SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
(MARK ONE)
x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ___________
Commission file number: 0-5860
----------------------------
RECOTON CORPORATION
(Exact name of Registrant as Specified in its Charter)
NEW YORK 11-1771737
(State or Other Jurisdiction (IRS Employer
of Incorporation or Identification No.)
Organization)
2950 LAKE EMMA ROAD, LAKE MARY, FLORIDA 32746
(Address of principal executive offices, including zip code)
(407) 333-8900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
reporting requirements for the past 90 days. Yes x/ No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 11,732,524 common shares, par
value $.20 per share, as of November 12, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
RECOTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(TABULAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------ --------------- --------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,242 $ 21,385
Accounts receivable (less allowance for doubtful
accounts of $5,411,000 in 1999 and $4,940,000
in 1998) 153,965 183,230
Inventories 184,922 161,294
Prepaid, refundable and deferred income taxes 13,388 12,931
Prepaid expenses and other current assets 11,939 12,629
---------- ---------
TOTAL CURRENT ASSETS 378,456 391,469
PROPERTY AND EQUIPMENT (at cost, less accumulated
depreciation and amortization) 38,707 40,693
TRADEMARKS AND PATENTS (less accumulated amortization) 4,670 4,777
GOODWILL (less accumulated amortization) 35,520 37,233
DEFERRED INCOME TAXES 9,563 8,070
OTHER ASSETS 10,658 4,428
---------- -----------
T O T A L $477,574 $486,670
========== ===========
LIABILITIES
CURRENT LIABILITIES:
Bank loans and drafts payable $ 95,526
Current portion of long-term debt $ 384 9,359
Accounts payable 82,422 63,848
Accrued expenses 27,314 40,418
Income taxes payable 2,011 4,023
----------- -----------
TOTAL CURRENT LIABILITIES 112,131 213,174
LONG-TERM DEBT (less current portion above) 233,609 114,186
OTHER NONCURRENT LIABILITIES 17,341 11,315
------------ -----------
TOTAL LIABILITIES 363,081 338,675
------------ -----------
SHAREHOLDERS' EQUITY
PREFERRED SHARES - $1.00 par value each - authorized
10,000,000 shares; none issued -- --
COMMON SHARES - $.20 par value each - authorized
25,000,000 shares; issued 12,970,854 shares in
1999 and 12,933,704 shares in 1998 2,594 2,587
ADDITIONAL PAID-IN CAPITAL 85,229 80,867
RETAINED EARNINGS 39,160 75,088
CUMULATIVE OTHER COMPREHENSIVE INCOME (6,002) (4,090)
---------- ----------
TOTAL 120,981 154,452
TREASURY SHARES - 1,238,330 shares in 1999 and
1,235,367 shares in 1998, at cost (6,488) (6,457)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY 114,493 147,995
----------- ----------
T O T A L $477,574 $486,670
=========== ============
The attached notes are made a part hereof.
</TABLE>
<PAGE>
RECOTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT INCOME PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1999 1998 1999 1998
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
NET SALES $174,172 $177,092 $459,876 $455,913
COST OF GOODS SOLD 114,151 108,752 294,629 278,284
--------- --------- --------- ---------
GROSS PROFIT 60,021 68,340 165,247 177,629
---------- --------- --------- ---------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 67,415 59,257 171,516 153,386
RESTRUCTURING CHARGE 3,444 3,444
INTEREST EXPENSE 6,236 4,581 17,002 11,974
INVESTMENT INCOME (314) (117) (700) (322)
---------- -------- --------- ---------
T O T A L 76,781 63,721 191,262 165,038
---------- -------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (16,760) 4,619 (26,015) 12,591
INCOME TAX PROVISION (1,148) (881) (1,148) (2,077)
---------- -------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (17,908) 3,738 (27,163) 10,514
LOSS ON SENIOR DEBT RESTRUCTURING (8,765) (8,765)
---------- -------- --------- ---------
NET INCOME (LOSS) $(26,673) $ 3,738 $(35,928) $ 10,514
========== ========== ========= ==========
BASIC EARNINGS PER SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $(1.52) $.32 $(2.32) $.90
EXTRAORDINARY ITEM (.75) (.75)
---------- --------- --------- ---------
NET INCOME (LOSS) $(2.27) $.32 $(3.07) $.90
========== ========= ========= =========
DILUTED EARNINGS PER SHARE:*
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $(1.52) $.30 $(2.32) $.86
EXTRAORDINARY ITEM (.75) (.75)
---------- --------- --------- ---------
NET INCOME (LOSS) $(2.27) $.30 $(3.07) $.86
========== ========= ========= =========
NUMBER OF SHARES USED IN COMPUTING
PER SHARE AMOUNTS:
BASIC 11,732 11,697 11,714 11,642
========= ========= ========= =========
DILUTED* 11,732 12,420 11,714 12,232
========= ========= ========= =========
DIVIDENDS NONE NONE NONE NONE
========= ========= ========= =========
* The effect of the assumed exercise of outstanding stock options and warrants for the three and nine months
ended September 30, 1999 is antidilutive and therefore is not reflected in the diluted loss per share amounts.
The attached notes are made a part hereof.
</TABLE>
<PAGE>
RECOTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(TABULAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1999 1998
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(35,928) $ 10,514
--------- ---------
Adjustments to reconcile results of operations
to net cash effect of operating activities:
Depreciation 7,057 6,711
Amortization of intangibles 3,181 2,413
Write-off of financing costs relating to debt restructuring 1,013
Provision for losses on accounts receivable 1,679 1,508
Deferred income taxes (934) (4,057)
Expense applicable to stock options granted at
prices less than fair market value 55
Change in asset and liability accounts:
Accounts receivable 25,397 (16,996)
Inventory (24,870) (62,860)
Prepaid and refundable income taxes (937) 90
Prepaid expenses and other current assets 537 807
Other assets (146) (1,448)
Accounts payable and accrued expenses 6,527 19,439
Income taxes payable (807) 4,905
Other noncurrent liabilities 6,087 (154)
---------- ----------
TOTAL ADJUSTMENTS 23,784 (49,587)
---------- -----------
NET CASH USED FOR OPERATING ACTIVITIES (12,144) (39,073)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for trademarks, patents and
intellectual property (294) (121)
Expenditures for property and equipment (5,194) (10,486)
---------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (5,488) (10,607)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) under credit agreements
and other bank debt (13,943) 28,500
Proceeds from sale of senior subordinated notes 35,000
Proceeds from sale of senior notes 25,000
Proceeds from long-term bank borrowings 5,881
Repayment of long-term bank borrowings (12,003) (7,052)
Financing costs (4,150) (691)
Proceeds from exercise of stock options 161 1,639
Purchase of treasury stock (7) (126)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,939 47,270
------------ -----------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES
ON CASH OF FOREIGN SUBSIDIARIES $ (450) $ 76
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,143) (2,334)
CASH AND CASH EQUIVALENTS - January 1 21,385 17,247
-------- --------
CASH AND CASH EQUIVALENTS - SEPTEMBER 30 $14,242 $14,913
======= =======
SUPPLEMENTAL DISCLOSURES:
Interest paid $15,852 $11,947
======= =======
Income taxes paid (net of refunds received) $ 3,710 $ 1,051
======== ========
NONCASH ACTIVITIES:
In connection with the exercise of stock options, 21,334 shares of common
stock were issued in 1999 in exchange for 2,613 shares of previously issued
common stock with a market value of $24,000. In 1998, 15,500 shares of
common stock were issued in exchange for 6,000 shares of previously issued
common stock with a market value of $213,000, plus cash of $14,965.
In connection with the sale of senior subordinated notes and the debt
restructuring in 1999, the Company issued 660,000 common stock purchase
warrants valued at approximately $4,184,000, which has been credited to
additional paid-in capital and is being charged to operations over the
terms of the related debt.
The attached notes are made a part hereof.
</TABLE>
<PAGE>
RECOTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(TABULAR AMOUNTS IN THOUSANDS)
NOTE A - The attached summarized financial information does not include all
disclosures required to be included in a complete set of financial
statements prepared in conformity with generally accepted accounting
principles. Such disclosures were included with the consolidated
financial statements of the Company at December 31, 1998, included in
its annual report on Form 10-K. Such statements should be read in
conjunction with the data herein.
NOTE B - The financial information reflects all normal recurring adjustments
which, in the opinion of management, are deemed necessary for a fair
presentation of the results for the interim periods. The results for
the interim periods are not necessarily indicative of the results to
be expected for the year. Historically, the Company's sales and
earnings have been higher in the second half of each year.
NOTE C - Inventory at September 30, 1999 is comprised of:
Raw materials and work-in-process $ 33,881
Finished goods 132,469
Merchandise in-transit 18,572
--------
T O T A L $184,922
========
NOTE D - Total comprehensive income is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $(26,673) $ 3,738 $(35,928) $ 10,514
Other comprehensive income (loss) -
foreign currency transaction
adjustments 1,756 3,039 (1,912) 1,865
---------- ------- --------- --------
Total comprehensive income (loss) $(24,917) $ 6,777 $(37,840) $12,379
========== ======= ========= ========
</TABLE>
NOTE E - Business Restructuring and Related Costs: In the third quarter of
1999, the Company adopted a strategic business plan designed to
improve operating efficiencies, increase future profitability, improve
cash flow and increase return on assets. The plan includes staff
reductions, consolidation of certain businesses, reduction or
elimination of certain product lines and sales of certain assets. In
this connection, in the three months ended September 30, 1999, the
Company recorded a restructuring provision of approximately $3.4
million relating primarily to employee severance payments and lease
termination costs, recorded inventory write-downs of approximately
$8.3 million applicable to products which are being reduced or
eliminated and recorded other charges totaling approximately $5.8
million applicable to the value of assets to be sold and the valuation
of related receivables and other assets and the costs of developing
the plan.
NOTE F - Debt Restructuring: On September 8, 1999, the Company and its lenders
and noteholders entered into a restructuring agreement which includes
the extension of the previous bank credit facilities, a shortening of
the term of the Company's adjustable rate senior notes and an
additional bank credit facility of up to $50 million for working
capital purposes, each of which becomes due on June 30, 2001. In
connection with these transactions, the interest rates on the
previously outstanding debt were increased, certain fees became
payable, warrants to acquire the Company's common shares were issued
to certain lenders and previously outstanding warrants to holders of
the Company's senior subordinated notes were repriced. The
modifications to the senior notes were treated as creating a
substantially different instrument with the result that the previously
outstanding senior notes are considered to be extinguished and the
notes with the revised terms are considered as new debt. Accordingly,
the unamortized original debt issue costs of the notes, plus the
present value of certain fees payable to the senior noteholders
resulting from the acceleration of their original due date and other
fees paid or payable have been recorded as an extraordinary item in
the attached 1999 condensed consolidated statements of operations.
Selling, general and administrative expenses for the 1999 periods also
includes professional fees and other costs of approximately $1.2
million relating to the debt restructuring and the costs of seeking
alternative financing. The Company also incurred other costs of
approximately $4.1 million in connection with the debt restructuring
which have been deferred and are being amortized over the terms of the
restructured loans.
NOTE G - The following table presents certain operating segment information for
each of the nine and three month periods ended September 30, 1999 and
September 30, 1998:
<TABLE>
<CAPTION>
VIDEO AND
COMPUTER
GAME RAC ACCESSORIES UNALLOCATED
BUSINESS BUSINESS BUSINESS CORPORATE TOTAL
-------- -------- -------- ---------- ------
NINE MONTHS ENDED
SEPTEMBER 30, 1999:
<S> <C> <C> <C> <C> <C>
Net sales:
External customers $128,606 $178,887 $152,383 $459,876
Intersegment 15,675 2,027 482 18,184
Income (loss) before
income taxes and
extraordinary item 1,448 (13,317) 2,688 $(16,834) (26,015)
NINE MONTHS ENDED
SEPTEMBER 30, 1998:
Net sales:
External customers $149,071 $162,296 $144,546 $455,913
Intersegment 36,289 3,042 406 39,737
Income (loss) before
income taxes 14,631 (1,233) 9,228 $(10,035) 12,591
THREE MONTHS ENDED
SEPTEMBER 30, 1999:
Net sales:
External customers $48,723 $ 64,562 $60,887 $174,172
Intersegment 5,227 899 205 6,331
Income (loss) before
income taxes and
extraordinary item 1,471 (9,292) (2,394) $(6,545) (16,760)
THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales:
External customers $58,929 $ 61,499 $ 56,664 $177,092
Intersegment 4,448 1,841 6,289
Income (loss) before
income taxes 5,602 (570) 2,779 $(3,192) 4,619
</TABLE>
NOTE H - The Company usually records its income tax provisions for interim
reporting purposes based on its estimated annual effective income tax
rate for its calendar year ending December 31. However, as a result of
the losses incurred in 1999, commencing with the quarter ended June
30, 1999 the Company has recorded no income tax benefit attributable
to the losses from its domestic operations and its foreign
subsidiaries operating at a loss. The provision for income taxes for
the three and nine month periods ended September 30, 1999 is
applicable to those foreign subsidiaries which are operating at a
profit.
NOTE I - See "Legal Proceedings" in Part II, Item 1 of this Form 10-Q and the
Form 10-Q for the quarter ended March 31, 1999 for a discussion of a
lawsuit commenced in April 1999 against InterAct Accessories, Inc. (a
wholly-owned subsidiary of the Company) and one of its suppliers by
Sony Computer Entertainment America, Inc. See "Legal Proceedings" in
Part I, Item 3 of the Company's Form 10-K for the year ended December
31, 1998, in Part II, Item 1 of this Form 10-Q and in the Form 8-K
dated July 27, 1999 for a discussion of the status of the
investigation conducted by the United States Customs Service and the
United States Attorney's Office in Orlando, Florida.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison for the Quarters Ended September 30, 1999 and 1998
And the Nine Months Ended September 30, 1999 and 1998
GENERAL
Recoton Corporation is a global leader in the development, manufacturing
and marketing of branded video and computer game accessories, home and mobile
audio products and other electronic accessories for aftermarket use by
consumers. Our diverse accessory lines include 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. Our products are sold under various brand
names including: AAMP, ADVENT, AMBICO, AMPERSAND, AR/ACOUSTIC RESEARCH,
DISCWASHER, HECO, INTERACT, JENSEN, LINEAR RESEARCH, MACAUDIO, MAGNAT, NHT(NOW
HEAR THIS), NITRO, PARSEC, PERIPHERAL, PHASE LINEAR, RECOTON, REMBRANDT,
ROADGEAR, ROSS, SOLE CONTROL, SOUNDQUEST, AND STINGER.
Prior to 1995, the Company was primarily engaged in the development,
manufacture and marketing of a broad range of consumer electronic accessories.
In 1995 we expanded into the video and computer game accessory business with the
acquisition of STD Holding Limited, a Hong Kong based company, and the business
of its U.S. distribution arm now operating under the name InterAct Accessories,
Inc. In August 1996, we acquired the branded products business of International
Jensen Incorporated (now known as Recoton Audio Corporation), which allowed us
to enter the market for loudspeakers and other audio products for home and
automotive aftermarket use as well as expand our foothold for growth worldwide.
Commencing with our financial statements for the year ended December 31,
1998, we have classified our business into three principal segments in
accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information." Each
segment's earnings before corporate interest and income taxes are reported to
our 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 our three segments:
0 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),
our 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. The profits on products
produced by STD for and sold by our other business segments have been
allocated to them. For the nine months ending September 30, 1999
approximately 28% of our revenues were from sales by this segment.
0 RECOTON AUDIO CORPORATION BUSINESS: This segment consists of
Recoton Audio Corporation and its United States and European
subsidiaries (RAC), which primarily sell audio products for home and
aftermarket mobile use. Home audio products are sold under the ADVENT,
AR/ACOUSTIC RESEARCH, JENSEN AND NHT/(NOW HEAR THIS) brand names and
in Europe, under the HECO, MACAUDIO 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 by our Mobile
Electronic Division under the ADVENT, JENSEN, LINEAR RESEARCH, NITRO,
PHASE LINEAR and ROADGEAR brand names in Europe, include speakers,
subwoofers, amplifiers, cassette receivers, equalizers, electronic
crossovers, signal processors, CD players, CD changers and
installation accessories. For the nine months ended September 30, 1999
approximately 39% of our revenues were from sales by this segment.
0 ACCESSORIES BUSINESS: This segment consists of Recoton
Corporation; Christie Design Corporation, a research and development
subsidiary; Recoton (Far East) Limited, a Hong Kong distributor; AAMP
of Florida, Inc., a distributor of car audio installation products;
and Recoton Canada Ltd., a Canadian distributor of all our products.
Products sold include indoor and outdoor television antennas, photo,
camcorder, and audio storage cases, headphones, remote controls, and
other accessories for home and mobile audio, camcorder, cellular and
standard telephone, music and video products, and 900 MHz and other
wireless technology products marketed under numerous brand names
including AAMP, ADVENT, AMBICO, DISCWASHER, JENSEN, PARSEC, RECOTON,
ROADGEAR, SOLE CONTROL, SOUNDQUEST AND STINGER and, under licenses,
SPRINT for telephone accessories and ROLLING STONE for music storage.
For the nine months ended September 30, 1999, approximately 33% of our
revenues were from sales by this segment.
RESULTS OF OPERATIONS
In the third quarter of 1999 we began the implementation of a comprehensive
strategic business plan (the Strategic Plan) geared towards improving our
overall operations, cash flow and return on assets. The Strategic Plan includes
a reduction of staff, consolidation of businesses, the reduction and
discontinuation of certain products and the sale of certain assets. In the third
quarter of 1999, approximately $17.6 million in charges have been recorded in
conjunction with our Strategic Plan. These charges include approximately $3.4
million relating primarily to employee severance payments and lease termination
costs, $8.3 million of inventory write-downs applicable to product lines which
are being reduced or eliminated and approximately $5.8 million of other charges
applicable to the value of assets to be sold and the valuation of related
receivables and other assets, and the costs of developing the plan. Furthermore,
in conjunction with our Strategic Plan we have reorganized our management
structure to better accommodate a company of our size and global presence while
allowing our corporate management team to focus on a broader range of issues.
The plan further incorporates the development of a more incentive-based method
of compensation, more stringent financial controls and an upgrade of our
management information systems. We anticipate the restructuring of the Company
to allow the Company to regain earnings momentum beginning in the current fourth
quarter. In addition, in September 1999 we entered into a debt restructuring
agreement with our lenders, which provides financing through June 2001 to meet
our working capital requirements. The Company is in negotiations with other
financial institutions that, if consummated, would result in longer term
financing, increased liquidity and reduced interest expense. Total costs
associated with the restructure of debt charged to operations in the third
quarter of 1999 were approximately $10.0 million, of which approximately $8.8
million was recorded as an extraordinary item. (See the discussion regarding the
debt restructuring in "Liquidity and Capital Resources".)
The following table presents certain operating segment information for the
indicated three months ended September 30:
<TABLE>
<CAPTION>
(IN MILLIONS)
Video and Computer RAC Accessories
1999 Game Business Business Business
- ------------------ ------------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................. $48.7 $64.6 $60.9
Gross profit*.............................. 22.9 15.1 22.0
Income (loss) before
income taxes, unallocated
expenses and extraordinary item**... 1.5 (9.3) (2.4)
(*) Includes inventory write-downs in conjunction with the Strategic Plan aggregating approximately
$6.0 million for the RAC Business and $2.3 million for the Accessories Business.
(**) Includes charges in conjunction with the Strategic Plan aggregating approximately $1.1 million
for the Video and Computer Game business, $10.1 million for the RAC Business, and $6.4 million
for the Accessories Business.
Video and Computer RAC Accessories
1998 Game Business Business Business
- ------------------ ------------- ----------- -----------
Net sales.................................. $58.9 $61.5 $56.7
Gross profit............................... 27.0 18.2 23.1
Income (loss) before
income taxes, unallocated
expenses and extraordinary item......... 5.6 (0.6) 2.8
</TABLE>
The following table presents certain operating segment information for the
indicated nine months ended September 30:
<TABLE>
<CAPTION>
(IN MILLIONS)
Video and Computer RAC Accessories
1999 Game Business Business Business
- ------------------ ------------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................. $128.6 $178.9 $152.4
Gross profit*.............................. 58.4 48.1 58.7
Income (loss) before
income taxes, unallocated
expenses and extraordinary item**... 1.4 (13.3) 2.7
(*) Includes inventory write-downs in conjunction with the Strategic Plan aggregating approximately
$6.0 million for the RAC Business and $2.3 million for the Accessories Business.
(**) Includes charges in conjunction with the Strategic Plan aggregating approximately $1.1 million
for the Video and Computer Game business, $10.1 million for the RAC Business, and $6.4 million
for the Accessories Business.
Video and Computer RAC Accessories
1998 Game Business Business Business
- ------------------ ------------- ----------- -----------
Net sales.................................. $149.1 $162.3 $144.5
Gross profit............................... 68.9 51.0 57.7
Income (loss) before
income taxes, unallocated
expenses and extraordinary item......... 14.6 (1.2) 9.2
</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 our
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 conformity with
generally accepted accounting principles.
Net sales for the quarter ended September 30, 1999 totaled $174.2 million,
a decrease of $2.9 million or 1.6% from the quarter ended September 30, 1998 of
$177.1 million. Net sales for the nine months ended September 30, 1999 totaled
$459.9 million, up $4.0 million or 0.9% from the $455.9 million reported for the
nine months ended September 30, 1998. Sales by segment were as follows:
0 Net sales for the video and computer game business for the
third quarter of 1999 were $48.7 million, a decrease of 17.3% compared
to $58.9 million for the same period in 1998. Net sales for the nine
months ended September 30, 1999 were $128.6 million, a decrease of
13.7% compared to $149.1 million for the same period in 1998. Although
unit sales increased, the decline in net sales for the three months
ended September 1999 was in part due to lower unit pricing and in part
the current general transition phase of the video game business as new
game platforms are introduced by Sega, Nintendo and Sony. We began
shipping new products in the third quarter to coincide with the
introduction of the new game platform "Dreamcast" by Sega.
0 Net sales for the RAC business for the third quarter of 1999
were $64.6 million, an increase of 5.0% compared to $61.5 million for
the same period in 1998. Net sales for the nine months ended September
30, 1999 were $178.9 million, an increase of 10.2% compared to $162.3
million for the nine months ended September 30, 1998. The sales
increases for this segment were due to (1) an expanded customer base,
(2) increases in revenue from existing customers and (3) increases in
sales of Marine products.
0 Net sales for the accessory business for the third quarter
of 1999 were $60.9 million, an increase of 7.4% compared to $56.7
million in the third quarter of 1998. Net sales for the nine months
ended September 30, 1999 were $152.4 million, an increase of 5.5%
compared to $144.5 million for the same period in 1998. The sales
increases for this segment were primarily due to increased sales in
our domestic accessories business and in the Company's AAMP division.
Gross margin for the third quarter of 1999 decreased to 34.5% from 38.6%
for the same period in 1998. However, gross margin before inventory write-downs
associated with our Strategic Plan was 39.2% in the third quarter, an increase
of 0.6% over the same period in 1998. Gross margin including inventory
write-downs associated with our Strategic Plan decreased to 35.9% for the nine
months ended September 30, 1999 compared to 39.0% for the same period in 1998.
The gross margin decrease in both 1999 periods was due to $8.3 million in
charges associated with the reduction and discontinuance of certain products.
The gross margin before the inventory write-downs associated with our Strategic
Plan was 37.7%, a decrease of 1.3% over the same period in 1998. This gross
margin decrease year to date is mainly due to decreased margins on InterAct
products in the first two quarters of 1999 slightly offset by increased margins
from the accessory business in the second quarter. Gross margins by segment were
as follows:
0 Gross margin for the video and computer game business
increased to 47.0% for the quarter ended September 30, 1999 from 45.7%
for the quarter ended September 30, 1998 mainly due to product mix and
the launch of the new "Dreamcast" products. Gross margin decreased to
45.4% for the nine months ended September 30, 1999 compared to 46.2%
for the nine months ended September 30, 1998. The decrease is
attributable to product mix, competitive pricing pressures and the
general transition of the industry from existing platforms as game
manufacturers prepare for the introduction of a new generation of
products.
0 Gross margin for the RAC business decreased to 23.4% for the
quarter ended September 30, 1999 from 29.6% for the quarter ended
September 30, 1998 and decreased to 26.9% for the nine months ended
September 30, 1999 from 31.4% for the nine months ended September 30,
1998. These decreases were mainly due to $6.0 million of inventory
write-downs associated with our Strategic Plan, which provides for the
discontinuance of certain home speaker products and an outsourcing of
manufacturing operations. Gross margin for the quarter ended September
30, 1999, before the inventory write-down associated with the our
Strategic Plan, was 32.7% and for the nine months ended September 30,
1999 was 30.2%.
0 Gross margin for the accessories business decreased to 36.1%
for the quarter ended September 30, 1999 from 40.9% for the quarter
ended September 30, 1998 and decreased slightly to 38.5% for the nine
months ended September 30, 1999 from 39.9% for the nine months ended
September 30, 1998. These decreases were mainly due to $2.3 million of
write-downs associated with our Strategic Plan. Before the inventory
write-down associated with the our Strategic Plan gross margin, for
the quarter was 39.9% and for the nine months ended September 30,
1999, was 40.0%.
Selling, general and administrative expenses increased for the third
quarter of 1999 by approximately $8.1 million to $67.4 million compared to $59.3
million for the third quarter of 1998 and increased as a percentage of net sales
to 38.7% for the third quarter of 1999 from 33.5% in the third quarter of 1998.
These expenses include approximately $5.8 million in charges associated with the
Strategic Plan and $1.2 million in costs associated with the debt restructuring
and seeking alternative financing in the third quarter of 1999. Selling, general
and administrative expenses before such charges were $60.4 million for the
quarter, an increase of $1.1 million compared to the same period in 1998. The
increase is due mainly to increases in promotional expenses in the accessory
segment. For the nine months ended September 30, 1999, selling, general and
administrative expenses increased to $171.5 million compared to $153.4 million
for the same period in 1998 and increased as a percentage of net sales from
33.6% to 37.3% for the nine months ended September 30, 1999. The increase was
primarily due to the charges associated with the Strategic Plan and debt
restructuring recorded in the third quarter of 1999. Before such charges,
selling, general and administrative expenses for the nine months ended September
30, 1999 were $164.5 million, an increase of $11.1 million compared to the same
period in 1998. This increase was due to increased market development and
promotional activities principally related to InterAct products in the first
half of the year.
The Company also recorded $3.4 million in restructuring charges in the
third quarter of 1999, which include charges relating primarily to employee
severance payments and lease termination costs.
Interest expense (net of investment income) increased by $1.5 million to
$5.9 million for the third quarter of 1999 compared to the same period in 1998.
Interest expense (net of investment income) increased by $4.7 million to $16.3
million for the nine months ended September 30, 1999 compared to the same period
in 1998. These increases were primarily attributable to the sale of $35 million
of senior subordinated notes in February 1999 and increases in interest rates.
We are presently in negotiations with other financial institutions that, if
consummated, would result in longer term financing, increased liquidity and
reduced interest rates.
On a consolidated basis, the loss before income taxes and extraordinary
item for the third quarter of 1999 was $16.8 million. This was mainly due to
approximately $18.8 million in charges associated with the Strategic Plan and
debt restructuring. Before such charges, income before income taxes and
extraordinary item was $2.0 million compared to income before income taxes of
$4.6 million reported for the same period in 1998. For the nine months ended
September 30, 1999 the loss before income taxes and extraordinary item was $26.0
million. This loss was mainly due to the charges associated with the Strategic
Plan and debt restructuring in the third quarter. Before such charges, the loss
before income taxes and extraordinary item for the nine months was $7.2 million
compared to income before income taxes of $12.6 million reported for the same
period in 1998.
The extraordinary item recorded in the three and nine month periods ended
September 30, 1999 relates to charges resulting from the restructuring of the
our Senior Notes, which is discussed further under "Liquidity and Capital
Resources-Debt Restructuring" below.
The following discussion on a segment basis reflects results before income
taxes, unallocated expenses (which expenses consists primarily of interest and
certain costs incurred in connection with the debt restructuring) and
extraordinary item:
0 For the third quarter of 1999, income before income taxes,
unallocated expenses and extraordinary item for the video and computer
game business was $1.4 million compared to income before income taxes
and unallocated expenses of $5.6 million in the third quarter of 1998.
For the nine months ended September 30, 1999 income before income
taxes, unallocated expenses and extraordinary item was $1.4 million
compared to $14.6 million for the nine months ended September 30,
1998. These decreases were mainly due to $1.1 million in charges
recorded for the three and nine months ended September 30, 1999 in
connection with our Strategic Plan. Before such charges, income before
income taxes, unallocated expenses and extraordinary item for the
third quarter and nine months ended September 30, 1999 was $2.5
million. The decreases were attributable to lower gross profits and
higher promotional expenses.
0 Loss before income taxes, unallocated expenses and
extraordinary item for the RAC business was $9.3 million for the third
quarter of 1999 compared to a loss of $0.6 million for the third
quarter of 1998. For the nine months ended September 30, 1999 the loss
before income taxes, unallocated expenses and extraordinary item was
$13.3 million, compared to a loss of $1.2 million for the nine months
ended September 30, 1998. In addition to the effect of lower gross
margins, approximately $10.1 million of restructuring and other
charges associated with the Strategic Plan were applicable to the RAC
business, particularly its home audio division. Before such charges,
income before income taxes, unallocated expenses and extraordinary
item for the third quarter of 1999 was $0.8 million and for the nine
months ended September 30, 1999 was a loss before income taxes,
unallocated expenses and extraordinary item of $3.2 million.
0 Loss before income taxes, unallocated expenses and
extraordinary item for the accessories business was $2.4 million for
the third quarter of 1999 compared to income before income taxes and
unallocated expenses of $2.8 million for the third quarter of 1998.
For the nine months ended September 30, 1999 income before income
taxes, unallocated expenses and extraordinary item was $2.7 million
compared to $9.2 million for the nine months ended September 30, 1998.
The declines were attributable to both a marginal decline in the gross
margin percentage in the third quarter of 1999 and an increase in
operating expenses as well as approximately $6.4 in restructuring and
other charges associated with the Strategic Plan to the core
accessories business. Before such charges, income before income taxes,
unallocated expenses and extraordinary item for the third quarter of
1999 was $4.0 million and for the nine months ended September 30, 1999
was $9.1 million.
For interim reporting purposes, we usually record income taxes based on our
estimated annual effective income tax rate for the calendar year ending December
31. However, as a result of the losses incurred in 1999 we have recorded no
income tax benefit for our U.S. losses and for our foreign subsidiaries which
sustained losses but we have recorded income tax expense for those foreign
subsidiaries with earnings. For the nine month period ended September 30, 1998,
our income tax expense was based upon an estimated effective annual income tax
rates of 16.5%. In recent years, our 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 our Asian operations are taxed at a current maximum rate of
16.0%. However, the actual tax rate from Asian operations is dependent upon the
proportion of earnings from mainland China, which have been subject to a tax
holiday. Our 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. Also, we have not provided for additional U.S. income
taxes which would be payable upon the payment of dividends to us from our Asian
subsidiaries because these earnings were considered to be indefinitely invested
or could be remitted without the payment of additional U.S. income taxes. Our
effective income tax rate on future earnings from Asia and additional U.S.
income taxes on the unremitted Asian retained earnings at September 30, 1999
are, in part, dependent upon our future domestic cash requirements and our
domestic tax situation in the periods any intercompany dividends are declared.
Certain intercompany dividends were declared and paid in the three months ended
September 30, 1999 and we currently project that an additional portion of our
Asian retained earnings at September 30, 1999 will be remitted to us as
dividends in the quarter ending December 31, 1999. We currently estimate that
these dividends will have no material effect on our taxes payable or income tax
expense for 1999 and that the balance of our Asian retained earnings will remain
indefinitely invested. Such estimate is subject to future revision based upon
such factors as the results of our domestic operations for the full year and
thereafter, our ability to borrow or otherwise obtain funds to finance our
operations, market conditions in the consumer electronics industry and general
economic conditions in the United States and in Asia.
In 1998, we adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This statement, effective for fiscal years
beginning after December 15, 1997, requires us 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, our comprehensive income has been comprised of
our net income or loss and foreign currency translation adjustments (which
adjustments were a negative $1.9 million for the nine months ended September 30,
1999 and a positive $1.9 million for the same period in 1998) included in the
consolidated statements of stockholders' equity. As a result of significant
fluctuations in the value of the U.S. dollar in relation to currencies in
Western Europe for the nine months ended September 30, 1999 and 1998, and the
related foreign currency translation adjustments recorded by us, in addition to
the changes in net income or loss, total comprehensive loss for the nine months
ended September 30, 1999 was $37.8 million compared to total comprehensive
income of $12.4 million for the nine months ended September 30, 1998. Total
comprehensive loss for the quarter ended September 30, 1999 was $24.9 million as
compared to total comprehensive income of $6.8 million for the quarter ended
September 30, 1998. (See Note D of the Notes to the Condensed Consolidated
Financial Statements.)
For the third quarter of 1999, basic and diluted loss per share were
$2.27/share based on average outstanding shares of 11,732,000. For the third
quarter of 1998, basic earnings per share was $.32/share and diluted earnings
per share was $.30/share based on average shares of 11,697,000 (basic) and
12,420,000 (diluted). For the nine months ended September 30, 1999, basic and
diluted loss per share were $3.07/share based on average outstanding shares of
11,714,000. The per share amounts for the three and nine months ended September
30, 1999 include charges equal to $1.60 per share on losses before extraordinary
item and an extraordinary loss equal to $0.75 per share associated with the
Strategic Plan and restructuring of debt. The effect of the assumed exercise of
outstanding stock options and warrants for the three and nine months ended
September 30, 1999 is antidilutive and therefore is not reflected in the 1999
loss per share amounts. For the nine months ended September 30,1998, basic
earnings per share was $.90/share and diluted earnings per share was $.86/share
based on average shares of 11,642,000 (basic) and 12,232,000 (diluted).
IMPACT OF INFLATION AND CHANGING PRICES
The impact of inflation and changing prices on our net sales and revenues
and on income from continuing operations for the nine months ended September 30,
1999 was negligible.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND COMPONENTS OF WORKING CAPITAL. Our 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 our securities, including the
private placement of our notes. At September 30, 1999, we had cash and cash
equivalents of $14.2 million compared with $21.4 million at December 31, 1998.
At September 30, 1999, we had working capital of approximately $266.3
million as compared to approximately $178.3 million at December 31, 1998. Our
ratio of current assets to current liabilities was 3.4 to 1 at September 30,
1999 and 1.8 to 1 at December 31, 1998. The increases in working capital and the
working capital ratio are primarily the result of the proceeds of the issuance
of $35 million in aggregate principle amount of senior subordinated notes used
to reduce outstanding borrowings under the revolving credit facility and the
restructuring of our debt in September 1999. Trade receivables decreased $29.2
million to $154.0 million at September 30, 1999 as compared to $183.2 million at
December 31, 1998. Inventories increased from December 31, 1998 levels by $23.6
million to $184.9 million at September 30, 1999. Accounts payable and accrued
expenses increased $5.4 million to $109.7 million at September 30, 1999. These
changes are the result of our normal sales and purchasing patterns, where sales
have traditionally been higher in the third and fourth quarters of each year.
DEBT RESTRUCTURING. On September 8, 1999, we entered into a debt
restructuring agreement which included the extension of our previous bank credit
facilities, a shortening of the term of our adjustable rate senior notes and an
additional credit facility of up to $50 million for working capital purposes,
each of which will become due on June 30, 2001. The financial covenants under
our previous debt were reduced in number and significantly relaxed. Pursuant to
the agreement we granted the lenders and note holders collateral in
substantially all the assets of the Company. The interest rates on our
outstanding debt were increased, certain fees became payable and warrants to
acquire common shares were granted. In the third quarter of 1999, we incurred
approximately $10.0 million in debt restructuring costs and $4.1 million in
additional deferred finance charges. The $10.0 million applicable to debt
restructuring costs includes $8.8 million related to costs of restructuring our
senior notes and $1.2 million of professional fees and costs of seeking
alternative financing. The costs associated with the restructuring of our senior
notes has been recorded as an extraordinary item in the three and nine months
ended September 30, 1999 because their restructuring is considered to be the
equivalent of a debt extinguishment and the issuance of new loans under
generally accepted accounting principals.
At December 31, 1998 and June 30, 1999 and at various times prior to such
dates we were not in compliance with certain financial covenants, including
those involving the maintenance of financial ratios and minimum tangible net
worth, under our outstanding notes and our credit facility. At such times both
the note holders and bank lenders either amended the covenants or waived our
non-compliance with such covenants and temporarily relaxed such covenants. At
September 30, 1999, we were in compliance with the covenants under the notes and
credit facility. However, there can be no assurance that we will be in
compliance with the modified covenants in the future or that the lenders or note
holders will waive or amend any of the covenants should we be in violation of
any such covenants in the future.
CURRENT SOURCES OF CREDIT. We currently have a multibank credit facility,
entered into in January 1997 and modified several times with the most recent
modification occurring on September 8, 1999. The most recent modification froze
our revolving credit facility at $74.6 million and combined three existing term
loans with the revolving credit facility to create a total loan of $89.2 million
with a due date of June 30, 2001. The facility has a $12.5 million letter of
credit subfacility, of which $10.6 million was outstanding at September 30,
1999. We entered into an additional multibank credit facility on September 8,
1999 with an up to $50.0 million revolving credit facility through June 30,
2001. The outstanding borrowings under the new credit facility were $7.0 million
at September 30, 1999. The restructured loan under the original credit facility
bears an interest rate at the prime rate plus 3.77% and the revolving loan under
the new credit facility has an interest rate at the prime rate plus 3.5%. As of
September 30, 1999 these loans bore interest of 12.02% and 11.75%, respectively.
The outstanding borrowings and commitments pursuant to letters of credit under
the revolving facility were $95.7 million at December 31, 1998. (See the
discussion above regarding restructuring of this debt and the discussion below
regarding our outstanding notes and other borrowings.)
In January 1997, we issued $75 million in principal amount of adjustable
rate senior notes (the 1997 Notes), which were modified on September 8, 1999,
accelerating the maturity date to June 30, 2001 from January 6, 2007 and
increasing the interest rate to 12.75% (8.75% in 1998) per annum. In September
1998, we issued an additional $25 million in principal amount of 10-year senior
notes (the 1998 Notes), which were also modified accelerating the maturity date
to June 30, 2001 from September 1, 2008 and increasing the interest rate to
12.52% per annum (8.52% in September 1998).
In February 1999, we issued $35 million in aggregate principal amount of
senior subordinated notes due February 4, 2004 (the 1999 Notes). The proceeds
were used to reduce outstanding borrowings under our revolving credit facility.
The 1999 Notes are subject to required prepayment from the proceeds received by
us from the sale of either high yield indebtedness or common shares. Interest is
currently payable quarterly at 13.5% a year to November 4, 1999, increasing to
14.5% per annum from November 5, 1999 to February 4, 2000, then increasing to
15.0% per annum from February 5, 2000 to May 4, 2000, and then increasing to
15.5% per annum from and after May 5, 2000. Under the terms of the agreement,
the Company issued warrants to the noteholders to purchase 310,000 common shares
at a price of $18.26 per share which expire on February 4, 2004. In connection
with the debt restructuring, the exercise price of the warrants was reduced to
$7.77 per share and additional warrants to purchase 100,000 common shares at a
price of $7.77 per share were issued. These warrants expire on September 8,
2004.
We have granted two mortgages on our Florida property to one member of the
multibank credit group, which are due in June and July 2001, to secure repayment
of $2.5 million of such indebtedness. Interest rates on the loans are 8.0% and
8.4%.
Certain of our foreign subsidiaries have lines of credit of approximately
$18.3 million with foreign banks, primarily for import facilities. The banks
have security interests to the extent of merchandise purchased under these
lines. As of September 30, 1999, there were no trust receipt loans and
approximately $6.8 million of letters of credit outstanding which reduce the
amounts available under these foreign lines.
FACILITIES. In January 1998, we completed construction of an approximately
318,000 square foot expansion of our warehouse on our Lake Mary, Florida
property. The cost of the building construction was approximately $5.0 million.
FOREIGN OPERATIONS. To date there has been limited exposure to loss due to
foreign currency risks in our Asian subsidiaries, because the Hong Kong dollar
has been pegged to the U.S. dollar at an official exchange rate of HK $7.77 to
US $1.00. Additionally, in recent years there have been no material fluctuations
in the Hong Kong/Chinese exchange rates. Also, we maintain the majority of our
currency in Asia in U.S. dollar accounts. However, there can be no assurance
that these relationships will continue.
Our operations, which are currently being transacted on a global basis, are
exposed to variations in foreign exchange rates. Our shareholders' equity was
decreased by a foreign currency translation adjustment of approximately $1.9
million for the nine months ended September 30, 1999. During the nine months
ended September 30, 1998, our shareholders' equity was increased by a foreign
currency translation adjustment of approximately $1.9 million. The changes in
the exchange rates of the German and Italian currencies against the American
dollar, which were the principle causes of the foreign translation adjustments,
had no material impact on our results of operations but such adjustments serve
to reduce our tangible net worth which is required to be maintained at specified
levels under financial covenants in our loan and note purchase agreements.
If there are any material adverse changes in the relationships between the
European and/or Canadian currencies with the United States dollar or if the Hong
Kong or Chinese currencies should no longer be tied to the U.S. dollar, such
changes could adversely affect the results of our 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.
We have leased expanded facilities for sales and warehousing in Germany and
the U.K. In addition we are considering the purchase of additional computer
hardware and software to be used both in the United States and in its foreign
locations. We do not, however, anticipate engaging in any other acquisitions.
YEAR 2000
We have addressed what is known as the year 2000 (or Y2K) issue. Based on
current information, we believe that we will be year 2000 compliant in a timely
manner and the cost of achieving such compliance will not have a materially
adverse effect on our results of operations or financial condition. As noted in
the following discussion, however, there are multiple variables in determining
whether full Y2K compliance can be achieved, many of which are dependent on
efforts of third parties. For a discussion of this problem, see " Item 7.
Management's Discussion and Analysis of Financial Conditions and Results of
Operations" of our Form 10-K for the year ended December 31, 1998.
We believe that all of our internal computer systems and computer-dependent
systems are currently Y2K compliant. As noted in our Form 10-K, we have been
contacting our key vendors and service providers, as well as our key customers,
to ascertain their Y2K compliance to the extent that their problems could affect
our internal systems or other aspects of our business. Inquiry letters have been
sent to all key United States and most key foreign vendors, service providers
and customers.
Positive responses or other assurances have been received from
substantially all of our significant vendors and service providers and from most
of our significant customers. Responses from European vendors and customers,
however, have been slower in coming as many European countries have only
recently recognized the potential severity of the Y2K problem. We have received
satisfactory responses from (or deemed it not necessary to query) vendors
representing approximately 85% of our worldwide purchases (95% of purchases by
all non-European companies) and from customers representing approximately 80% of
our worldwide sales (90% of sales by all non-European companies). For our
planning purposes we are assuming that companies which do not satisfactorily
respond will not be Y2K compliant. Any serious Y2K problems which significant
vendors and service providers encounter could impact our ability to sell the
affected products. Based on information received to date, however, we do not
anticipate any significant disruptions in supply and any such disruptions which
may arise should be minimized by the fact that we maintain inventory for most of
our components and have the ability to obtain alternative sources for many
items. Furthermore, sales in the first quarter of the calendar year are
generally less than in the prior fourth quarter, lessening the impact of any
situations which may arise. If significant customers (especially those which are
ordering from us electronically) have Y2K problems, that also could impact the
level of their purchases until such problems are resolved.
IMPLICATIONS TO THE COMPANY FROM THE ADOPTION OF A EUROPEAN COMMON CURRENCY
We have extensive operations in certain European countries, including
Germany, Italy and the United Kingdom. We also sell to additional countries in
Europe. For the nine months ended September 30, 1999, approximately 15% of our
net sales were in Europe. With the exception of the United Kingdom, all of the
countries in which we have operations have confirmed their participation in a
new 11-country European common currency, the Euro. We have not experienced, and
do not anticipate, that there will be any material adverse impact on us or our
European business resulting from the adoption of the Euro and any resulting
changes in European economic and market conditions. For a discussion of the
implications to us regarding the recent adoption of a common European currency,
see "Item 7. Management's Discussion and Analysis of Financial Conditions and
Results of Operations" of our Form 10-K for the year ended December 31, 1998.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Approximately 59% of our borrowings bear fixed interest rates. The
borrowings under the revolving credit portion of our credit facilities bear
various rates depending on changes in the prime rate.
We have no significant foreign borrowings from third parties. Recoton
Corporation and certain of our subsidiaries have intercompany loans which are
not denominated in their home country currency, which exposes us to exchange
rate fluctuations. We have not entered into any foreign currency or derivative
contracts to hedge these potential exchange adjustments, which are initially
recorded as cumulative foreign currency translation adjustments (a component of
shareholders' equity), but will ultimately be reflected in operations when the
debt is repaid. Exclusive of intercompany receivables and payables for current
transactions, the principal outstanding exposure at September 30, 1999
(expressed in U.S. dollars at current exchange rates) for foreign currency loans
made by Recoton Corporation and our subsidiaries to other subsidiaries in
Germany and Italy is $33.4 million. These loans have no fixed due dates.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CUSTOMS. We have entered into agreements to resolve all matters in the
pending customs investigation by the U.S. Customs Service and the U.S. Attorney
for the Middle District of Florida. The agreement with the U.S. Attorney's
office is subject to court approval. Pursuant to such agreement, on September 2,
1999 we entered a guilty plea to a number of counts involving country of origin
mismarking and undervaluation of imports and agreed to pay a fine to be
determined by the court. The sentencing hearing is scheduled to occur in
December, at which time the court is likely to announce its determination as to
the amount of the fine. We will pay the U.S. Customs Service the difference
between $14.0 million and the fine determined by the court. There can be no
assurance that the agreement with the U.S. Attorney will be approved. For a
further discussion of this matter, see" Item 3, "Legal Proceedings," of our Form
10-K for the year ended December 31, 1998 and our Form 8-K dated July 27, 1999.
SONY VS. INTERACT. Sony Computer Entertainment America Inc. sued our
subsidiary InterAct Accessories, Inc, and Datel Electronics, Ltd., the supplier
of InterAct's GameShark product, in the U.S. District Court for the Northern
District of California on April 7, 1999. The parties are currently engaged in
discussions to resolve this matter. For a further discussion of this case, see
Part II, Item 1 "Legal Proceedings" of our Form 10-Q for the quarter ended March
31, 1999.
ITEM 5. OTHER INFORMATION.
When used in this Form 10-Q and in future filings by us with the Securities
and Exchange Commission, in our press releases and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," "expect," "believe," "hope" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. We wish to caution readers not to place undue reliance on such
forward-looking statements, which speak only as of the date made.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
(1) A report dated September 8, 1999 was filed to report under
Item 5 the restructuring of the Company's indebtedness.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RECOTON CORPORATION
/S/ STUART MONT
-----------------------------------
Stuart Mont
Executive Vice President-Operations and Chief
Operating Officer
/S/ ARNOLD KEZSBOM
-----------------------------------
Arnold Kezsbom
Senior Vice President-Finance, Treasurer and Chief
Financial Officer
Dated: November 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at September 30, 1999
(Unaudited) and the Condensed Consolidated Statement of Income for the Nine
Months Ended September 30, 1999 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 14,242
<SECURITIES> 0
<RECEIVABLES> 159,376
<ALLOWANCES> 5,411
<INVENTORY> 184,922
<CURRENT-ASSETS> 378,456
<PP&E> 78,039
<DEPRECIATION> 39,332
<TOTAL-ASSETS> 477,574
<CURRENT-LIABILITIES> 112,131
<BONDS> 233,609
0
0
<COMMON> 2,594
<OTHER-SE> 111,899
<TOTAL-LIABILITY-AND-EQUITY> 477,574
<SALES> 459,876
<TOTAL-REVENUES> 460,576
<CGS> 294,629
<TOTAL-COSTS> 294,629
<OTHER-EXPENSES> 173,281
<LOSS-PROVISION> 1,679
<INTEREST-EXPENSE> 17,002
<INCOME-PRETAX> (26,015)
<INCOME-TAX> 1,148
<INCOME-CONTINUING> (27,163)
<DISCONTINUED> 0
<EXTRAORDINARY> (8,765)
<CHANGES> 0
<NET-INCOME> (35,928)
<EPS-BASIC> (3.07)
<EPS-DILUTED> (3.07)
</TABLE>
