otherwise) or operations of the
Company and the Subsidiaries taken as a whole.
(b) Neither the Company nor any Subsidiary (after giving
effect to the amendments to the Existing Note Agreement effected
hereby) is in default under any term of any agreement or instrument to
which it is a party or by which it is bound, or any order, judgment,
decree or ruling of any court, arbitrator or governmental body or is
in violation of any applicable law, ordinance, rule or regulation
(including, without limitation, all federal, state, local and regional
statutes, laws, ordinances and judicial or administrative orders,
judgments, rulings and regulations relating to the protection of the
environment) of any court or administrative or governmental body,
which default or violation, individually or in the aggregate, could
reasonably be expected to have a material adverse effect on the
business, condition (financial or otherwise) or operations of the
Company and the Subsidiaries taken as a whole.
2.5. NO DEFAULTS. No event has occurred and is continuing and no
condition exists which, upon the effectiveness of the amendments provided for in
this Agreement, would constitute a Default or Event of Default.
3. CONDITIONS PRECEDENT
The amendment to be effected by Section 4 shall become retroactively
effective as of February 4, 1999 at such time as the Company and each of the
Noteholders shall have executed and delivered this Agreement (the time and date
of such execution and delivery is referred to herein as the "EFFECTIVE DATE");
the willingness of the Noteholders to execute and deliver this Agreement is
contingent on the satisfaction of each of the following conditions (which shall
be deemed to have been satisfied upon such execution and delivery; however, no
such deemed satisfaction shall affect the provisions of Section 6.3):
3.1. CONSENT OF NOTEHOLDERS. The Company and each Noteholder shall
have executed and delivered a counterpart of this Agreement.
3.2. WARRANTIES AND REPRESENTATIONS TRUE; COMPLIANCE WITH THIS
AGREEMENT.
(a) WARRANTIES AND REPRESENTATIONS TRUE. The warranties and
representations contained in Section 2 shall be true on the Effective
Date with the same effect as though made on and as of that date.
(b) COMPLIANCE WITH THIS AGREEMENT. The Company shall have
performed and complied with all agreements and conditions contained
herein that are required to be performed or complied with by the
Company on or prior to the Effective Date, and such performance and
compliance shall remain in effect on the Effective Date.
3.4. BANK AGREEMENT. The Company shall have confirmed to the
Noteholders that it has entered into an amendment to the Bank Credit Agreement,
pursuant to which the defined term "EBITDA" therein contained shall have been
amended substantially in conformity with the amendment to the term "Consolidated
EBITDA" set forth in Section 4. No "Default" or "Event of Default" under, and as
defined in, the Bank Credit Agreement shall exist on the Effective Date.
3.5. 1997 NOTE PURCHASE AGREEMENT. The Company shall have confirmed to
the Noteholders that it has entered into an amendment to the Company's Note
Purchase Agreements, dated as of January 6, 1997 (as amended, the "1997 Note
Purchase Agreement"), under which it issued $75,000,000 in aggregate principal
amount of its Adjustable Rate Senior Notes Due January 6, 2007, pursuant to
which the defined term "Consolidated EBITDA" therein contained shall have been
amended substantially in conformity with the amendment to the term "Consolidated
EBITDA" set forth in Section 4. No "Default" or "Event of Default" under, and as
defined in, the 1997 Note Purchase Agreement shall exist on the Effective Date.
3.6. 1998 NOTE PURCHASE AGREEMENT. The Company shall have confirmed to
the Noteholders that it has entered into an amendment to the Company's Note
Purchase Agreement, dated as of September 1, 1998 (as amended, the "1998 Note
Purchase Agreement"), under which it issued $25,000,000 in aggregate principal
amount of its Adjustable Rate Senior Notes Due September 1, 2008, pursuant to
which the defined term "Consolidated EBITDA" therein contained shall have been
amended substantially in conformity with the amendment to the term "Consolidated
EBITDA" set forth in Section 4. No "Default" or "Event of Default" under, and as
defined in, the 1998 Note Purchase Agreement shall exist on the Effective Date.
3.6. EXPENSES. All fees and disbursements required to be paid pursuant
to section 6.2 shall have been paid in full, including, but not limited to, the
statement for reasonable fees and disbursements of Willkie Farr & Gallagher, the
Noteholders' special counsel, presented to the Company on or prior to the
Effective Date.
3.7. PROCEEDINGS SATISFACTORY. All proceedings taken in connection
with the execution and delivery of this Agreement and the transactions
contemplated hereby shall be satisfactory to the Noteholders and their special
counsel; and the Noteholders and their special counsel shall have received
copies of such documents and papers as they may reasonably request in connection
therewith.
4. AMENDMENT TO EXISTING NOTE AGREEMENT.
Each of the Company and the Noteholders hereby consents and agrees
that the defined terms "Consolidated Adjusted Cash Flow" and "Consolidated
EBITDA" in paragraph 10B of the Existing Note Agreement are hereby amended and
restated in their entirety to read, respectively, as follows:
"CONSOLIDATED ADJUSTED CASH FLOW" shall mean, for any period, the sum
of
(i) Consolidated Operating Income for such period, PLUS
(ii) to the extent, and only to the extent, that such amount
was deducted in the computation of Consolidated Net Income for such
period, the aggregate amount of amortization and depreciation of the
Company and the Restricted Subsidiaries during such period, determined
on a consolidated basis for such Persons;
PROVIDED, HOWEVER, that, if for any period prior to December 31, 1999
Consolidated Net Income shall be reduced as a result of the
establishment by the Company of a reserve for the eventual resolution
of the investigation by the United States Customs Service and United
States Attorney's office in Tampa, Florida disclosed in the Company's
Form 10-K for the year ended December 31, 1997, there shall be added
to Consolidated Net Income for such period an amount equal to such
reduction (provided that the aggregate of the amounts added to
Consolidated Net Income for all such periods pursuant to this proviso
shall not exceed $15,000,000).
"CONSOLIDATED EBITDA" shall mean, for any period,
(i) Consolidated Net Income for such period, PLUS
(ii) without duplication and only to the extent deducted
from revenues in the determination of Consolidated Net Income for such
period, the sum of (a) income tax expense, (b) interest expense,
amortization or writeoffs of debt discount and debt issuance costs and
commissions, discounts and other fees and charges associated with the
issuance of Debt (including the Notes), (c) depreciation and
amortization expense and (d) amortization of intangibles (including,
but not limited to, goodwill) and organization costs, MINUS
(iii) only to the extent included in the determination of
Consolidated Net Income for such period, the sum of (a) interest
income and (b) income tax credits, all determined on a consolidated
basis;
PROVIDED, HOWEVER, that, if for any period prior to December 31, 1999
Consolidated Net Income shall be reduced as a result of the
establishment by the Company of a reserve for
the eventual resolution of the investigation by the United States
Customs Service and United States Attorney's office in Tampa, Florida
disclosed in the Company's Form 10-K for the year ended December 31,
1997, there shall be added to Consolidated Net Income for such period
an amount equal to such reduction (provided that the aggregate of the
amounts added to Consolidated Net Income for all such periods pursuant
to this proviso shall not exceed $15,000,000).
5. AFFIRMATION OF OBLIGATIONS.
Except as expressly amended by this Agreement, (a) no terms or
provisions of any agreement are modified or changed by this Agreement, (b) the
terms and provisions of the Transaction Documents shall continue in full force
and effect and (c) the terms and provisions of the Transaction Documents are
hereby ratified, confirmed and approved in all respects.
6. MISCELLANEOUS.
6.1. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
shall inure to the benefit of, the successors and assigns of the parties hereto
and the holders from time to time of the Notes.
6.2. FEES AND EXPENSES. On the Effective Date, the Company shall pay
all reasonable costs and expenses of the Noteholders relating to this Agreement,
including, but not limited to, the statement for reasonable fees and
disbursements of the Noteholders' special counsel presented to the Company on or
prior to the Effective Date. The Company will also pay, upon receipt of any
statement thereof, each additional statement for reasonable fees and
disbursements of the Noteholders' special counsel rendered after the Effective
Date in connection with this Agreement. The obligations of the Company under
this Section 6.2 shall survive the termination of this Agreement.
6.3. SURVIVAL. All warranties, representations, certifications and
covenants made by the Company in this Agreement or in any certificate or other
instrument delivered by it or on its behalf under this Agreement shall be
considered to have been relied upon by the Noteholders and shall survive the
execution of this Agreement, regardless of any investigation made by or on
behalf of any Noteholder. All such statements made herein or in any such
certificate or other instrument shall constitute warranties and representations
of the Company under this Agreement and the Amended Note Agreement.
6.4. GOVERNING LAW. This Agreement shall be construed, interpreted and
enforced in accordance with, and governed by, the laws of the State of New York,
excluding choice-of-law principles of the law of such State that would require
the application of the laws of a jurisdiction other than such State.
6.5. SECTION HEADINGS, ETC. The titles of the Sections hereof appear
as a matter of convenience only, do not constitute a part hereof and shall not
affect the construction hereof. The words "herein," "hereof," "hereunder" and
"hereto" refer to this Agreement as a whole and not to any particular Section or
other subdivision. References to Sections are, unless otherwise specified,
references to Sections of this Agreement.
6.6. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and shall be effective when at least one counterpart shall have
been executed by each party hereto, and each set of counterparts which,
collectively, show execution by each such party hereto shall constitute one
duplicate original. Any party hereto may execute and deliver a counterpart of
this Agreement by delivering by facsimile transmission a signature page of this
Agreement signed by such party, and such facsimile signature shall be treated in
all respects as having the same effect as an original signature.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. NEXT PAGE IS SIGNATURE PAGE]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed on their behalf by a duly authorized officer or agent thereof, as
the case may be, as of the date first above written.
RECOTON CORPORATION
By: /s/ Arnold Kezsbom
--------------------------
Name: Arnold Kezsbom
Title: Vice President
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By: /s/ Kevin J. Kraska
--------------------------
Name: Kevin Kraska
Title: Vice President
ING (U.S.) CAPITAL LLC
By: /s/ Barry A. Isley
-------------------------
Name: Barry A. Isley
Title: Senior Vice President
Exhibit 21
SUBSIDIARIES OF RECOTON CORPORATION
COMPANY JURISDICTION
Recoton Canada Ltd. Ontario, Canada
Recoton (Far East) Limited Hong Kong
STD Holding Limited + Hong Kong
STD Electronic International Limited ++ Hong Kong
STD Manufacturing Limited ++ Hong Kong
STD Plastic Industrial Limited ++ # Hong Kong
STD Trading Limited ++ # Hong Kong
Peak Hero Limited ++ # Hong Kong
Ever Smart Management Limited ++ Hong Kong
STD Industrial (Shenzhen) Limited ++ P.R. of China
STD (Tianjin) International Trade
Development Company Limited ++# P.R of China
Christie Design Corporation Delaware
InterAct Accessories, Inc. Delaware
AAMP of Florida, Inc., d/b/a AAMP of Florida
America, Inc.
Recoton Audio Corporation, d/b/a
Recoton Mobile Electronics Delaware
ReCone, Inc. +++# Delaware
Recoton Home Audio, Inc. +++ California
Recoton Japan, Inc. +++ Illinois
RAC-FSC +++# U.S. Virgin Islands
Recoton International Holdings, Inc. Delaware
+++
Recoton European Holdings, Inc. +++ Delaware
Recoton German Holdings GmbH +++ Germany
Mac Audio Electronic GmbH +++ Germany
Magnat Audio-Produkte GmbH +++ Germany
HECO Audio-Produkte GmbH +++ Germany
Recoton Italia s.r.l. +++ Italy
Recoton (UK) Limited, d/b/a Ross
Consumer Products +++ United Kingdom
Tambalan Limited +++# United Kingdom
Ross Consumer Products (HK) Ltd. +++# Hong Kong
+ Subsidiary of Recoton (Far East) Limited
++ Subsidiary of STD Holding Limited
+++ Direct or indirect subsidiary of Recoton Audio Corporation
# Inactive or in dissolution
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Registration
Nos. 33-43571 and 33- 59240 on Forms S-8 of our report dated February 26, 1999
appearing in this Annual Report on Form 10-K of Recoton Corporation for the year
ended December 31, 1998.
/s/ CORNICK, GARBER & SANDLER, LLP
-----------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
NEW YORK, NEW YORK
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and the Consolidated Statement of Operations filed as
part of the annual report on Form 10-K and is qualified in its entirety by
reference to such annual report on Form 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 21,385
<SECURITIES> 0
<RECEIVABLES> 188,170
<ALLOWANCES> 4,940
<INVENTORY> 161,294
<CURRENT-ASSETS> 391,469
<PP&E> 73,077
<DEPRECIATION> 32,384
<TOTAL-ASSETS> 486,670
<CURRENT-LIABILITIES> 213,174
<BONDS> 114,186
0
0
<COMMON> 2,587
<OTHER-SE> 145,408
<TOTAL-LIABILITY-AND-EQUITY> 486,670
<SALES> 700,408
<TOTAL-REVENUES> 700,872
<CGS> 429,334
<TOTAL-COSTS> 429,334
<OTHER-EXPENSES> 241,709
<LOSS-PROVISION> 2,743
<INTEREST-EXPENSE> 17,920
<INCOME-PRETAX> 9,166
<INCOME-TAX> 4,836
<INCOME-CONTINUING> 4,330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,330
<EPS-PRIMARY> .37
<EPS-DILUTED> .36
</TABLE>
