REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
To the Board of Directors
of Audiovox Corporation
Hauppauge, New York
We have audited the accompanying combined balance sheets of the AUDIO
BUSINESS GROUP OF RECOTON CORPORATION ("The Group") as at December 31, 2001 and
2002 and the related combined statements of operations and cash flows for each
of the three years in the period ended December 31, 2002. These combined
financial statements are the responsibility of the Group's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits with the standards of the Public Company Accounting
Oversight Board (United States). 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
the 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Group
as at December 31, 2001 and 2002 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States.
/s/ Cornick, Garber & Sandler, LLP
Cornick, Garber & Sandler, LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
August 22, 2003
Exhibit 99.1
Audio Business Group of Recoton Corporation
Combined Balance Sheet
(Dollars in thousands)
December 31, June 30,
2001 2002 2003
------ ------ -----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,915 2,758 $ 2,223
Accounts receivable (less allowance for doubtful accounts of
$1,682 in 2001, $1,406 in 2002 and $5,436 in 2003) 66,626 31,042 12,322
Inventories 50,801 25,365 21,858
Prepaid expenses and other current assets 2,710 3,221 3,365
-------- -------- --------
Total current assets 122,052 62,386 39,768
Property and equipment, net 2,465 3,100 2,830
Trademarks and patents, net 3,499 3,466 3,466
Goodwill, net 16,247 -- --
Other 1,237 717 731
-------- -------- --------
$145,500 $ 69,669 $ 46,795
======== ======== ========
Total assets
LIABILITIES
Current liabilities:
Bank loans payable $ 7,865 $ 3,776
Accounts payable $ 22,769 18,250 18,558
Accrued expenses 3,666 3,491 2,223
-------- -------- --------
Total current liabilities 26,435 29,606 24,557
Due to Recoton Corporation and its other subsidiaries - net 55,868 1,011 --
Other liabilities 119 231 244
-------- -------- --------
Total liabilities 82,422 30,848 24,801
-------- -------- --------
Commitments and contingencies
GROUP EQUITY
Group equity 63,078 38,821 41,078
Less receivables from Recoton Corporation and its other subsidiaries -- -- (19,084)
-------- -------- --------
Net group equity 63,078 38,821 21,994
-------- -------- --------
Total liabilities and group equity $145,500 $ 69,669 $ 46,795
======== ======== ========
See accompanying notes to the combined financial.
Exhibit 99.1
Audio Business Group of Recoton Corporation
Combined Statements of Operations
(Dollars in thousands)
Years Ended Six Months Ended
December 31, June 30,
------------------------------- ---------------------
2000 2001 2002 2002 2003
------ ------ ------ ------ -----
(Unaudited)
Net sales $210,341 $207,944 $211,399 $112,800 $ 35,551
Cost of sales 147,372 142,912 161,064 80,044 35,047
------------------------------- --------------------
Gross profit 62,969 65,032 50,335 32,756 504
Selling, general and administrative expenses 41,712 44,046 46,668 22,086 19,326
-------------------------------- --------------------
Operating income (loss) 21,257 20,986 3,667 10,670 (18,822)
------------------------------- --------------------
Other (income) expenses:
Interest expense 2,764 2,854 2,645 1,340 628
Investment income (210) (693) (519) (9) -
------------------------------- --------------------
Net other expenses 2,554 2,161 2,126 1,331 628
------------------------------- --------------------
Income (loss) from continuing operations before income taxes and cumulative
effect of change in accounting principle 18,703 18,825 1,541 9,339 (19,450)
Income tax provision (benefit) 7,434 7,455 787 3,582 (1,750)
------------------------------- --------------------
Income (loss) from continuing operations before cumulative effect of change in
accounting principle 11,269 11,370 754 5,757 (17,700)
(Loss) from discontinued operations, net of taxes (15) (396) (1,134) (304) -
Cumulative effect of change in accounting principle - - (16,247) (16,247) -
------------------------------- --------------------
Net income (loss) $ 11,254 $ 10,974 $(16,627) $(10,794) $(17,700)
=====================================================
See accompanying notes to the combined statements.
Exhibit 99.1
Audio Business Group of Recoton Corporation
Combined Statement of Cash Flows
(Dollars in thousands)
Years Ended Six Months Ended
December 31, June 30,
------------------------------ ----------------------
2000 2001 2002 2002 2003
------ ------ ------ ------ -----
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ 11,254 $ 10,974 $(16,627) $(10,794) $(17,700)
---------------------------------------------------
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Loss on impairment of goodwill - - 16,247 16,247 -
Depreciation 1,785 1,266 1,571 553 787
Amortization on intangibles 827 823 - - -
Provision for losses on accounts receivable 17 650 659 185 4,338
Deferred income taxes (37) (37) - - -
Loss on sale of discontinued operation - - 474 - -
Change in asset and liability accounts:
Accounts receivable (1,384) (9,167) 37,722 (4,271) 15,841
Inventories (13,666) 3,037 26,479 1,390 4,787
Prepaid expenses and other current assets (421) 2,265 (357) (3,558) (80)
Other assets 422 (637) 753 25 24
Accounts payable, accrued expenses and other liabilities (5,201) 7,229 (4,983) 8,523 (1,737)
Net advances from (repayments to) Recoton Corporation and
its other subsidiaries for operating activities 4,619 (15,435) (67,305) (6,009) (2,101)
---------------------------------------------------
Total adjustments (13,039) (10,006) 11,260 13,085 21,859
---------------------------------------------------
Net cash provided by (used for) operating activities (1,785) 968 (5,367) 2,291 4,159
---------------------------------------------------
Cash flows from investing activities:
Expenditures for property and equipment (415) (1,352) (2,043) (884) (262)
Proceeds from sale of discontinued operation - - 795 - -
---------------------------------------------------
Net cash flows provided by (used in) investing activities (415) (1,352) (1,248) (884) (262)
---------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements - - 7,073 - (4,648)
---------------------------------------------------
Net cash flows provided by (used in) financing activities - - 7,073 - (4,648)
---------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (423) (205) 385 354 216
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,623) (589) 843 1,761 (535)
Cash and cash equivalents, beginning of period 5,127 2,504 1,915 1,915 2,758
---------------------------------------------------
Cash and cash equivalents, end of period $ 2,504 $ 1,915 $ 2,758 $ 3,676 $ 2,223
===================================================
Supplemental disclosures:
Interest paid $ 333 $ 1,147 $ 1,305 $ 347 $ 687
===================================================
Income taxes paid (refunded) $ 2,139 $ 2,181 $ 612 $ (394) $ 468
===================================================
See accompanying notes to the combined statements.
Exhibit 99.1
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT JUNE 30, 2003 AND FOR THE SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2003 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
Note A -Summary of Significant Accounting Policies
Basis of Presentation - Description of Business
On July 8, 2003, a wholly-owned subsidiary of Audiovox Corporation acquired
the outstanding capital stock of the Italian, German and Japanese
subsidiaries of Recoton Corporation ("Recoton") together with certain
assets and business of certain of Recoton's subsidiaries, as follows:
Recoton Audio Corporation
Recoton Home Audio, Inc.
Recoton Mobile Electronics, Inc.
Since April 2003, Recoton was operating under Chapter XI of the Federal
Bankruptcy Act. The attached financial statements combine the accounts of
the above entities, which are collectively referred to as the Audio
Business Group (the "Group"). For purposes of these financial statements,
all expenses applicable to the operations and management of the Group,
including allocated costs and expenses from Recoton's Shared Services
Group, have been included. However, certain executive level costs of
Recoton, which are duplicative of costs incurred at the subsidiary level
and certain interest costs on debt not directly incurred by the Audio
Business Group have not been allocated to it, as these costs either would
not have existed if the Group operated on a stand-alone basis or the
allocable portion of such costs is not reasonably determinable. The
attached financial statements do, however, report a provision for U.S. and
foreign income taxes on the stand-alone profits of the Group, while on a
consolidated basis Recoton recorded no U.S. income tax expense as a result
of consolidated losses for these periods. The individual accounts of the
Group's "NHT" Division which was sold to a third party in 2002 have been
reflected as a discontinued business operation.
The Group is a developer and marketer of consumer home and mobile, audio
and video products generally for aftermarket use. The Group's products are
sold primarily to retailers located in the United States and Europe. In
addition to its domestic facilities, the Group maintains office and
warehouse facilities in Asia and Western Europe.
Principles of Combination
The combined financial statements include the accounts of the companies
comprising the Group as described above. All significant intercompany
accounts and transactions between members of the Group have been
eliminated.
Unaudited Interim Financial Statements
The unaudited interim 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. As a result of
the bankruptcy filing of Recoton, results for the interim period ended June
30, 2003 are not considered indicative of the results to be expected for
the year.
Exhibit 99.1
(Continued)
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT JUNE 30, 2003 AND FOR THE SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2003 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, operating results 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. Significant estimates include inventory provision, sales returns,
allowance for doubtful accounts, market development accruals and lives of
long-lived assets. Actual results could differ from those estimates.
Cash
The Group's cash accounts in foreign banks, which comprise a substantial
portion of the cash and cash equivalents on the balance sheets, are not
insured by the FDIC.
Inventories
The Group's merchandise inventory is carried at the lower of cost or market
on a first-in, first-out basis. The Group writes down inventory for
estimated obsolescence or unmarketable inventory equal to the difference
between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual conditions
are less favorable than those projected by management, additional inventory
write-downs may be required. Inventory write-downs for the year ended
December 31, 2002 and the six months ended June 30, 2003 were affected by
the decline in Recoton's business in the latter part of 2002 and its
ultimate bankruptcy filing in 2003, which affected the sales value of
inventory, including the resale value of returned merchandise. Such
write-downs aggregated approximately $9,500 for the year ended December 31,
2002 and $5,600 for the six months ended June 30, 2003.
Allowance for Doubtful Accounts
The Group maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If
the financial condition of the Group's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Market Development Accruals
The Group estimates expenses for customer programs and incentive offerings,
including: special pricing agreements, price protection, promotions and
other volume-based incentives. If market conditions were to decline, the
Group takes actions to increase customer incentive offerings possibly
resulting in an incremental expense at the time the incentive is offered.
Exhibit 99.1
(Continued)
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT JUNE 30, 2003 AND FOR THE SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2003 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
Depreciation of Property and Equipment
Depreciation is computed over the estimated useful lives of the assets on
the straight-line method. Interest cost associated with financing of
construction is capitalized.
Computer Software Costs
In accordance with the Statement of Position ("SOP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use," the
Group capitalizes costs of software developed for internal use. In 2002,
the Group capitalized approximately $1,287 associated with the
implementation of its new ERP system.
Goodwill and Trademarks
Effective January 1, 2002, Recoton adopted Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." The guidance in SFAS No.
141 supersedes APB Opinion No. 16, "Business Combinations." Upon adoption
of SFAS No. 142, goodwill amortization ceased. Goodwill is now subject to
fair-value based impairment tests performed, at a minimum, on an annual
basis. In addition, a transitional goodwill impairment test was required as
of the January 1, 2002 adoption date. These impairment tests are conducted
on each business of the Group where goodwill is recorded and may require
two steps. The initial step is designed to identify potential goodwill
impairment by comparing an estimate of fair value for each applicable
business to its respective carrying value. For those businesses where the
carrying value exceeds fair value, a second step is performed to measure
the amount of goodwill impairment in existence, if any.
During the second quarter of 2002, Recoton completed the first step of the
two-step transitional goodwill impairment test required by SFAS No. 142 and
reported that it considered its goodwill to be impaired as of January 1,
2002. Based on the foregoing, the $16.2 million recorded value of the
Group's goodwill was considered to be fully impaired as at January 1, 2002
and the impairment loss was recognized as a cumulative effect of change in
accounting principle at that date.
Trademarks were being amortized over a term of 40 years. However, as a
result of the application of SFAS 142 they were considered to have an
indefinite life and their amortization was discontinued as of January 1,
2002.
The following income statement information is presented as if the Group
stopped amortizing goodwill and trademarks as of January 1, 2000.
Year Ended
December 31,
2000 2001
Net income $11,254 $10,974
Goodwill and trademarks amortization, net of tax 744 769
------- -------
Pro forma net income $11,998 $11,743
======= =======
Exhibit 99.1
(Continued)
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT JUNE 30, 2003 AND FOR THE SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2003 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
Deferred Tax Valuation Allowance
As a result of the consolidated operations of Recoton and its subsidiaries,
the Group has recorded a valuation allowance for all of its deferred tax
assets since January 1, 2000 as these assets will not be realized through
future tax benefits.
Translation of Foreign Financial Statements
The assets and liabilities of the foreign companies in the Group are
translated into United States dollars at rates of exchange as of the
balance sheet dates. Operating accounts are translated at average rates of
exchange during the year. Gains and losses on translation are included as a
component of the Group's equity on the combined balance sheets. Such
translation gains (losses) aggregated approximately ($1.9) million and $.7
million at December 31, 2001 and 2002 and ($.9) million at June 30, 2003.
Fair Value of Financial Instruments
As a result of the subsequent bankruptcy filing of Recoton in 2003, it is
not practicable to determine whether the carrying value at December 31,
2001 and 2002 and June 30, 2003 of the Group's financial instruments
approximate their fair values.
Sales Recognition
Revenue is recognized when products are shipped. The Group offers its
customers rights of return and stock rotation rights. Due to these rights,
the Group continuously monitors and tracks product returns and records a
provision for the estimated future amount of such future returns, based on
historical experience and any notification it receives of pending returns.
Historically, such returns have been within the Group's expectations and
the provisions established. However, in 2003 a significant decrease in
product sales was experienced by the Group due to Recoton's bankruptcy
filing and the loss of certain major customers and the resulting returns
credits (approximately $8.5 million) which have been provided for at
December 31, 2002 had a material adverse impact on its operating results
for the period.
Shipping and Handling Costs
Shipping and handling costs include all direct costs to deliver inventory
to customers. Such amounts, which are included in selling, general and
administrative expenses in the statements of operations, aggregated
approximately $6,345, $6,484 and $6,963 for the years ended December 31,
2000, 2001 and 2002, respectively, and $3,750 and $1,304 for the respective
six month periods ended June 30, 2002 and 2003.
Advertising Costs
Advertising expenses are charged to operations at the time the advertising
first takes place. Advertising expense charged to operations aggregated
approximately $2,144, $1,789 and $1,863 for the years ended December 31,
2000, 2001 and 2002, respectively, and $834 and $181 for the respective six
month periods ended June 30, 2002 and 2003.
Exhibit 99.1
(Continued)
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT JUNE 30, 2003 AND FOR THE SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2003 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
Research and Development
Research and development costs for new products aggregated approximately
$1,390, $1,506 and $1,423 for the years ended December 31, 2000, 2001 and
2002, respectively, and $753 for the six months ended June 30, 2002.
Comprehensive Income (Loss) and Group Equity Transactions with Recoton
Comprehensive income or loss, representing the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources, includes all changes in equity except
those resulting from investments by owners and distributions to owners. The
Group's comprehensive income (loss) has been comprised of net income (loss)
and foreign currency translation adjustments as follows:
Six Months Ended
Years Ended December 31, June 30,
------------------------ ---------
2000 2001 2002 2002 2003
-------- -------- -------- -------- --------
Net income (loss) $ 11,254 $ 10,974 $(16,627) $(10,794) $(17,700)
Net change in cumulative foreign
currency translation adjustments (116) (900) 2,601 1,253 (1,561)
-------- -------- -------- -------- --------
Total comprehensive income (loss) $ 11,138 $ 10,074 $(14,026) $ (9,541) $(19,261)
======== ======== ======== ======== ========
The following reconciles the changes in Group equity in the attached
combined financial statements:
Six Months
Years Ended December 31, Ended June 30,
------------------------------- --------------
2000 2001 2002 2003
-------- -------- -------- --------
Balance - beginning of period $ 33,467 $ 50,294 $ 63,078 $ 38,821
Net change in cumulative foreign
currency translation
adjustment (116) (900) 2,601 (1,561)
Net income (loss) 11,254 10,974 (16,627) (17,700)
Less dividends to Recoton -- -- (16,169) --
Add contributions of
intercompany loans to capital 5,689 2,710 5,938 21,518
-------- -------- -------- --------
Balance - end of period $ 50,294 $ 63,078 $ 38,821 $ 41,078
======== ======== ======== ========
In addition, as a result of the then pending bankruptcy proceedings of
Recoton, the net receivable from Recoton and its other subsidiaries at June
30, 2003 has been reflected as a reduction of Group equity on the combined
balance sheet at that date.
Exhibit 99.1
(Continued)
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT JUNE 30, 2003 AND FOR THE SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2003 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
Foreign Exchange Contracts
Gains and losses on foreign exchange forward contracts that are designated
as hedges are included in other liabilities or other receivables,
respectively. Periodically, the Group has entered into various types of
foreign currency agreements, but does not have any significant holding in,
nor issue, financial instruments for trading and speculative purposes. The
Group uses foreign exchange forward contracts to hedge risk of changes in
foreign currency exchange rates associated with firm commitments of less
than one year that are denominated in foreign currency.
The forward exchange contracts have little credit risk as the
counter-parties in each case are principally large banks with high credit
ratings. Such fair values are determined by the Group based upon available
market information and appropriate valuation methodologies and accordingly
may not be indicative on the amounts the Group would realize in a current
market exchange.
Derivative Instruments and Hedging Activities
During the first quarter of 2001, the Group adopted SFAS No. 133 and 138,
"Accounting for Derivative Instruments and Hedging Activities."
Implementation of SFAS 133 and SFAS 138 did not have a material impact on
the Group's consolidated financial statements.
Impairment or Disposal of Long-Lived Assets
On January 1, 2002, the Group adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long- Lived Assets." SFAS 144 applies to all
long-lived assets, including discontinued operations and develops one
accounting model for long-lived assets to be disposed of by sale. SFAS 144
supersedes SFAS 121 and the accounting and reporting provisions of APB No.
30, "Reporting the Results of Operations, Reporting the Effects of Disposal
of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30"), for the disposal of a
segment of a business.
In December 2002, the net assets and business of the Group's "NHT" division
were sold for approximately $795, resulting in a loss of approximately
$472. That loss together with the following net results of "NHT's"
operations are reflected as discontinued operations in the attached
statements of operations as follows:
Six Months
Years Ended December 31, Ended June 30,
-------------------------------- --------------
2000 2001 2002 2002
-------- -------- -------- ---------
Sales $ 10,370 $ 8,751 $ 7,054 $ 4,164
======== ======== ======== ========
Gross profit $ 3,788 $ 3,467 $ 2,813 $ 1,688
======== ======== ======== ========
Net (loss) $ (15) $ (396) $ (661) $ (304)
Loss on sale -- -- (472) --
-------- -------- -------- ---------
Net loss from discontinued operations $ (15) $ (396) $ (1,133) $ (304)
======== ======== ======== ========
The net assets of the "NHT" division at December 31, 2001 were immaterial.
Exhibit 99.1
(Continued)
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT JUNE 30, 2003 AND FOR THE SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2003 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
Vendor Incentives
In November 2001, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 01-09, "Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor's Products" ("EITF
01-09"), which is a codification of EITF 00-14, 00-22 and 01-09. This issue
presumes that consideration from a vendor to a customer or reseller of the
vendor's products to be a reduction of the selling prices of the vendor's
products, unless the consideration relates to a separate identifiable
benefit and the benefit's fair value can be established. Effective January
1, 2002, the Group adopted the provisions of EITF 01-09. The adoption of
this pronouncement did not have a material impact to its financial position
or results of operations.
The majority of vendor consideration granted by the Group relates to sales
incentives such as promotions, trade ads, volume-based incentives and co-op
advertising agreements with the Group's retail customers. Based on the
requirements of EITF 01-09, the Group has included all sales incentives as
a reduction of sales and co-op advertising costs as a component of selling,
general and administrative expenses for all periods presented. Total vendor
sales incentives now characterized as reductions of revenue that previously
would have been classified as selling, general and administrative costs
were approximately $13,206, $8,561 and $12,075 for the years ended December
31, 2000, 2001 and 2002, respectively, and $3,338 and $3,591 for the
respective six month periods ended June 30, 2002 and 2003.
Note B -Inventories
Inventories are summarized as follows:
As of As of
December 31, June 30,
2001 2002 2003
------- ------- -------
Raw materials and work-in-process $ 4,270 $ 2,667 $ 1,516
Finished goods 34,006 20,027 18,685
Merchandise in transit 12,525 2,671 1,657
------- ------- -------
Totals $50,801 $25,365 $21,858
======= ======= =======
Exhibit 99.1
(Continued)
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT JUNE 30, 2003 AND FOR THE SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2003 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
Note C -Property and Equipment:
Property and equipment are summarized as follows:
Estimated
As of As of Useful Life
December 31, June 30, (Years)
2001 2002 2003
------- ------- ------- ------------
Buildings, leaseholds and
improvements $ 551 $ 400 $ 655 10 - 40
Machinery and equipment 2,806 2,357 2,434 3 - 10
Furniture, fixtures and office
equipment 2,032 2,953 3,221 5 - 10
Tools and dies 2,879 3,350 3,482 2 - 10
------- ------- -------
Totals 8,268 9,060 9,792
Less accumulated depreciation and
amortization (5,803) (5,960) (6,962)
------- ------- -------
Balance $ 2,465 $ 3,100 $ 2,830
======= ======= =======
The Group recorded $1,785, $1,266 and $1,571 of depreciation expense in the
years ended December 31, 2000, 2001 and 2002, respectively, and $553 and
$787 for the respective six month periods ended June 30, 2002 and 2003.
Note D - Bank Loan Payable
In October 2000, the Group's German companies entered into a 50 million
Deutsche Mark annually renewable revolving credit facility (up to
approximately $25.5 million with interest at 2.5% over European LIBOR (or a
total of 5.55% at December 31, 2002). At December 31, 2002, the factoring
facility supported a $16 million letter of credit issued in favor of a
financial institution as security for Recoton's borrowings in the United
States. Outstanding borrowings under this facility were $7.8 million as of
December 31, 2002 and $3.7 million as of June 30, 2003.
Substantially all of the assets of the Group have been pledged under the
terms of either the above loan or loans of Recoton.
Exhibit 99.1
(Continued)
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT JUNE 30, 2003 AND FOR THE SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2003 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
Note E -Income Taxes
Income taxes applicable to income (loss) from continuing operations
computed on the Group's stand-alone operations before cumulative effect of
change in accounting principle, are comprised of the following:
Six Months Ended
Years Ended December 31, June 30,
------------------------ ------------------
2000 2001 2002 2002 2003
---- ---- ---- ---- ----
Currently payable (refundable)
Federal $ 4,937 $ 4,639 $(1,192) $ 2,452
State and local 804 755 (194) 399
Foreign 1,730 2,098 2,173 729 $ (1,750)
--------- --------- -------- --------- --------
Totals 7,471 7,492 787 3,580 (1,750)
Deferred (37) (37) - - -
--------- --------- -------- --------- --------
Net provision $ 7,434 $ 7,455 $ 787 $ 3,580 $ (1,750)
========= ========= ======== ========= =========
The following table reconciles statutory U.S. federal income taxes on the
Group's income (loss) from continuing operations before income taxes and
cumulative effect of change in accounting to the Group's actual income tax
provision.
Years Ended December 31, Six Months Ended June 30,
-------------------------- --------------------------
2000 2001 2002 2002 2003
------ ------ ------ ------ -----
Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount
Statutory U.S. Federal income
tax provision (benefit) 34.0% $6,359 34.0% $6,400 34.0% $524 34.0% $3,176 (34.0)% $(6,613)
Effect of:
State and local tax provision
(benefit) (net of federal
effect) 2.8 530 2.6 498 (8.3) (128) 2.8 263 - -
Valuation allowances on the
tax benefits of domestic
losses - - - - - - - - 26.0 5,054
Difference between U.S. and
foreign income tax rates on
foreign earnings (losses) 1.9 364 2.0 376 25.5 392 1.3 122 (1.0) (191)
Other items (net) 1.0 181 1.0 181 (0.2) (1) 0.2 19 - -
------------------------------------------------------------------------------------
Actual income tax provision
(credits) 39.7% $7,434 39.6% $7,455 51.0% $787 38.3% $3,580 (9.0)% $(1,750)
==================================================================================
There was no income tax benefit attributable to the write-off of goodwill
as of January 1, 2002.
The principal temporary differences from which deferred tax assets and
liabilities arise are primarily the allowance for estimated doubtful
accounts and estimated sales returns, estimated warranty reserves, tax
basis adjustments to inventory and the difference in basis and amortization
periods of trademarks and package design costs. As at December 31, 2001 and
2002 and June 30, 2003, valuation allowances have been recorded equal to
Exhibit 99.1
(Continued)
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT JUNE 30, 2003 AND FOR THE SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2003 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
the net deferred tax assets. Historically, the domestic companies in the
Group filed consolidated tax returns with Recoton, which returns have
reflected losses for several years. Therefore, it had been determined that
it is more likely than not that these deferred tax assets will not be
realized.
Note F -Commitments and Contingencies
Leases
Aggregate minimum rental payments under the Group's long-term leases of
premises at December 31, 2002, which expire at various dates through 2008
are as follows:
Year ending December 31:
2003 $ 850
2004 836
2005 836
2006 828
2007 819
2008 205
-------
Total $4,374
======
Rent expense was $1,658, $1,594 and $1,408 for the years ended December 31,
2000, 2001 and 2002, respectively, and $659 and $765 for the respective six
month periods ended June 30, 2002 and 2003.
Legal Proceedings
At June 30, 2003, various suits and claims arising in the ordinary course
of business are pending against the Group. Dispositions of these matters
are not expected to materially affect the Group's consolidated financial
position, cash flows or results of operations, either as a result of
Recoton's bankruptcy filing or their settlement or adjudication.
Note G -Concentrations
In 2000, 2001 and 2002, sales to one customer represented approximately
32.7%, 33.6% and 32.6% of combined net sales. In each of the six month
periods ended June 30, 2002 and 2003 sales to one customer represented
36.6% and 11.2% of combined net sales.
The Group has sourced certain products from single suppliers. However, to
lessen the risks of offshore manufacturing, the Group maintained
substantial inventories of long-lead-time items and continually evaluated
alternative supply sources.
Exhibit 99.1
(Continued)
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT JUNE 30, 2003 AND FOR THE SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2003 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
Note H -Transactions with Recoton and Its Other Subsidiaries
Transactions with Recoton and its other subsidiaries are as follows:
Six Month
December 31, Ended June 30,
------------------------ ---------------
2000 2001 2002 2002 2003
------ ------ ------ ------ -----
Sales to Recoton and its other subsidiaries $2,871 $2,381 $4,143 $1,472 $ 470
Allocated operating costs and expenses from
Recoton 7,356 7,508 8,398 4,526 1,894
Interest expense on intercompany borrowings 2,431 1,707 1,277 993 4
Exhibit 99.1
(Continued)