 |
 |
|
 |
|
 |
|
 |
|
 |
|
||||||||||
|
|
Notes
to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Consolidation and Revenue Recognition Principles. The consolidated financial statements include the accounts of the Company and subsidiaries after the elimination of significant intercompany transactions and accounts. Revenue is primarily recognized upon shipment of goods, when title to goods transfers. Where necessary, prior years’ information has been reclassified to conform to the 2001 consolidated financial statement presentation. Cash Equivalents. Cash equivalents of $0.5 million and $0.2 million with maturities less than three months were included in cash and cash equivalents at June 30, 2001, and 2000, respectively. Inventories. Inventories are valued at the lower of cost or market. Cost is determined principally by the first-in, first-out method. Property, Plant and Equipment. Property, plant and equipment is recorded at cost or, in the case of capitalized leases, at the present value of the future minimum lease payments. Depreciation and amortization of property, plant and equipment is provided primarily using the straight-line method over useful lives estimated from 3 to 50 years. Buildings and improvements are depreciated over 3 to 30 years or the term of the lease, whichever is shorter. Machinery and equipment are depreciated over 5 to 10 years and furniture and fixtures are depreciated over 3 years. Income Taxes. The deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversal of the cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. Deferred income tax expense is measured by the change in the net deferred income tax asset or liability during the year. The Company has not provided U.S. federal or foreign withholding taxes on foreign subsidiary undistributed earnings as of June 30, 2001, because such earnings are intended to be permanently invested. It is not practicable to determine the U.S. federal income tax liability, if any, that would be payable if such earnings were not reinvested indefinitely. Foreign Currency Translation. Assets and liabilities in foreign functional currencies are translated into U.S. dollars based upon the prevailing currency exchange rates in effect at the balance sheet date. Translation gains and losses are not included in the determination of net income but are accumulated in a separate component of shareholders’ equity. These translation gains and losses are a component of comprehensive income. Excess of Cost over Fair Value of Assets Acquired. The net excess of cost over fair value of assets acquired is being amortized over periods from 3 to 40 years, using the straight-line method. The Company evaluates the recoverability of the intangible assets through comparisons of projected cash flows from the related assets. Purchased and Deferred Software Costs. Software costs that are related to conceptual formulation and incurred prior to the establishment of technological feasibility are expensed as incurred. Costs incurred to purchase software to be sold as an integral component of a product are deferred. Software costs incurred subsequent to establishment of technological feasibility and which are considered recoverable by management are deferred in compliance with SFAS 86 and amortized over the product’s life, usually three years. At June 30, 2001, purchased software costs were $7.3 million and other deferred software costs totaled $20.9 million, net of accumulated amortization of $9.9 million. Purchased software costs at June 30, 2000, totaled $7.3 million and other deferred costs totaled $9.8 million, net of accumulated amortization of $5.7 million. Purchased and deferred software costs, net, are included in other assets on the balance sheet. Deferred costs are principally composed of costs to acquire or develop automotive navigation, telecommunications and networking software. Research and Development. Research and development costs are expensed as incurred. The Company’s expenditures for research and development were $88.7 million, $76.2 million and $76.0 million for the fiscal years ending June 30, 2001, 2000, and 1999, respectively. Stock Option Plan. Pursuant to SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company elected to continue to apply the provisions of APB Opinion No. 25 for stock-based compensation accounting and reporting. The Company provides disclosure of pro forma net income and pro forma earnings per share for grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. Use of Estimates. Estimates and assumptions have been made relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reporting of revenues and expenses during the reporting periods to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Recent Accounting Pronouncements. In July 2001, the FASB issued Statement No. 141, “Business Combinations,” and Statement No. 142, “Goodwill and Other Intangible Assets.” Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The Company is required to adopt the provisions of Statement 141 immediately and anticipates adopting Statement 142 effective July 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001, will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company’s statement of earnings. The Company has elected not to early adopt the provisions of Statement 142. Because of the extensive effort needed to comply with adopting the Statement, it is not practicable to reasonably estimate the impact of adopting this Statement on the Company’s financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. Amortization expense related to goodwill was approximately $7.5 million for the fiscal year ended June 30, 2001. 2.
Inventories
3.
Property, Plant and Equipment
4.
Short-Term Borrowings The Company utilizes the swing line feature of the revolving credit facility to meet its short-term borrowing requirements. At June 30, 2001, the Company had $3.5 million drawn on its swing lines at base rates in the local countries where the funds were drawn, ranging from 5.75 percent in the United Kingdom to 7.5 percent in Germany. At June 30, 2000, the Company had $3.1 million drawn on its swing lines at base rates in the local countries where the funds were drawn, ranging from 3.0 percent in Switzerland to 7.0 percent in Germany. 5.
Long-Term Debt The Company’s other long-term debt agreements contain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional indebtedness, create restrictions on subsidiary dividends and distributions, limit the Company’s ability to encumber certain assets and restrict the Company’s ability to issue capital stock of its subsidiaries. The Company was in compliance with the terms of its long-term debt agreements at June 30, 2001, and 2000. Under the most restrictive provisions, limited amounts of dividends may be paid as of June 30, 2001. Interest paid for both short- and long-term borrowings was $24,873,000, $20,472,000, and $25,288,000 during the fiscal years ended June 30, 2001, 2000, and 1999, respectively. Long-term debt is composed of the following:
Long-term debt, including obligations under capital leases, maturing in each of the next five fiscal years (000s omitted) is as follows:
6.
Leases
Capital lease obligations of $7.4 million were incurred to fund equipment additions during the fiscal year ended June 30, 1999. No new capital lease obligations were incurred in fiscal years 2001 and 2000. At June 30, 2001, the Company is liable for the following minimum lease commitments under terms of noncancelable lease agreements:
Operating lease expense net of subrental income under operating leases having noncancelable terms of greater than one year for the fiscal years ended June 30, 2001, 2000, and 1999, was $53,649,000, $43,731,000, and $35,072,000, respectively. 7.
Stock Option Plan The 1992 Plan replaced the Company’s 1987 Plan and added an automatic grant feature for nonofficer directors. The 1987 Plan has been terminated; however, options previously granted pursuant to this Plan remain outstanding and will be exercisable in accordance with the terms of the Plan. Stock appreciation rights allow the holders to receive a predetermined percentage of the spread between the option price and the current value of the shares. A grant of restricted stock involves the immediate transfer to a participant of ownership of a specified number of shares of Common Stock in consideration of the performance of services. The participant is entitled immediately to voting, dividend and other share ownership rights. A transfer of restricted stock may be made without consideration or in consideration of a payment by the participant that is less than current market value, as the Compensation and Option Committee may determine. A performance unit is the equivalent of $100 and is granted for the achievement of specified management objectives. No stock appreciation right, performance unit or restricted stock grants have been made under the 1992 Plan through June 30, 2001. Options to purchase shares of Common Stock have been granted under both Plans. Options granted are at prices not less than market value on the date of grant and, under the terms of the 1992 Plan, may not be repriced. Options granted pursuant to the 1987 and 1992 Plans generally vest over five years and expire ten years from the date of grant. In August 1998, the Company granted 600,000 performance-based stock options to a group of employees that only vest as Harman’s common stock price achieves specified target levels and the average closing stock price remains at or above those levels for at least 30 consecutive calendar days. These options were granted at a price of $19.88 per share, equal to the market price on the date of grant, and expire in August 2008. The Company measures the cost of these performance-based options as the difference between the exercise price and market price and recognizes this expense over the period to the estimated vesting dates and in full for options that have vested. The Company recognized $8.6 million and $2.0 million in fiscal years 2001 and 2000, respectively, in compensation expense for the performance-based options. The Company has agreed to buy these options from the employees at fair market value. The fair value of each option granted has been estimated on the date of grant using the Black-Scholes option-pricing model, with the following assumptions for grants in fiscal 2001, fiscal 2000 and fiscal 1999: annual dividends consistent with the Company’s current dividend policy, which resulted in payments of $0.10 per share in the last three years; expected volatility of 56 percent in fiscal 2001 and 33 percent in fiscal years 2000 and 1999; risk-free interest rate of 3.9 percent in fiscal 2001, 6.4 percent in fiscal 2000 and 5.7 percent in fiscal 1999; and expected life of 2.3 years from the vesting date. The weighted average fair value of options granted was $14.81 in fiscal 2001, $19.11 in fiscal 2000 and $19.74 in fiscal 1999. Pro forma compensation cost for grants under the stock option program since July 1, 1995, recognized in accordance with SFAS No. 123, would reduce the Company’s net income from $32.4 million (diluted EPS of $0.96) to $27.3 million (diluted EPS of $0.81) in fiscal 2001, from $72.8 million (diluted EPS of $2.06) to $68.6 million (diluted EPS of $1.94) in fiscal 2000, and from $11.7 million (diluted EPS of $0.32) to $9.5 million (diluted EPS of $0.26) in fiscal 1999. At June 30, 2001, a total of 6,266,637 shares of Common
Stock Stock Option Activity Summary: Years ended June 30
Options Outstanding at June 30, 2001
Options Exercisable at June 30, 2001
At June 30, 2000, options with an average exercise price of $16.88 were exercisable on 2,163,304 shares. At June 30, 1999, options with an average exercise price of $15.87 were exercisable on 1,743,528 shares. Share data have been adjusted for the two-for-one stock split in August 2000. 8.
Income Taxes
Income tax expense (benefit) consists of the following:
Deferred taxes are recorded based upon differences between the financial statement and tax basis of assets and liabilities and available tax loss carry-forwards. The following deferred taxes are recorded: Assets/(liabilities)
Management believes the results of future operations will generate sufficient taxable income to realize the net deferred tax asset. The Company acquired tax-loss carryforwards from certain foreign subsidiaries. A portion of the Company’s loss carryforward has been recorded as an asset. Goodwill reduction resulting from tax-loss carryforward utilization at Becker, in German marks, was 12.4 million in fiscal 2000 and 22.9 million in fiscal 1999. Cash paid (refunded) for federal, state and foreign income taxes was $13,181,000, $2,306,000, and ($1,985,000), during fiscal years ended June 30, 2001, 2000, and 1999, respectively. Accrued income taxes were $11.3 million and $26.2 million as of June 30, 2001, and 2000, respectively. These balances are included in accrued liabilities. 9.
Business Segment Data The Consumer Systems Group manufactures loudspeakers and electronics for high-fidelity audio reproduction in the home, in vehicles, and with computers. Home applications include two-channel audio, multichannel audio/video and personal-computer audio. Consumer products are marketed worldwide under brand names including JBL, Harman Kardon, Infinity, Revel, Lexicon, Mark Levinson and Proceed. In the consumer segment, car audio sales to DaimlerChrysler accounted for approximately 20.5%, 22.3% and 23.4% of consolidated net sales for the years ended June 30, 2001, 2000, and 1999. 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, Crown, Studer, Soundcraft, DOD, Digitech and dbx. The following table reports net sales, operating income, assets, capital expenditures and depreciation and amortization by segment. Segmentation
Net sales and long-lived assets by geographic area for the years ended June 30, 2001, 2000, and 1999, were as follows.
10.
Commitments and Contingencies On September 1, 2000, the trial court issued a judgment 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 judgment was increased to $7.2 million, plus interest, to account for sales for the five months preceding the trial court’s judgment 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 judgment, this will have a material adverse effect on the results of operations. The Company and its subsidiaries are also involved in several other legal actions. The outcome cannot be predicted with certainty; however, management, based upon advice from legal counsel, believes such actions are either without merit or will not have a material adverse effect on the Company’s financial position or results of operations. Harman’s Board of Directors has authorized the repurchase of 7.0 million shares. Through June 30, 2001, the Company has acquired and placed in treasury 5,689,300 shares of its common stock at a total cost of $137.0 million. Future repurchases are expected to be funded with operating cash flow. 11.
Employee Benefit Plans The Company also has a Supplemental Executive Retirement Plan (SERP) that provides normal retirement, preretirement and termination benefits, as defined, to certain key executives designated by the Board of Directors. Expenses related to the SERP for the years ended June 30, 2001, 2000, and 1999, were $2,067,300, $1,887,306 and $737,400, respectively. Additionally, certain nondomestic subsidiaries maintain defined benefit pension plans. These plans are not material to the accompanying consolidated financial statements. 12.
Fair Value of Financial Instruments The fair values of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate their carrying values due to the short-term nature of these instruments. Long-Term Debt. Fair values of long-term debt are based on market prices where available. When quoted market prices are not available, fair values are estimated using discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. At June 30, 2001, the carrying value and fair value of long-term debt, excluding obligations under capital leases and unsubordinated loans, was $331.5 million and $330.0 million, respectively. 13.
Derivatives 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 June 30, 2001, the Company had contracts maturing through June 2002 to purchase and sell the equivalent of approximately $20.7 million of various currencies to hedge future foreign currency purchases and sales. The Company recorded approximately $1.6 million in net losses from cash flow hedges of forecasted foreign currency transactions in the year ended June 30, 2001. These losses were offset by equivalent gains on the underlying hedged items. The amount as of June 30, 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 $0.8 million. The Company has also purchased forward contracts to hedge future cash flows due from foreign consolidated subsidiaries under operating lease agreements. As of June 30, 2001, the Company had such contracts in place to purchase and sell the equivalent of approximately $47.3 million of various currencies to hedge quarterly lease commitments through March 2006. The Company recorded $0.6 million in net gains from cash flow hedges related to the purchase of these forward contracts in the twelve months ended June 30, 2001. The amount as of June 30, 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 $0.9 million. 14.
Acquisitions 15.
Earnings Per Share Information
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
