-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GGoo59P2ki9sEX6ziDlUCeo8TUsJq5WRG/kgLhpcLnp8kP8Eqg+QQ6STyE5BEmby ooPUN6elIOo+w4IdWesj0w== 0000800459-01-500008.txt : 20010516 0000800459-01-500008.hdr.sgml : 20010516 ACCESSION NUMBER: 0000800459-01-500008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARMAN INTERNATIONAL INDUSTRIES INC /DE/ CENTRAL INDEX KEY: 0000800459 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 112534306 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09764 FILM NUMBER: 1637335 BUSINESS ADDRESS: STREET 1: 1101 PENNSYLVANIA AVENUE N W STREET 2: STE 1010 CITY: WASHINGTON STATE: DC ZIP: 20004 BUSINESS PHONE: 2023931101 MAIL ADDRESS: STREET 1: 1101 PENNSYLVANIA AVENUE NW STREET 2: SUITE 1010 CITY: WASHINGTON STATE: DC ZIP: 20004 10-Q 1 a10q0103.txt MARCH 31, 2001 10-Q DOCUMENT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: March 31, 2001 Commission File Number: 1-9764 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED - ------------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 11-2534306 - ---------------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1101 PENNSYLVANIA AVENUE, NW WASHINGTON, D.C. 20004 - ------------------------------------------------------------------------ (Address of principal executive offices) (Zip code) (202) 393-1101 ------------------------------------------------------------ (Registrant's telephone number, including area code) NOT APPLICABLE ------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------- ------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 32,020,021 shares of Common Stock, $.01 par value, at April 30, 2001. HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Condensed Consolidated Balance Sheets - March 31, 2001 and June 30, 2000 3 Condensed Consolidated Statements of Operations - Three and nine months ended March 31, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows - Nine months ended March 31, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6-11 Item 2. Management's Discussion and Analysis of the Results of Operations and Financial Condition 12-16 PART II. OTHER INFORMATION 17 SIGNATURES 18 EXHIBIT 10.69 19 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND JUNE 30, 2000 (000s omitted except per share amounts) ASSETS 03/31/01 06/30/00 ------------- ------------- Current assets Cash and cash equivalents $ 6,299 4,365 Receivables (less allowance for doubtful accounts of $11,161 at March 31, 2001 and $11,760 at June 30, 2000) 310,556 306,596 Inventories 349,856 298,273 Other current assets 60,063 61,792 ------------- ------------- Total current assets 726,774 671,026 ------------- ------------- Property, plant and equipment, net 250,588 251,737 Excess of cost over fair value of assets acquired, net 151,147 166,647 Other assets 40,730 48,095 ------------- ------------- Total assets $1,169,239 1,137,505 ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings $ 10,577 14,969 Current portion of long-term debt 2,415 7,537 Accounts payable 117,404 161,333 Accrued liabilities 182,100 177,542 ------------- ------------- Total current liabilities 312,496 361,381 ------------- ------------- Borrowings under revolving credit facility 171,951 11,835 Senior long-term debt 240,731 242,983 Other non-current liabilities 33,397 33,918 Minority interest 982 1,055 Shareholders' equity Common stock, $.01 par value 377 188 Additional paid-in capital 295,706 292,897 Other comprehensive income (loss): Cumulative translation adjustment (82,392) (59,131) Retained earnings 332,963 322,383 Less common stock held in treasury (136,972) (70,004) ------------- ------------- Total shareholders' equity 409,682 486,333 ------------- ------------- Total liabilities and shareholders' equity $1,169,239 1,137,505 ------------- ------------- See accompanying Notes to Condensed Consolidated Financial Statements. 3 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (000s omitted except per share amounts) Three Months Ended Nine Months Ended March 31, March 31, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net sales $ 435,658 423,931 1,268,810 1,231,530 Cost of sales 339,316 299,752 941,165 884,617 ---------- ---------- ---------- ---------- Gross profit 96,342 124,179 327,645 346,913 Selling, general & administrative 114,823 87,335 290,300 260,198 ---------- ---------- ---------- ---------- Operating income (loss) (18,481) 36,844 37,345 86,715 Other expense: Interest expense 7,249 4,917 18,594 14,624 Miscellaneous, net 174 489 425 1,464 ---------- ---------- ---------- ---------- Income (loss) before income taxes (25,904) 31,438 18,326 70,627 Income tax expense (benefit) (7,512) 9,121 5,319 21,109 ---------- ---------- ---------- ---------- Net income (loss) $ (18,392) 22,317 13,007 49,518 ---------- ---------- ---------- ---------- Basic earnings (loss) per share $ (0.57) 0.65 .40 1.43 ---------- ---------- ---------- ---------- Diluted earnings (loss) per share $ (0.57) 0.63 .38 1.40 ---------- ---------- ---------- ---------- Weighted average shares outstanding - basic 31,998 34,332 32,383 34,550 ---------- ---------- ---------- ---------- Weighted average shares outstanding - diluted 31,998 35,464 33,842 35,272 ---------- ---------- ---------- ---------- See accompanying Notes to Condensed Consolidated Financial Statements. 4 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED MARCH 31, 2001 AND 2000 ($000s omitted) 2001 2000 ---------- ---------- Cash flows from operating activities: Net income $ 13,007 49,518 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 42,805 41,040 Amortization of intangible assets 11,180 6,118 Loss on disposal of assets 2,678 --- Changes in assets and liabilities: Decrease (increase) in: Receivables (14,199) (13,713) Inventories (64,668) (21,090) Other current assets 2,316 11,194 Increase (decrease) in: Accounts payable (38,374) 11,793 Accrued liabilities 10,054 21,611 Other operating activities 260 (426) ---------- ---------- Net cash provided by (used in) $ (34,941) 106,045 operating activities ---------- ---------- Cash flows from investing activities: Payment for purchase of companies, net of cash acquired $ -- (49,683) Proceeds from disposition of assets -- 7,134 Capital expenditures (56,547) (48,606) (Issuance) collection of loans, net 12,259 (1,964) Purchase and capitalized software expenditure (11,127) (3,572) Other items, net 3,335 2,954 ---------- ---------- Net cash used in investing activities $ (52,080) (93,737) ---------- ---------- Cash flows from financing activities: Borrowings on (repayments of) lines of credit $ (3,651) (8,628) Net proceeds from issuance of long-term debt 159,642 33,634 Shares repurchases (66,968) (32,196) Dividends paid to shareholders (2,427) (2,590) Proceeds from exercise of stock options 2,997 1,385 ---------- ---------- Net cash provided by (used in) financing activities $ 89,593 (8,395) ---------- ---------- Effect of exchange rates on cash (638) (570) ---------- ---------- Net increase (decrease) in cash and cash equivalents 1,934 3,343 Cash and cash equivalents at beginning of period 4,365 2,963 ---------- ---------- Cash and cash equivalents at end of period $ 6,299 6,306 ---------- ---------- Supplemental disclosures of cash flow information: Interest paid $ 15,955 17,348 Income taxes paid $ 12,506 12,105 Supplemental disclosures of non-cash investing activities: Fair value of assets acquired $ -- 68,084 Cash paid for the assets -- 49,683 ---------- ---------- Liabilities assumed $ -- 18,401 ---------- ---------- See accompanying Notes to Condensed Consolidated Financial Statements. 5 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements NOTE A - BASIS OF PRESENTATION The Company's Condensed Consolidated Financial Statements as of March 31, 2001, and for the three and nine months ended March 31, 2001 and 2000, have not been audited by the Company's independent auditors; however, in the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial position of the Company and subsidiaries as of March 31, 2001 and the results of their operations and their cash flows for the periods presented. Where necessary, prior years' information has been reclassified to conform to the current year consolidated financial statement presentation. These financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2000. The results of operations for the three and nine months ended March 31, 2001, are not necessarily indicative of the results to be expected for the full year. NOTE B - COMPREHENSIVE INCOME Comprehensive income and its components for the three and nine months ended March 31, 2001 and 2000 are presented below. Three Months Ended Nine Months Ended March 31, March 31, (Dollars in thousands) 2001 2000 2001 2000 --------- --------- --------- --------- Net income (loss) $(18,392) 22,317 13,007 49,518 Other comprehensive income: Foreign currency translation adjustments (20,071) (8,219) (24,822) (10,892) Change in fair value of foreign currency cash flow hedges 1,582 -- 1,561 -- --------- --------- --------- --------- Total comprehensive income (loss) $(36,881) 14,098 (10,254) 38,626 --------- --------- --------- --------- 6 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (continued) NOTE B - COMPREHENSIVE INCOME (continued) The components of accumulated other comprehensive income as of March 31, 2001 and June 30, 2000 and the activity for the nine months ended March 31, 2001 are presented below. Cumulative Accumulated Accumulated Other Translation Derivative Comprehensive Adjustment Gain/(Loss) income(loss) ------------ ------------ ----------------- June 30, 2000 $ (59,131) -- (59,131) Foreign currency translation adjustments (24,822) -- (24,822) Change in fair value of foreign currency cash flow hedges -- 1,561 1,561 ------------ ------------ ----------------- March 31, 2001 $ ( 83,953) 1,561 (82,392) ------------ ------------ ----------------- NOTE C - EARNINGS PER SHARE INFORMATION Three Months Ended March 31, 2001 2000 -------------------- -------------------- (000's omitted except per share amounts) Basic Diluted Basic Diluted --------- --------- --------- --------- Net income (loss) $(18,392) (18,392) 22,317 22,317 --------- --------- --------- --------- Weighted average shares outstanding 31,998 31,998 34,332 34,332 Employee stock options -- -- -- 1,132 --------- --------- --------- --------- Total weighted average shares outstanding 31,998 31,998 34,332 35,464 --------- --------- --------- --------- Earnings (loss) per share $ (0.57) (0.57) 0.65 0.63 --------- --------- --------- --------- Employee stock options have been excluded from the net loss per share calculation for the three months ended March 31, 2001, because their effect would be anti-dilutive. 7 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (continued) NOTE C - EARNINGS PER SHARE INFORMATION (continued) Nine Months Ended March 31, 2001 2000 -------------------- -------------------- (000's omitted except per share amounts) Basic Diluted Basic Diluted --------- --------- --------- --------- Net income $ 13,007 13,007 49,518 49,518 --------- --------- --------- --------- Weighted average shares outstanding 32,383 32,383 34,550 34,550 Employee stock options -- 1,459 -- 722 --------- --------- --------- --------- Total weighted average shares outstanding 32,383 33,842 34,550 35,272 --------- --------- --------- --------- Earnings per share $ 0.40 0.38 1.43 1.40 --------- --------- --------- --------- NOTE D - SEGMENTATION The Company is engaged in the design, manufacture and marketing of high fidelity audio products. Our businesses are organized based on the end-user markets served - consumer and professional. The Consumer Systems Group manufactures loudspeakers and electronics for high fidelity audio and video reproduction in the home, with computers and in vehicles. Home applications include two channel audio, multi-channel audio/video and personal computer audio. Vehicle applications include audio, video, navigation, telematics, multi-media and wireless internet. Consumer products are marketed under brand names including JBL, Harman Kardon, Infinity, Becker, Revel, Lexicon, Mark Levinson and Proceed. The Professional Group manufactures loudspeakers and electronics used by audio professionals in concert halls, cinemas, recording studios, broadcasting operations and live music events. Professional products are marketed worldwide under brand names including JBL, AKG, Soundcraft, Amek, Studer, DOD, Crown, Digitech, AMEK and dbx. 8 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (continued) NOTE D - SEGMENTATION (continued) The following table reports external sales and operating income by segment for the three and nine months ended March 31, 2001: Three Months Ended Nine Months Ended March 31, March 31, ($000s omitted) 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net sales: Consumer Systems Group $ 325,269 315,888 937,034 915,491 Professional Group 110,389 108,043 331,776 316,039 Other -- -- -- -- ---------- ---------- ---------- ---------- Total $ 435,658 423,931 1,268,810 1,231,530 ---------- ---------- ---------- ---------- Operating income (loss): Consumer Systems Group $ (2,612) 30,828 51,852 77,288 Professional Group (9,141) 9,465 6,907 19,490 Other (6,728) (3,449) (21,414) (10,063) ---------- ---------- ---------- ---------- Total $ (18,481) 36,844 37,345 86,715 ---------- ---------- ---------- ---------- Consumer Systems Group sales for the nine months ended March 31, 2001 have been reduced by $16.6 million for a non-recurring repurchase of inventory from a European consumer audio and electronics distributor in the quarter ended December 31, 2000. Other operating income (loss) is primarily comprised of corporate expenses net of subsidiary allocations. NOTE E - INVENTORIES Inventories consist of the following: March 31, June 30, ($000's omitted) 2001 2000 -------------- -------------- Finished goods and inventory purchased for resale $ 168,749 134,038 Work in process 41,292 40,815 Raw materials and supplies 139,815 123,420 -------------- -------------- Total inventories $ 349,856 298,273 -------------- -------------- 9 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements NOTE F - DERIVATIVES The company uses foreign currency forward contracts to hedge a portion of its forecasted transactions. These forward contracts are designated as foreign currency cash flow hedges and recorded at fair value in the statement of financial position. The recorded fair value is balanced by an entry to other comprehensive income (loss) in the statement of financial position until the underlying forecasted foreign currency transaction occurs. When the transaction occurs, the gain or loss from the derivative designated as a hedge of the transaction is reclassified from accumulated other comprehensive income (loss) to the same income statement line item in which the foreign currency gain or loss on the underlying hedged transaction is recorded. If the underlying forecasted transaction does not occur, the amount recorded in accumulated other comprehensive income (loss) is reclassified to the miscellaneous, net line of the income statement in the then-current period. Because the amounts and the maturities of the derivatives approximate those of the forecasted exposures, changes in the fair value of the derivatives are highly effective in offsetting changes in the cash flows of the hedged items. Any ineffective portion of the derivatives is recognized in current earnings. The ineffective portion of the derivatives, which was immaterial for all periods presented, primarily results from discounts or premiums on forward contracts. As of March 31, 2001, the Company had contracts maturing through June 2001 to purchase and sell the equivalent of approximately $24.1 million of various currencies to hedge future foreign currency purchases and sales. The Company recorded approximately $0.9 million in net losses from cash flow hedges to forecasted foreign currency transactions in the nine months ended March 31, 2001. These losses were offset by equivalent gains on the underlying hedged items. The amount as of March 31, 2001, that will be reclassified from accumulated other comprehensive income (loss) to earnings within the next twelve months that is associated with these hedges is a loss of $1.0 million. The company has also purchased forward contracts to hedge future cash flows due from foreign consolidated subsidiaries under operating lease agreements. As of March 31, 2001, the Company had such contracts in place to purchase and sell the equivalent of approximately $45.6 million of various currencies to hedge quarterly lease commitments through 10 March 2006. The Company recorded $0.3 million in net gains from cash flow hedges related to the purchase of these forward contracts in the nine months ended March 31, 2001. The amount as of March 31, 2001 that will be reclassified from accumulated other comprehensive income (loss) to earnings within the next twelve months that is associated with these hedges is a gain of $0.7 million. NOTE G - STOCK SPLIT On August 16, 2000, the Company announced that its Board of Directors had approved a two-for-one split of its common stock in the form of a 100% stock dividend with a record date of August 28, 2000, and a distribution date of September 19, 2000. Share and per share amounts have been restated to reflect the stock split for all periods presented. NOTE H - LEGAL PROCEEDINGS The Company is a defendant in a lawsuit entitled Bose Corporation v. JBL, Inc., and Infinity Systems, Inc., United States District Court, District of Massachusetts. In this case, Bose sued JBL and Infinity for infringement of a U.S. patent owned by Bose relating to the use of elliptical ports in loudspeaker cabinets. On September 1, 2000, the trial court issued a judgement in favor of Bose in the amount of $5.7 million. In addition, the court initially issued a permanent injunction prohibiting JBL and Infinity from the manufacture and sale of loudspeakers in the United States utilizing elliptical ports. The judgement was increased to $7.2 million, plus interest, to account for sales for the five months preceding the trial court's judgement and for sales made from JBL and Infinity inventory between September 27, 2000 and November 26, 2000 as permitted by the trial court's September 27, 2000 modification of its permanent injunction. Management believes the trial court erred in its ruling and is appealing the decision, and that the Company should be successful in its appeal. However, if the Company is unsuccessful in its appeal and must pay $7.2 million plus interest in accordance with the trial court's judgement, this will have a material adverse effect on the results of operations. 11 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS - ------------------------------------- COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 Net sales for the three months ended March 31, 2001 were $435.7 million compared to $423.9 million in the same period last year, an increase of 3 percent. Excluding currency effects, sales increased 7 percent in the quarter. For the nine months ended March 2001, sales increased 3 percent to $1.269 billion versus $1.232 billion in the same period last year. Excluding currency effects, sales increased 10 percent for the first nine months. The Consumer Systems Group reported sales of $325.3 million for the three months ended March 2001, an increase of 3 percent over prior year. Excluding currency effects, sales increased 7 percent. Sales were particularly strong in Europe where Becker continues to experience strong demand for its radio and navigation units from Mercedes Benz. In addition, new customers such as Renault contributed to the growth in Europe. In North America and Asia, audio system sales to Toyota continue to increase and shipments of Mark Levinson sound systems to Lexus increased. These sales increases offset lower sales to Chrysler in the period. Sales of consumer audio products were soft reflecting the economic weakness in the U.S. and other markets. Also, sales to PC manufacturers decreased as the PC industry experienced substantial sales declines. The Consumer Systems Group reported net sales of $937.0 million for the nine months ended March 2001, compared to $915.5 million in the same period last year. Excluding the effects of foreign currency translation, net sales increased 9 percent during the period. Sales of consumer audio products in Europe were higher than last year offsetting lower sales in North America. Sales to the automakers in North America increased 9 percent, as shipments to Toyota, Lexus and Mitsubishi were higher than last year. Shipments to Chrysler were below last year's levels. In the European automotive market, sales increased 7 percent, 24 percent excluding currency translation. Becker reported strong sales to Mercedes Benz as well as higher sales of navigation systems in the aftermarket. 12 The Professional Group reported sales of $110.4 million for the quarter, a 2 percent increase over the prior year. Sales at JBL continue to be affected by a slow down in the cinema business. However, new product offerings such as the innovative JBL EVO line have begun offsetting the lost cinema revenues. Crown International, a maker of professional amplifiers, contributed to the sales growth and has been a steady performer since its acquisition in March 2000. AKG continues to perform well as its OEM programs, including microphones for the General Motors OnStar system, continue to grow. The Professional Group reported sales of $331.8 million for the nine months ended March 2001, a 5 percent increase over last year's $316.0 million. Sales of Crown amplifiers contributed to the growth while offsetting soft cinema sales at JBL Professional and last year's divestiture of Orban. At AKG, sales of hands-free microphones were higher than the previous year while sales to the wireless telephone makers were lower as that industry experienced a slow down over the past several months. The Company reported a $36.3 million pretax charge for restructuring and non- recurring items in the quarter ended March 2001. This includes non-cash charges of $18.5 million and cash charges of $17.8 million. The significant items included in the charge are: $6.4 million to terminate distributors in the UK, Germany and Finland; $6.5 million to cover severance of 250 employees, representing annual compensation of approximately $10 million; $7.3 million of fixed and impaired assets; $5.9 million for factory closures in Argentina and the UK; $8.6 million for inventory write-downs at Studer and Consumer International; and $1.6 million for legal expenses associated with transactions not consummated and other items. The gross profit margin for the three months ended March 2001 was 22.1 percent ($96.3 million) compared to 29.3 percent ($124.2 million) in the same quarter last year. The gross profit margin for the nine months ended March 2001 was 25.8 percent ($327.6 million) compared to 28.2 percent ($346.9 million) for the same period last year. The decline in gross profit margin for the quarter and nine months is mostly due to the non-recurring charge recorded to reduce the carrying value of inventories totaling $13.9 million. A significant portion of these costs related to inventory write-downs at Studer and Consumer International. Excluding the charge, gross profit margin was 25.3 percent ($110.2 million) and 26.9 percent ($341.5 million) for the three and nine months ended March 2001, respectively. Lower margins were realized for consumer audio products as the Company sought to decrease inventory levels while implementing a direct to retailer distribution system in Europe. 13 Selling, general and administrative costs as a percentage of sales were 26.4 percent ($114.8 million) for the three months ended March 2001 compared to 20.6 percent ($87.3 million) for the same period last year. For the nine months ended March 2001, selling, general and administrative costs were 22.9 percent of sales ($290.3 million) versus 21.1 percent ($260.2 million) in the same period last year. Selling, general and administrative costs for the three and nine months ended March 2001 included $22.4 million of charges to terminate distributors in Europe, cover severance costs for 250 employees, write-off fixed and impaired assets as well as costs for factory closures in Argentina and U.K. Excluding the non-recurring charges, selling, general and administrative costs as a percentage of sales were 21.2 percent ($92.4 million) and 21.1 percent ($267.8 million) for the three and nine months ended March 2001, respectively. These levels are consistent with the same prior year periods. Operating loss as a percentage of sales was 4.2 percent ($18.5 million) for the three months ended March 2001, and operating income was 2.9 percent ($37.3 million) for the first nine months of fiscal 2001. Last year, operating income as a percentage of sales was 8.7 percent ($36.8 million) for the quarter and 7.0 percent ($86.7 million) for the first nine months. The decreases in operating income for the quarter and the first nine months are mostly due to the non-recurring charge totaling $36.3 million, discussed previously. Excluding the non-recurring charge, operating income as a percentage of sales were 4.1 percent ($17.9 million) and 5.8 percent ($73.7 million) for the three and nine months ended March 2001, respectively. Operating income, as a percentage of sales excluding the non-recurring charge, was lower compared to the same period last year due to the effects of soft markets. Interest expense for the three months ended March 2001 was $7.2 million compared to $4.9 million in the same quarter last year. For the nine months ended March 2001, interest expense was $18.6 million, compared to $14.6 million last year. Interest expense increased due to higher borrowings. Average borrowings outstanding were $440.6 million for the third quarter of fiscal 2001 and $397.6 million for the first nine months, higher than the $319.8 million and $332.3 million, respectively, for the same periods in the prior year. The weighted average interest rate on borrowings was 6.6 percent for the third quarter and 6.2 percent for the nine months ended March 2001. The weighted average interest rates for the comparable periods in the prior year were 6.2 percent and 5.9 percent, respectively. Loss before income taxes was $25.9 million for the quarter ended March 2001, compared to income of $31.4 million in the prior year. 14 For the nine months ended March 2001, income before income taxes was $18.3 million, compared with income of $70.6 million last year. Excluding the non-recurring charge, income before income taxes was $10.4 million and $54.7 million for the three and nine months ended March 2001, respectively. The effective tax rate for the third quarter of fiscal 2001 was 29.0 percent, equal to the rate reported for the same period a year ago. The effective tax rate for the first nine months of fiscal 2001 was 29.0 percent compared with 30.0 percent last year. The effective tax rates were below the U.S. statutory rate due to utilization of tax credits, realization of certain tax benefits for United States exports and the utilization of tax loss carryforwards at certain foreign subsidiaries. The Company calculates its effective tax rate based upon its current estimate of annual results. Net loss for the quarter ended March 2001 was $18.4 million, compared to income of $22.3 million reported for the same period last year. Net income for the nine months ended March 2001 was $13.0 million, compared to $49.5 million in the prior year. Excluding the non-recurring charge, net income was $7.4 million and $38.8 million for the three and nine months ended March 2001, respectively. Basic and diluted loss per share for the three months ended March 2001 were $.57. In the same period last year, basic earnings per share were $.65, and diluted earnings per share were $.63. Excluding the non-recurring charge, basic earnings per share was $.23 and diluted earnings per share was $.22. Basic earnings per share for the nine months ended March 2001 were $.40 and diluted earnings per share were $.38. For the same period last year, basic earnings per share were $1.43 and diluted earnings per share were $1.40. Excluding the non-recurring charge of $36.3 million ($25.8 million after-tax), basic earnings per share were $1.20 and diluted earnings per share were $1.15. FINANCIAL CONDITION - ---------------------------------- Net working capital at March 31, 2001 was $414.3 million, compared with $309.6 million at June 30, 2000. The working capital increase was primarily due to higher inventories and lower accounts payable at March 31 compared to June 30. Inventories increased compared to June 30 due to lower than expected sales levels in certain markets, higher safety stock levels of integrated circuits, and the repurchase of inventory from a European consumer electronics 15 distributor. Accounts payable decreased due to the timing of vendor payments. The Company temporarily suspended its common stock repurchase program during the quarter until substantive working capital reductions are achieved. For the nine months ended March 31, 2001, the Company acquired and placed in treasury 2,201,300 shares of its common stock at a cost of $67.0 million. Borrowings under the revolving credit facility at March 31, 2001 were $168.7 million. Borrowings under the revolving credit facility at June 30, 2000 were $15.0 million. Borrowings under the revolving credit facility increased due to higher working capital levels, common stock repurchases and capital expenditures. For the three months ended March 31, 2001, operating cash flow was $15.2 million. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company's market risk exposures since June 30, 2000. Except for historical information contained herein, the matters discussed are forward-looking statements which involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements, including, but not limited to, the effect of economic conditions, product demand, currency exchange rates, labor disputes, competitive products and other risks detailed in the Company's other Securities and Exchange Commission filings. 16 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings There are various legal proceedings pending against the registrant and its subsidiaries. With the exception of the litigation described in Note H to the financial statements included in this report, in the opinion of management, liabilities, if any, arising from such claims will not have a materially adverse effect upon the consolidated financial condition of the registrant. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K Employment agreement dated April 1, 2001 between Harman International Industries, Incorporated and William S. Palin....Exhibit 10.69 (b) Reports on Form 8-K None. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED (Registrant) DATE: May 15, 2001 BY: /s/ Bernard A. Girod ------------------------- Bernard A. Girod Chief Executive Officer DATE: May 15, 2001 BY: /s/ Frank Meredith ------------------------- Frank Meredith Executive Vice-President of Finance and Administration, Chief Financial Officer and Secretary 18 EXHIBIT 10.69 19 EX-10 2 a10qpalin.txt MARCH 31, 2001 10-Q EXHIBIT 10.69 April 4, 2001 Mr. William S. Palin The White House Llandyrnog Denbighshire LL16 4LT WALES Dear Bill: I am writing to confirm our agreement on terms of your employment: 1. Your employment is with Harman International Industries, Incorporated but for payroll, tax and social security purposes you may be attached to one of the UK subsidiaries, your residence being in the UK. 2. Your title is Vice President. 3. You will report to the Chief Financial Officer of the Company. 4. Your base salary will be UKP 185,000 per annum paid monthly in arrears. It will be subject to annual review the first of such to be carried out in September 2001. 5. Your employment will be subject to a notice period mutually applied of 12 months, such notice may not be given prior to June 30, 2003. During your employment and any notice period you agree not to engage in any conduct which is competitive with the Company. 6. You will be entitled to participate in the Company's UK health and life insurance plans at the Company's expense. 7. The Company will provide you with an automobile for both business and your personal use. The Company will bear all running costs. The car provided will be selected by you in line with those driven by other employees of the Company at a similar level to yourself in Europe. 8. You will participate in the Company's discretionary bonus scheme. 9. You will be eligible to participate in any General Option Award by the Company. 10. The Company shall contribute annually to your portable pension scheme an amount no less than 10 percent of your base salary payable in January of each calendar year. 11. In addition to public holidays, you will be entitled to 30 business days annual vacation. 12. Your position will involve a considerable amount of travel to various Company locations. 13. The Company will reimburse you for all travel and related expense and for any out-of-pocket expenses reasonably incurred in the performance of your duties (telephone, equipment, stationery, journals, etc.). 14. Travel by rail may be first class, and by air up to business class at your option. 15. In the event your employment is terminated after a Change in Control, the Company shall be obligated to provide you with severance and benefits for a period of 24 months. 16. This agreement replaces and supersedes all other agreements concerning your employment. Will you please indicate your understanding of and agreement to the foregoing by signing and returning to me the attached copy of this letter. Sincerely, HARMAN INTERNATIONAL INDUSTRIES, INC. Frank Meredith Chief Financial Officer AGREED TO AND ACCEPTED: By: ____________________________________________ William S. Palin -----END PRIVACY-ENHANCED MESSAGE-----