INDEPENDENT AUDITORS' REPORT
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 did not audit the financial statements of the Group's
German subsidiary, which statements reflect total assets of $42.3 million and
$34.0 million as at December 31, 2001 and 2002, respectively, and total revenues
of $58.2 million, $58.8 million and $66.4 million for each of the respective
three years in the period ended December 31, 2002. Those statements were audited
by other auditors whose reports thereon have been furnished to us, and our
opinion, insofar as it relates to the amounts included for the Group's German
subsidiary, is based solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the 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 and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
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
--------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
NEW YORK, NEW YORK
AUGUST 22, 2003
Exhibit 99.1
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 STATEMENTS
Exhibit 99.1
2
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
---- ---- ---- ---- ----
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 FINANCIAL STATEMENTS
Exhibit 99.1
3
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
---- ---- ---- ---- ----
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
for) 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 FINANCIAL STATEMENTS
Exhibit 99.1
4
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
5
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
Exhibit 99.1
6
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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
7
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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
8
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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
Ended
Years Ended December 31, June 30, 2003
------------------------ -------------
2000 2001 2002
---- ---- ----
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
9
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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
10
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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
11
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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
12
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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 39.7% $7,434 39.6% $7,455 51.0% $787 38.3% $3,580 (9.0)% $(1,750)
(credit) ====== ====== ====== ====== ====== ==== ====== ======= ======= ========
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 the net deferred tax assets. Historically, the
domestic companies in the Group filed consolidated tax returns
Exhibit 99.1
13
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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
14
AUDIO BUSINESS GROUP OF RECOTON CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - TRANSACTIONS WITH RECOTON AND ITS OTHER SUBSIDIARIES
Transactions with Recoton and its other subsidiaries are as follows:
Six Month Ended
December 31, 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
15