Recoton Corporation is a global leader in the development, manufacturing and marketing of branded home and mobile audio products, video and computer game accessories and other consumer electronic accessories for aftermarket use by consumers. The Company's diverse 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. The Company's products are sold under various brand names including AAMP, Advent, Ambico, AR/Acoustic Research, Discwasher, GameShark, Heco, InterAct, Jensen, Linear Research, MacAudio, Magnat, NHT(Now Hear This), Parsec, Performance, Peripheral, Phase Linear, Recoton, Ross, SoundQuest, and Stinger and certain products are licensed to be sold under the names Barbie, Nintendo 64, Rolling Stone, Sega Dreamcast, Sony Playstation and Sprint.

     The Company classifies its business into three principal segments in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." Each segment's earnings before corporate interest and income taxes are reported to the Company's chief operating decision-makers. General corporate expenses other than certain interest costs and certain amortization of financing costs have been allocated to each segment on the basis used for internal management decision-making purposes.

     The Company operates its business under three segments as follows:

     The following table presents certain operating segment information for the quarters ended March 31 (further discussed in Note E to the Notes to Condensed Consolidated Financial Statements):

                                                      Video and           Consumer
                                     Recoton           Computer         Electronics
                                      Audio             Game            Accessories
2000                                Business          Business            Business
------------------                  --------          --------          -----------
Net sales...................        $  56.2            $ 36.8             $  52.5
Gross profit................           18.2              12.3                22.4
Income (loss) before
   income taxes and
   unallocated expenses                 2.5              (4.0)                5.8

1999
----
Net sales...................         $ 47.5            $ 50.0             $  46.4
Gross profit................           14.4              22.9                18.6
Income (loss) before
  income taxes and
  unallocated expenses .....           (4.6)              3.8                 4.1

     The financial results of the reportable segments have been prepared using a management approach, which is consistent with the basis and manner in which the Company's 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.

     Net sales for the first quarter of 2000 totaled $145.5 million, up approximately $1.6 million or 1.1% from the $143.9 million reported in the first quarter of 1999. Sales by segment were as follows:

     Gross margin decreased to 36.4% in the first quarter of 2000 compared to 38.9% in the first quarter of 1999. The gross margin decrease was mainly due to decreased margins from the video and computer game business, which was partially offset by gross margin increases in the other segments. Gross margins by segment were as follows:

     Selling, general and administrative expenses decreased in the first quarter of 2000 by approximately $4.6 million to $47.8 million compared to $52.4 million in the first quarter of 1999 and decreased as a percentage of net sales to 32.9% in 2000 from 36.4% in 1999. These decreases were a result of the Company's strategic plan initiatives and decreased market development and promotional activities principally related to the video and computer game segment.

     Operating income in the first quarter of 2000 increased $1.6 million or 45.4% to $5.1 million from $3.5 million in the first quarter of 1999. The increase is mainly due to the Company's strategic plan initiatives resulting in a decrease in selling, general and administrative expenses.

     Interest expense (net of investment income) increased by $2.7 million to $8.1 million in the first quarter of 2000 compared to $5.4 million in the first quarter of 1999. This increase was primarily attributable to the issuance of $35 million of senior subordinated notes in February 1999 and increases in interest rates following the restructuring of debt in September 1999. In February 2000, the Company signed a commitment letter with Heller Financial that, if consummated, will replace a substantial portion of the Company's debt and provide the Company with reduced interest rates, longer term financing and increased liquidity.

     Amortization of financing costs increased to $507,000 in the first quarter of 2000 compared to $160,000 in the first quarter of 1999 which was attributable to the issuance of the senior subordinated notes and the debt restructuring.

     On a consolidated basis, the loss before income taxes in the first quarter of 2000 was $3.5 million compared to loss before income taxes of $2.0 million reported for the first quarter of 1999. This was mainly due to increased interest expense and losses in the video and computer game business, which was caused by the general transition of the industry to new gaming platforms, which were partially offset by increases in income in the other segments.

     The following is a discussion of income or loss on a segment basis defined as the results before income taxes and unallocated expenses (which expenses consists primarily of interest and certain amortization of financing costs):

     In recent years, the Company's income taxes and effective consolidated income tax rate have been materially affected by changes in the proportion of domestic and foreign earnings. While earnings from operations in North America and Western Europe are primarily taxed at or above United States income tax rates, earnings from the Company's Asian operations are taxed at a current maximum rate of 16.0%. However, the actual tax rate from Asian operations is dependent upon the proportion of earnings from mainland China, which are currently subject to a 50% tax holiday, which expires at the end of the current year. The Company's effective income tax rate is dependant on the mix of foreign and domestic earnings and any additional U.S. income taxes on unremitted Asian retained earnings at March 31, 2000 which would be payable in the periods any intercompany dividends are declared. The Company currently estimates that the balance of its Asian retained earnings will remain indefinitely invested. Such estimate is subject to future revision based upon such factors as the results of domestic operations, ability to borrow or otherwise obtain funds to finance operations, market conditions in the consumer electronics industry and general economic conditions in the United States and in Asia. The Company's income tax credit for the first quarter of 2000 is based on a 25% estimated effective annual income tax rate for 2000. This rate is estimated by management based upon its forecast of the Company's profitability in each of its various foreign and domestic tax jurisdictions. This resulted in a net income tax credit of $875,000 for the three months ended March 31, 2000. For the three months ended March 31, 1999, the Company's income tax credit was based on a 27% estimated effective annual income tax rate.

     Comprehensive income is comprised of the net income or loss and foreign currency translation adjustments (which adjustments, net of income tax effect, were a negative $1.3 million in the first quarter of 2000 and a negative $2.5 million in the first quarter of 1999) included in the consolidated statements of shareholders' equity. As a result of fluctuations in the value of the U.S. dollar in relation to currencies in Western Europe in the first quarter of 2000 and the first quarter of 1999, and the related foreign currency translation adjustments recorded by the Company, in addition to the net loss, total comprehensive loss in the first quarter of 2000 and in the first quarter of 1999 were $4.0 million.

     In the first quarter of 2000, basic and diluted loss per share was $0.22 based on average outstanding shares of 11,737,000. In the first quarter of 1999, basic and diluted loss per share was $0.13 based on average outstanding shares of 11,699,000. The effect of the assumed exercise of outstanding stock options and warrants is antidilutive and therefore is not reflected in the loss per share amounts.

     The impact of inflation and changing prices on the Company's net sales and revenues and on income from continuing operations in 2000 and 1999 calendar year has been negligible.

     Sources and Components of Working Capital. At March 31, 2000, the Company had cash and cash equivalents of $25.2 million compared to $21.6 million at December 31, 1999. At March 31, 2000, the Company had working capital of approximately $256.9 million as compared to approximately $272.2 million at December 31, 1999. The ratio of current assets to current liabilities was 4.41 to 1 at March 31, 2000 and 3.35 to 1 at December 31, 1999. The increase in the working capital ratio primarily results from accounts receivable collections, which were utilized to pay current liabilities. Trade receivables decreased $61.0 million to $140.1 million at March 31, 2000 as compared to $201.1 million at December 31, 1999. The decrease is the result of the Company's normal business cycle, where sales have traditionally been higher in the third and fourth quarters of each year. Inventories increased from December 31, 1999 levels by $2.8 million to $143.8 million at March 31, 2000. Accounts payable and accrued expenses decreased $25.3 million to $72.6 million at March 31, 2000, also as a result of the Company's normal business cycle. During the three months ended March 31, 2000, the Company repaid approximately $27 million which was outstanding under the new credit facility as at December 31, 1999, of which approximately $14.3 million was recorded as a current liability.

     Debt Restructuring. On September 8, 1999, the Company entered into a debt restructuring agreement which included the extension of its previous bank credit facilities, a shortening of the term of its 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 the previous debt were reduced in number and significantly relaxed. Pursuant to the agreement, the Company granted the lenders and senior note holders collateral in substantially all the non-Asian assets of the Company. The interest rates on the Company's outstanding debt were increased, certain fees became payable and warrants to acquire common shares were granted. In February 2000, the Company signed a commitment letter with Heller Financial Inc. for a three-year senior credit facility for up to $270 million to replace a substantial portion of the Company's existing debt. If such refinancing occurs, the write off of certain deferred financing costs associated with the September 1999 debt restructuring will be accelerated and certain prepayment premiums on outstanding note obligations will become due. The amounts of such prepayment premiums depend on the treasury rates in effect at the time of such payment. The Company has recorded a liability for what it estimates to be a substantial portion of such prepayment premium. This facility, which remains subject to final due diligence, legal documentation and syndication, will, if consummated, provide the Company with enhanced liquidity, reduced interest expense and a solid financing base to support future operations.

     Current Sources of Credit. The Company currently has a multibank credit facility, entered into in January 1997 and modified several times with the most recent modification occurring with the debt restructuring in September 1999. The most recent modification froze the existing 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 $11.5 million was outstanding at March 31, 2000. In September 1999, the Company restructured the existing senior indebtedness and obtained an additional revolving credit facility of $50.0 million from certain existing lenders and noteholders, which is due June 30, 2001. In connection with these transactions, as described above, the interest rates on the previously outstanding debt were increased, certain fees were paid, warrants were issued and the loan covenants, as revised, were made applicable to all such senior indebtedness. There were no outstanding borrowings under the new credit facility and $5.4 million in letters of credit were outstanding at March 31, 2000. During the three months ended March 31, 2000, the Company repaid approximately $27 million which was outstanding under the new credit facility as at December 31, 1999. The outstanding letters of credit under both facilities as of March 31, 2000 include standby letters of credit aggregating approximately $12.4 million to a foreign bank for the benefit of the Company's Hong Kong subsidiary primarily for import facilities and discounting of customer drafts, of which $6.2 million in letters of credit and $4.3 million in trust receipt loans were outstanding at March 31, 2000. The restructured loan under the original credit facility and the revolving loan under the new credit facility bear interest at the greater of prime or a federal funds rate plus 3.77% and 3.5%, respectively. As of March 31, 2000 these loans bore interest of 12.77% and 12.5%, respectively. At December 31, 1999, the outstanding borrowings under the new credit facility were $27.0 million and $5.4 million in letters of credit were outstanding. (See the discussion above regarding restructuring of this debt and the discussion below regarding the Company's outstanding notes and other borrowings.)

     In January 1997, the Company issued $75 million in principal amount of adjustable rate senior notes (the 1997 Notes), which were modified in September 1999, accelerating the maturity date to June 30, 2001 from January 6, 2007 and increasing the interest rate to 12.75% (9.75% from January 1, 1999 to the date of restructuring) per annum. In September 1998, the Company issued an additional $25 million in principal amount of 10-year senior notes (the 1998 Notes), which were also modified in September 1999 accelerating the maturity date to June 30, 2001 from September 1, 2008 and increasing the interest rate to 12.52% per annum (9.52% from January 1, 1999 to the date of restructuring). Additionally, as a result of the accelerated maturity the senior note holders are entitled to receive prepayment premiums when the debt is repaid, the present value of such premiums is approximately $6.0 million at March 31, 2000 based on interest rates currently in effect.

     In February 1999, the Company 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 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 equity interest or subordinated indebtedness. Interest was 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 September 1999 debt restructuring, the exercise price of the warrants was reduced to $7.77 a share and additional warrants to purchase 100,000 common shares at a price of $7.77 a share were issued in place of warrants to purchase up to an additional 310,000 shares which would have been issuable in May 2001 if the subordinated debt had not been repaid by that date. These warrants expire on September 8, 2004.

     Recoton granted two mortgages on its Florida property to secure loans aggregating $2.4 million from one member of the multibank credit group, which are due in June and July 2001. Interest rates on such loans are 8.0% and 8.4%. In September 1999, the Company also granted an additional mortgage on such property to secure the other senior indebtedness.

     Additionally, the Company's German subsidiary has lines of credit primarily for import facilities and discounting of customer drafts of approximately $11.7 million with foreign banks. The banks have security interests to the extent of merchandise purchased under these lines and the amounts of customer drafts. As of March 31, 2000 approximately $207,000 of letters of credit and approximately $5.1 million discounted drafts were outstanding.

     Capital Expenditures. The Company is considering the purchase of additional computer hardware and software (including upgrades to the Company's management information system) to be used both in the United States and in its foreign locations but no commitments have been made.

     Foreign Operations. 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 $7.79 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, 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. Shareholders' equity was reduced by a foreign currency translation adjustment of approximately $1.3 million for the three months ended March 31, 2000. During the three months ended March 31, 1999, the shareholders' equity was reduced by a foreign currency translation adjustment of approximately $2.5 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 results of operations but such adjustments serve to reduce the Company's tangible net worth which is required to be maintained at specified levels under financial covenants in loan and note purchase agreements.

     If there are any material adverse changes in the relationships between the European and/or Canadian currencies with the United States dollar or if the Hong Kong or Chinese currencies should no longer be tied to the U.S. dollar, such changes could adversely affect the results of the Company's European, Canadian and/or Asian operations included in the consolidated financial statements and could cause further increases in the amount of foreign currency translation adjustments which are charged directly to shareholders' equity.

     Recoton has extensive operations in certain European countries, including Germany, Italy and the United Kingdom. The Company also sells to additional countries in Europe. For the three months ended March 31, 2000, approximately 11% of the Company's net sales were in Europe. With the exception of the United Kingdom, all of the European countries in which the Company has operations have confirmed their participation in a new 11-country European common currency, the Euro. The Company does not 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". The Company has not experienced, and does not anticipate, that there will be any material adverse impact on the Company or its European business resulting from the adoption of the Euro and any resulting changes in European economic and market conditions. For a further discussion of the implications on the Company regarding the adoption of a common European currency, see "Item 7 Management's Discussion and Analysis of Financial Conditions and Results of Operations," from the Company's form 10-K for the year ended December 31, 1999.

     In June 1998, the FASB issues SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. In June 1999, the FASB issues SFAS No. 137, "Accounting for Derivatives Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 for the Company until 2001. The Company has not yet determined whether the application of SFAS No. 133 will have a material impact on its financial position or results of operations.

     Approximately 61% of the Company's borrowings bear fixed interest rates. The borrowings under the revolving credit portion of the credit facilities bear various rates depending on changes in the prime rate.

     The Company has no significant foreign borrowings from third parties. Recoton Corporation and certain of its subsidiaries have intercompany loans, which are not denominated in their home country currency, which exposes the Company to exchange rate fluctuations. The Company has not entered into any foreign currency or derivative contracts to hedge these potential exchange adjustments, which are initially recorded as cumulative foreign currency translation adjustments (a component of shareholders' equity), but will ultimately be reflected in operations when the debt is repaid. Exclusive of intercompany receivables and payables for current transactions, the outstanding foreign currency loans at March 31, 2000 (expressed in U.S. dollars at current exchange rates) which remain subject to currency fluctuations consist of $30 million in loans made by Recoton Corporation and its subsidiaries to other subsidiaries in Germany and Italy. These loans have no fixed due dates.

     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.