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Recoton Restructuring Following Q3 $26 Mil. Loss

Lake Mary, Fla. – Pulling in its belt in the face of mounting losses and heavy debt, accessories and audio and gaming products maker Recoton has unveiled a major restructuring plan to restore profitability, reduce debt and enhance cash flow.

To this end, Recoton is in the process of selling its video game segment; foreign audio operations; U.S. car audio accessories company, called AAMP of America; and its U.K.-based distributor of accessory products. Sale of these assets is expected to generate $90 million to $100 million, most of which will be used to pay down loans. Net losses from these businesses have been reclassified as discontinued operations in the third quarter of 2002.

Recoton’s third quarter financial results, reported in tandem with its restructuring actions, showed relatively flat consolidated sales for the three months. Sales reached $74.8 million, up from $73.7 million in the year-ago period.

The company reported a consolidated net loss of $25.6 million for the third quarter, compared with net income of $359,000 in the same three months in 2001. The company recorded a goodwill impairment charge of $7.6 million in the three months.

Hand in hand with its video game segment and other business divestitures, Recoton said it has reduced its North American workforce by 10 percent and lowered executive compensation on average by 10 percent, as well. These actions are expected to produce annualized savings of about $7.6 million.

In addition, Recoton is undertaking a number of actions to reduce Selling, General and Administrative (SG&A) costs, which collectively should produce annualized savings in 2003 in excess of $8 million.

“Recoton’s strategic plan is focused on streamlining our efforts and concentrating primarily on our core North American audio and accessories businesses in restoring the company to financial health,” said Bob Borchardt, chairman/CEO.

“We intend to build on the popularity of our Jensen, Acoustic Research and Advent brands, among others. Our key focus is to contract spending, but still maintain a high level of support for our retail customer base,” he said.

Among its surviving product segments, consumer electronics accessories was the most healthy, with third quarter sales of $39.4 million, up 7.7 percent from the $36.6 million recorded in the year-ago period.

Gross profit margin in the segment dipped 90 basis points in the third quarter, down to 37.6 percent, compared with 38.5 percent year-on-year, primarily due to product mix, increased freight charges and accelerated sales of slow moving or discontinued inventory.

Earnings Before Interest and Taxes (EBIT) for the accessories segment in the third quarter, ended Sept. 30, was $2.9 million, down from $4.4 million in the same period last year.

For the nine months, accessories segment sales reached $116.5 million, about flat with the same period in 2001. Gross profit margin slid 140 basis points, to 37 percent, down from 38.4 percent. EBIT was $9.1 million for the nine months, down from $15.3 million year over year, due primarily to lower margin and higher SG&A.

In Recoton’s audio segment, sales for the third quarter hit $35.5 million, down from $37.1 million in the same period last year. Gross profit margin was 22.8 percent, a severe drop from the 31 percent recorded in the third quarter of 2001, primarily due to accelerated sales of slow moving or discontinued inventory. This contributed to an EBIT loss of $613,000 in the segment for the three months, compared with positive EBIT of $3.6 million in the year-ago period.

For the nine months, sales in the audio segment climbed 11.6 percent, hitting $125.1 million, up from $112.1 million in the first nine months of 2001. Gross profit margin, however, dropped 230 basis points, to 25.5 percent, compared with 27.8 percent in the same nine months last year. EBIT for the nine months was $4.5 million, compared with $7.4 million year-on-year, mainly due to significant reductions in gross margin and increased SG&A.

For the nine months, Recoton consolidated sales increased 5.7 percent, hitting $241.6 million, up from $228.6 million in the same period last year. Net loss was $92.3 million for the nine months, compared with a loss of $5.2 million year over year.

Looking ahead, Borchardt said it is “very difficult” to comment on the fourth quarter, but that the next four weeks are critical. “Retail is relatively soft. While accessories and audio orders are not up to historical levels, it’s not loss of shelf space [causing this], however, but soft retail,” he said.

Next year, Borchardt anticipates Recoton doing $300 million in net revenue, with gross profit margins up to 2001 levels, about a 2 to 3 percentage point increase. He anticipates a reduction of operating expenses by about $15 million year-on-year, while Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) should come in at $35 million to $40 million.