EX-13 5 a10kmda01.txt EXHIBIT 13.1 HII ANNUAL REPORT MD&A Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations. Net sales for fiscal 2001 increased 2 percent to $1.717 billion, compared to $1.678 billion in fiscal 2000 and $1.500 billion in fiscal 1999. Fiscal 2001 sales increased due to higher audio system sales to automakers and strong demand for aftermarket car radio and navigation units. Sales of home speakers and electronics were down. Professional audio sales approximated last year's levels. In fiscal 2000, sales growth was driven by higher audio system shipments to the automakers as well as strong sales to personal computer manufacturers. Continued weakness in European currencies reduced our reported sales as compared to prior year in both fiscal 2001 and fiscal 2000. Excluding currency effects, fiscal 2001 sales increased 8 percent over the prior year, and fiscal 2000 sales increased 17 percent over the prior year. The Company experiences seasonal fluctuations in sales and earnings. The first fiscal quarter is the weakest due to automotive model changeovers and the July and August holidays in Europe. Variations in seasonal demands among end-user markets may also cause operating results to vary from quarter to quarter. The Company's businesses are organized by the end-user markets they serve. The Consumer Systems Group manufactures loudspeakers and electronics for high fidelity audio reproduction in the home, in vehicles and with computers. The Professional Group manufactures loudspeakers and electronics used by audio professionals in concert hall, recording, broadcast and cinema applications. Consumer Systems Group sales increased 3 percent to $1.267 billion in fiscal 2001, compared to $1.228 billion in fiscal 2000 and $1.091 billion in fiscal 1999. Exclusive of currency effects, the Group's fiscal 2001 sales increased 9 percent over fiscal 2000. Sales to automobile manufacturers were higher by $64.9 million in fiscal 2001 due to increased audio system shipments to Toyota and higher shipments of radio and navigation units to Mercedes-Benz and the European aftermarket. Sales of home speakers and electronics were lower by $15.2 million due to economic conditions compared to fiscal 2000. Sales to personal computer manufacturers were lower by $10.4 million as the industry experienced substantial sales declines over the past year. Fiscal 2000 sales were higher than the previous year as a result of strong audio system sales to the automakers and growth in radio and navigation system shipments. In addition, sales to the personal computer manufacturers, principally Dell, Apple and Compaq, were strong. Professional Group sales of $449.2 million in fiscal 2001 approximated fiscal 2000 sales of $449.7 million. Fiscal 1999 sales were $408.8 million. Excluding currency effects, sales were 4 percent higher in fiscal 2001 than in the previous year. Sales increased due to the acquisition of Crown and higher AKG microphone shipments to General Motors' OnStar program. These increases were offset by lower sales to mobile phone manufacturers and the disposition of Orban in May 2000. Fiscal 2000 sales were higher versus the prior year as JBL Pro, Crown, Harman Music Group and AKG all performed well. The Company reported a $36.3 million pretax charge for restructuring and other items in the third quarter 17 ended March 31, 2001. This included non-cash charges of $18.5 million and cash charges of $17.8 million. The significant items included in the charge were provisions to terminate distributors in the U.K. and Germany, severance costs, write-off of impaired assets, factory closures in the U.K. and Argentina, and inventory write-downs at Studer and Consumer International. The consolidated gross profit percentage was 26.1 percent in fiscal 2001, compared to 28.0 percent in fiscal 2000 and 26.5 percent in fiscal 1999. Fiscal 2001 gross profit was reduced by inventory write-downs totaling $8.6 million and other unusual charges of $5.3 million as discussed above. Excluding those charges, the fiscal 2001 gross profit percentage was 26.9 percent. 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. The Professional Group experienced lower margins as well due to softness in the cinema business and inventory reduction initiatives at Studer. In fiscal 2000, the majority of the Consumer Systems Group and Professional Group companies reported a higher gross margin percentage than the prior year, but this was offset by lower margins on sales to international consumer audio dealers and distributors due to lower factory overhead absorption and other effects of the dealer destocking program. Fiscal 1999 gross profit included charges totaling $24.3 million to reduce the carrying value of inventories of discontinued product lines. Selling, general and administrative expenses as a percentage of sales were 22.0 percent in fiscal 2001, compared to 20.7 percent in fiscal 2000 and 21.5 percent in fiscal 1999. In fiscal 2001, selling, general and administrative expenses included $22.4 million in unusual charges to terminate distributors in the U.K. and Germany, to cover severance costs for 250 employees, to write-off impaired assets, and to close factories in the U.K. and Argentina. Excluding these charges, selling, general and administrative expenses as a percentage of sales were 20.6 percent, approximately the same as last year. Higher selling costs and a $12.5 million increase in engineering and development expenses were partially offset by overhead cost reductions. Selling, general and administrative expenses as a percentage of sales decreased in fiscal 2000 compared to the prior year. The decrease was due to cost savings realized from the implementation of restructuring programs in fiscal 1999, partially offset by higher investments in business infrastructure but at a rate of increase lower than the sales growth rate. In fiscal 1999, Harman reported plant closing and severance costs of $17.0 million, equal to 1.1 percent of sales, and asset impairment costs of $20.0 million, equal to 1.3 percent of sales. The plant closing and severance costs resulted from the closure of the El Paso, Texas, electronics plant, the closure of other smaller facilities and elimination of full-time positions in certain other locations. The asset impairment charge resulted from the write-down of tooling, factory equipment and other assets associated with discontinued product lines and other write-downs of assets that no longer provided economic benefit to the Company. Fiscal 2001 operating income was 4.1 percent of sales, compared to 7.3 percent in fiscal 2000 and 2.6 percent 18 in fiscal 1999. Excluding the charges for restructuring and other items totaling $36.3 million, fiscal 2001 operating income was 6.3 percent of sales. Consumer Systems Group operating income decreased primarily due to higher costs to implement changes in consumer international distribution and lower operating margins on sales to Chrysler in North America, partially offset by higher operating margins from domestic home speaker and electronic sales. Consumer International's operating loss was $18.9 million before restructuring and other charges and $28.6 million after the charges. Professional Group operating income of $33.7 million, excluding unusual charges, approximated last year's level. Operating income in fiscal 2000 increased over fiscal 1999 due to sales growth, higher margins and overhead reductions as a result of the fiscal 1999 restructuring program, partially offset by $21 million of losses incurred in sales to international dealers due to a destocking program. Interest expense in fiscal 2001 was $25.0 million, compared to $18.5 million in fiscal 2000 and $23.6 million in fiscal 1999. Fiscal 2001 interest expense increased due to higher borrowings as a result of the Company's share repurchase program, higher working capital levels and increased interest rates. Capital expenditures of $88.1 million also contributed to the increase in borrowings in fiscal 2001. Fiscal 2000 interest expense was lower than the prior year due to strong operating cash flows used to reduce revolving credit facility borrowings. The weighted average interest rate in fiscal 2001 was 6.3 percent, compared to 5.7 percent in fiscal 2000 and 6.0 percent in fiscal 1999. The increase in average interest rates in fiscal 2001 was due to a higher percentage of U.S. dollar denominated borrowings versus Euro denominated borrowings due to the conversion of a Deutschmark term loan to U.S. dollars. In fiscal 2000, average interest rates decreased due to a lower percentage of U.S. dollar denominated debt. As a result, in fiscal 2001 the Company reported income before income taxes and minority interest of $45.1 million, or $81.4 million excluding restructuring and other charges, compared to $102.8 million in fiscal 2000, and $14.4 million in fiscal 1999, or $80.9 million before restructuring charges. In fiscal 2001, the Company reported income tax expense of $12.7 million, an effective tax rate of 28.2 percent. This compares with income tax expense of $29.9 million and an effective tax rate of 29.1 percent in fiscal 2000. Fiscal 1999 income tax expense was $2.7 million with an effective tax rate of 18.7 percent. The effective tax rates for fiscal years 2001, 2000 and 1999 were below the U.S. statutory rate due to utilization of tax credits, realization of tax benefits for United States exports and the utilization of tax loss carry- forwards at certain foreign subsidiaries. The effective tax rate for fiscal 1999 was significantly below the statutory rate because the above benefits offset a lower pretax income base. Net income for fiscal 2001 was $32.4 million. Excluding restructuring and other charges, net income was $58.2 million compared with $72.8 million in fiscal 2000 and $11.7 million in fiscal 1999. Fiscal 1999 net income was $57.6 million excluding restructuring charges. 19 Liquidity and Capital Resources. Harman International primarily finances its working capital requirements through cash generated by operations, borrowings under a revolving credit facility and normal trade credit. The Company and certain subsidiaries have a multi-currency revolving credit facility with a group of twelve banks committing $275 million to the Company for cash borrowings and letters of credit through September 30, 2002. The Company plans to refinance this agreement during the next fiscal year. At June 30, 2001, the Company had outstanding indebtedness under the revolving credit facility of $111.6 million, outstanding letters of credit of $7.3 million and unused credit thereunder of $156.1 million. The indebtedness at June 30, 2001, consists of committed rate loans, which bear interest at LIBOR plus 0.25 percent, and swing line borrowings, which bear interest at base rates. The Company and certain subsidiaries have a term loan with a group of banks led by Commerzbank committing $73.4 million to the Company for cash borrowings through August 30, 2002. The variable rate loan bears interest at LIBOR plus 0.60, equal to 4.7 percent at June 30, 2001. In addition, at June 30, 2001, the Company's international subsidiaries maintained unsecured short-term lines of credit of $23.2 million and had outstanding indebtedness thereunder of approximately $15.9 million. Capital expenditures, net of lease financing, were $88.1 million in fiscal 2001, compared with $80.4 million in fiscal 2000 and $67.8 million in fiscal 1999. Expenditures in fiscals 2001, 2000 and 1999 were for equipment and facilities required to increase capacity and efficiency, primarily in our business supplying the automotive industry, and new product tooling. The Company anticipates capital expenditures of approximately $120 to $130 million during the next fiscal year. Firm commitments for capital expenditures during fiscal 2002 of approximately $24.6 million existed as of June 30, 2001. The Company anticipates that a portion of these capital expenditures will be financed through operating lease arrangements. Net working capital at June 30, 2001, was $358.7 million, compared with $309.6 million at June 30, 2000. The increase primarily results from higher inventories, reflecting lower than anticipated sales, and lower accounts payable due to timing of purchases and vendor payments. Excess of cost over fair value of assets acquired was $145.3 million at June 30, 2001, compared with $166.6 million at June 30, 2000. The decrease was due to amortization and the effect of foreign currency translation. Shareholders' equity was $422.9 million at June 30, 2001, compared with $486.3 million at June 30, 2000, and $468.2 million at June 30, 1999. The decrease in fiscal 2001 resulted from net income offset by common stock repurchases totaling $67.0 million and negative foreign currency translation adjustments totaling $33.2 million due primarily to the weakening of the Euro against the U.S. dollar. Fiscal 2000 shareholders' equity increased due to net income offset by $36.0 million of common stock repurchases and negative foreign currency translation of $17.2 million. 20 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. Cash generated by operations and the unused credit available under the revolving credit facility should provide sufficient funds to meet the Company's working capital, capital expenditure, dividend, debt service and share repurchase requirements in fiscal 2002. The Company is subject to various risks, including dependence on key customers, economic conditions affecting disposable consumer income and fluctuations in currency exchange rates. A disruption in the operations of one of our key customers, such as an automotive strike, could have a material adverse effect on the Company. Effects of Inflation and Currency Exchange Rates. The Company maintains significant operations in Germany, the United Kingdom, Denmark, France, Austria, Hungary, Switzerland, Mexico and Sweden. As a result, exposure to foreign currency gains and losses exists. A portion of foreign currency exposure is hedged by incurring liabilities, including bank debt, denominated in the local currency where subsidiaries are located. The Company's subsidiaries purchase products and parts in various currencies. As a result, the Company may be exposed to cost increases relative to local currencies in the markets to which it sells. To mitigate such adverse trends, the Company enters into foreign exchange contracts and other hedging activities. Also, foreign currency positions are partially offsetting and are netted against one another to reduce exposure. Some products made in the U.S. are sold abroad. Sales of such products are affected by the value of the U.S. dollar relative to other currencies. Any long-term strengthening of the U.S. dollar could depress these sales. Competitive conditions in the Company's markets may limit its ability to increase product pricing in the face of adverse currency movements. However, due to the multiple currencies involved in the Company's businesses and the netting effect of various simultaneous transactions, the Company's foreign currency positions are partially offsetting. Over the next several years Harman International expects significant revenue and earnings growth due to major new OEM automotive awards. The Company recently announced that it will supply all navigation systems for Mercedes-Benz vehicles beginning in fiscal 2003. The new awards are for integrated infotainment systems with display for E Class vehicles and for DVD navigation systems for S Class vehicles. Recent Accounting Pronouncements. Recent accounting pronouncements SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," are discussed in footnote 1 to the consolidated financial statements, Summary of Significant Accounting Policies. 21 Statement of Management Responsibility The consolidated financial statements and accompanying information were prepared by, and are the responsibility of, the management of Harman International Industries, Incorporated. The statements were prepared in conformity with generally accepted accounting principles and, as such, include amounts that are based on management's best estimates and judgements. The Company's internal control systems are designed to provide reliable financial information for the preparation of financial statements, to safeguard assets against loss or unauthorized use and to ensure that transactions are executed consistent with Company policies and procedures. Management believes that existing internal accounting control systems are achieving their objectives and that they provide reasonable assurance concerning the accuracy of financial statements. Oversight of management's financial reporting and internal accounting control responsibilities is exercised by the Board of Directors through the audit committee which consists solely of outside directors. The committee meets periodically with financial management and the independent auditors to ensure that each is meeting its responsibilities and to discuss matters concerning auditing, accounting control and financial reporting. The independent auditors have free access to meet with the audit committee without management's presence. /s/ Bernard A. Girod /s/ Frank Meredith Bernard A. Girod Frank Meredith Vice Chairman and Executive Vice President and Chief Executive Officer Chief Financial Officer 22 Independent Auditor's Report The Board of Directors and Shareholders of Harman International Industries,Incorporated: We have audited the accompanying consolidated balance sheets of Harman International Industries, Incorporated and subsidiaries as of June 30, 2001 and 2000 and the related consolidated statements of operations, cash flows and shareholders' equity for each of the years in the three-year period ended June 30, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. These 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 significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harman International Industries, Incorporated and subsidiaries as of June 30, 2001 and 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Los Angeles, California August 10, 2001 23 Consolidated Balance Sheets Harman International Industries, Incorporated and Subsidiaries
June 30, 2001 and 2000 ($000s omitted except per share amounts) Assets 2001 2000 -------------------------------------------------------------------------- Current assets Cash and cash equivalents $ 2,748 4,365 Receivables (less allowance for doubtful accounts of $11,457 in 2001 and $11,760 in 2000) 315,817 306,596 Inventories (note 2) 317,500 298,273 Other current assets 72,806 61,792 ------------ ------------ Total current assets 708,871 671,026 Property, plant and equipment, net (notes 3, 5 and 6) 264,136 251,737 Excess of cost over fair value of assets acquired (less accumulated amortization of $40,645 in 2001 and $32,196 in 2000) 145,258 166,647 Other assets 44,120 48,095 ------------ ------------ Total assets $ 1,162,385 1,137,505 ------------ ------------ Liabilities and Shareholders' Equity --------------------------------------------------------------------------- Current liabilities Short-term borrowings (notes 4 and 5) $ 19,394 14,969 Current portion of long-term debt (note 5) 5,544 7,537 Accounts payable 151,478 161,333 Accrued liabilities 173,739 177,542 ------------ ------------ Total current liabilities $ 350,155 361,381 Borrowings under revolving credit facility (note 5) 108,072 11,835 Senior long-term debt (note 5) 235,750 242,983 Other non-current liabilities 44,537 33,918 Minority interest 929 1,055 Shareholders' equity (notes 5 and 7) Preferred stock, $.01 par value. Authorized 5,000,000 shares; none issued and outstanding -- -- Common stock, $.01 par value. Authorized 100,000,000 shares; issued 37,749,931 shares in 2001 377 188 and 37,550,608 shares in 2000 Additional paid-in capital 297,515 292,897 Accumulated other comprehensive income: Unrealized gains on hedging derivatives 2,785 -- Equity adjustment from foreign currency translation (92,288) (59,131) Retained earnings 351,525 322,383 Less common stock held in treasury (5,689,300 shares in 2001 and 3,488,000 shares in 2000) (136,972) (70,004) ------------ ------------ Total shareholders' equity $ 422,942 $ 486,333 ------------ ------------ Commitments and contingencies (notes 6, 10 and 12) Total liabilities and shareholders' equity $ 1,162,385 1,137,505 ------------ ------------
See accompanying notes to consolidated financial statements 24 Consolidated Statements of Operations Harman International Industries, Incorporated and Subsidiaries
Years Ended June 30, 2001, 2000 and 1999 ($000s omitted except per share amounts 2001 2000 1999 --------------------------------------------------------------------------------------- Net sales $ 1,716,547 1,677,939 1,500,135 Cost of sales 1,268,512 1,208,603 1,102,400 ------------ ------------ ------------ Gross profit 448,035 469,336 397,735 Selling, general and administrative expenses 376,807 347,614 322,008 Plant closures and severance -- -- 17,010 Asset impairment -- -- 20,054 ------------ ------------ ------------ Operating income 71,228 121,722 38,663 Other expenses Interest expense 24,950 18,507 23,641 Miscellaneous, net 1,179 386 575 ------------ ------------ ------------ Income before income taxes and minority interest 45,099 102,829 14,447 Income tax expense 12,703 29,923 2,706 Minority interest 32 68 18 ------------ ------------ ------------ Net income $ 32,364 72,838 11,723 ------------ ------------ ------------ Basic EPS $ 1.00 2.11 0.33 ------------ ------------ ------------ Diluted EPS $ 0.96 2.06 0.32 ------------ ------------ ------------ Weighted average shares outstanding - basic 32,296 34,452 35,794 Weighted average shares outstanding - diluted 33,737 35,300 36,122
See accompanying notes to consolidated financial statements. 25 Consolidated Statements of Cash Flows Harman International Industries, Incorporated and Subsidiaries
Years Ended June 30, 2001, 2000 and 1999 ($000s omitted) 2001 2000 1999 ----------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 32,364 72,838 11,723 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 52,168 53,487 60,202 Amortization of intangible assets 15,033 11,131 6,578 Special charges, net of cash paid -- -- 54,751 Tax benefit attributable to stock options 1,008 137 59 Deferred income taxes 12,480 4,512 2,635 Loss on disposition of assets 2,226 3,117 942 Change in working capital, net of acquisition/disposition effects: Decrease (increase) in: Receivables (25,174) (4,945) (14,897) Inventories (37,342) (20,557) (6,985) Other current assets 3,161 (63) 10,303 Increase (decrease) in: Accounts payable (1,699) 40,283 10,847 Accrued liabilities and income taxes payable 695 31,278 (10,731) Other operating activities (977) 3,347 753 ------------ ------------ ------------ Net cash provided by operating activities $ 53,943 194,565 126,180 ------------ ------------ ------------ Cash flows from investing activities: Payment for purchase of companies, net of cash acquired $ -- (49,683) (568) Proceeds from asset dispositions 4,135 16,690 2,861 Capital expenditures (88,083) (80,355) (67,830) Purchased and capitalized software expenditure (17,681) (16,306) (2,962) Collection (issuance) of loans, net 12,259 (645) (11,600) Other items, net (1,074) 356 1,825 ------------ ------------ ------------ Net cash used in investing activities $ (90,444) (129,943) (78,274) ------------ ------------ ------------ Cash flows from financing activities: Net borrowings (repayments) under lines of credit $ 4,826 (3,240) 1,477 Proceeds from issuance of long-term debt 106,418 11,740 35,206 Repayments of long-term debt (9,426) (33,568) (63,002) Repurchase of common stock (66,968) (36,027) (33,977) Dividends paid to shareholders (3,222) (3,444) (3,589) Exercise of stock options 3,799 1,888 2,479 ------------ ------------ ------------ Net cash flow provided by (used in) financing activities $ 35,427 (62,651) (61,406) ------------ ------------ ------------ Effect of exchange rate changes on cash (543) (569) 259 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (1,617) 1,402 (13,241) Cash and cash equivalents at beginning of year 4,365 2,963 16,204 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 2,748 4,365 2,963 ------------ ------------ ------------ Supplemental schedule of non-cash investing activities: Fair value of assets acquired $ -- 78,084 1,672 Cash paid for the capital stock -- 49,683 568 ------------ ------------ ------------ Liabilities assumed $ -- 28,401 1,104 ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 26 Consolidated Statements of Shareholders' Equity Harman International Industries, Incorporated and Subsidiaries
Years Ended June 30, 2001, 2000 and 1999 ($000s omitted) Accumulated Common Additional other Total stock $.01 paid-in comprehensive Retained Treasury shareholders' par value capital income earnings stock equity ------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1998 $ 186 288,336 (21,478) 244,855 -- 511,899 ---------- ---------- ------------- -------- --------- ------------- Exercise of stock options 1 2,478 -- -- -- 2,479 Tax benefit attributable to stock option plan -- 59 -- -- -- 59 Treasury shares purchased -- -- -- -- (33,977) (33,977) Dividends ($.10 per share) -- -- -- (3,589) -- (3,589) Comprehensive income: Net income -- -- -- 11,723 -- 11,723 Foreign currency translation adjustment -- -- (20,407) -- -- (20,407) ---------- ---------- ------------- -------- ---------- ------------- Balance, June 30, 1999 $ 187 290,873 (41,885) 252,989 (33,977) 468,187 ---------- ---------- ------------- -------- ---------- ------------- Exercise of stock options 1 1,887 -- -- -- 1,888 Tax benefit attributable to stock option plan -- 137 -- -- -- 137 Treasury shares purchased -- -- -- -- (36,027) (36,027) Dividends ($.10 per share) -- -- -- (3,444) -- (3,444) Comprehensive income: Net income -- -- -- 72,838 -- 72,838 Foreign currency translation adjustment -- -- (17,246) -- -- (17,246) ---------- ---------- -------------- -------- --------- ------------ Balance, June 30, 2000 $ 188 292,897 (59,131) 322,383 (70,004) 486,333 ---------- ---------- -------------- -------- --------- ------------ Stock split 188 (188) -- -- -- -- Exercise of stock options 1 3,798 -- -- -- 3,799 Tax benefit attributable to stock option plan -- 1,008 -- -- -- 1,008 Treasury shares purchased -- -- -- -- (66,968) (66,968) Dividends ($.10 per share) -- -- -- (3,222) -- (3,222) Comprehensive income: Net income -- -- -- 32,364 -- 32,364 Foreign currency translation adjustment -- -- (33,157) -- -- (33,157) Unrealized gains on hedging derivatives -- -- 2,785 -- -- 2,785 ---------- ---------- -------------- -------- --------- ------------ Balance, June 30, 2001 $ 377 297,515 (89,503) 351,525 (136,972) 422,942 ---------- ---------- -------------- -------- --------- ------------
See accompanying notes to consolidated financial statements. 27 Notes to Consolidated Financial Statements Harman International Industries, Incorporated and Subsidiaries 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 comprised of costs to acquire or develop automotive navigation, telecommunications and networking software. 28 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 29 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 Inventories consist of the following: June 30 ($000s omitted) 2001 2000 ---------------------------------------------------------------------- Finished goods $ 145,349 134,038 Work in process 38,572 40,815 Raw materials 133,579 123,420 ----------- ---------- Total $ 317,500 298,273 ----------- ---------- 3. Property, Plant and Equipment Property, plant and equipment are composed of the following: June 30 ($000s omitted) 2001 2000 ---------------------------------------------------------------------- Land $ 6,899 4,647 Buildings and improvements 117,801 116,376 Machinery and equipment 327,175 326,264 Furniture and fixtures 37,959 38,885 ----------- ----------- 489,834 486,172 Less accumulated depreciation and amortization (225,698) (234,435) ----------- ----------- Property, plant and equipment, net $ 264,136 251,737 ----------- ----------- 4. Short-Term Borrowings At June 30, 2001, the Company had unsecured short-term lines of credit for certain of its international subsidiaries aggregating $23.2 million with outstanding borrowings of $15.9 million. Interest rates based on various indices ranged from 4.9 percent to 8.8 percent. At June 30, 2000, the Company had outstanding borrowings of approximately $11.8 million and interest rates ranging from 4.9 percent to 7.5 percent. The Company utilizes the swing line feature of the revolving credit facility to meet its short-term borrowing requirements. At June 30, 2001, 30 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 and certain of its subsidiaries have a five-year multi-currency revolving credit facility with a group of twelve banks committing $275 million to the Company for cash borrowings and letters of credit through September 30, 2002. At June 30, 2001, the Company had borrowings of $111.6 million on the revolving credit facility (including swing line, competitive advance and revolving credit borrowings) and outstanding letters of credit of $7.3 million. The unused credit under the revolving credit facility at June 30, 2001, was $156.1 million. The interest rate on the June 30, 2001 competitive advance and revolving credit borrowings, at LIBOR plus 0.25 percent, ranged from 4.3 percent in the United States to 6.8 percent in Canada. The Company is required under the revolving credit agreement to maintain certain financial ratios and meet certain net worth and indebtedness tests. The Company was in compliance with such covenants at June 30, 2001 and 2000. 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: June 30 ($000s omitted) 2001 2000 ------------------------------------------------------------------------------ Borrowings under revolving credit facility, due September 30, 2002, with variable rates ranging from 4.3% to 6.8% at June 30, 2001 $ 108,072 11,835 Senior notes, unsecured, due July 1, 2007, interest due semiannually at 7.3% 150,000 150,000 Borrowings under Commerzbank term facility, due August 30, 2002; variable rate was 4.7% at June 30, 2001 73,403 73,230 Obligations under capital leases (note 6) 4,561 12,710 Other unsubordinated loans due in installments through 2030, some of which vary with the prime rate, bearing interest at an average effective rate of 3.6% at June 30, 2001 13,330 14,580 ----------- ----------- Total 349,366 262,355 Less current installments (5,544) (7,537) ----------- ----------- Long-term debt $ 343,822 254,818 ----------- ----------- Long-term debt, including obligations under capital leases, maturing in each of the next five fiscal years (000s omitted) is as follows: -------------------------- 2002 $ 5,544 2003 182,187 2004 726 2005 738 2006 382 Thereafter 159,789 -------------------------- 31 6. Leases The following analysis represents property under capital leases: June 30 ($000s omitted) 2001 2000 ---------------------------------------------------------------- Capital lease assets $ 10,254 34,361 Less accumulated amortization (2,392) (19,325) --------- -------- Net $ 7,862 15,036 --------- -------- 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: ($000s omitted) Capital Operating Leases Leases ------------------------------------------------------ 2002 $ 799 62,172 2003 675 51,244 2004 719 43,531 2005 728 29,922 2006 305 23,411 Thereafter 1,857 56,940 --------- -------- Total minimum lease payments 5,083 267,220 less interest (522) -------- --------- Present value of minimum lease payments $ 4,561 --------- 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 Incentive Plan (the 1992 Plan) provides for the grant of stock options, stock appreciation rights in tandem with options, restricted stock and performance units to officers, key employees and consultants of the Company and its subsidiaries. In addition, the 1992 Plan provides for the automatic annual grant of options to the non-officer directors of the Company and for a further automatic grant to such non-officer directors each year in which the Company achieves a specified level of return on consolidated equity. The 1992 Plan replaced the Company's 1987 Plan and added an automatic grant feature for non-officer 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. 32 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 were reserved for issuance under the 1992 Plan. Stock Option Activity Summary: Years ended June 30 Weighted Average Shares Exercise Price --------------------------------------------------------------- Balance at June 30, 1998 2,948,666 $ 17.49 ---------- Granted 1,180,500 $ 20.73 Canceled (321,678) $ 20.24 Exercised (178,826) $ 13.87 ---------- Balance at June 30, 1999 3,628,662 $ 18.48 ---------- Granted 968,000 $ 22.86 Canceled (133,250) $ 17.96 Exercised (105,138) $ 21.06 ---------- Balance at June 30, 2000 4,358,274 $ 19.38 ---------- Granted 855,900 $ 28.49 Canceled (145,200) $ 20.71 Exercised (202,725) $ 19.28 ---------- Balance at June 30, 2001 4,866,249 $ 20.95 ---------- 33 Options Outstanding at June 30, 2001 Weighted average Weighted Range of Number of remaining average exercise prices options life in years exercise price ------------------------------------------------------------------ $ 3.69-3.69 154,600 0.37 $ 3.69 $ 5.65-5.65 16,800 1.36 $ 5.65 $ 9.88-14.00 445,854 2.32 $ 12.50 $ 15.09-22.00 2,691,395 6.13 $ 20.22 $ 22.59-33.50 1,530,600 8.59 $ 26.23 $ 34.80-45.00 27,000 9.53 $ 42.01 --------------- ------------ $ 3.69-45.00 4,866,249 6.37 $ 20.95 --------------- ------------ Options Exercisable at June 30, 2001 Weighted Range of Number of average exercise prices options exercise price -------------------------------------------------- $ 3.69-3.69 154,600 $ 3.69 $ 5.65-5.65 16,800 $ 5.65 $ 9.88-14.00 445,854 $ 12.50 $ 15.09-22.00 1,895,755 $ 19.61 $ 22.59-33.50 251,660 $ 25.00 $ 34.80-45.00 0 - --------------- ----------- $ 3.69-45.00 2,764,669 $ 17.98 --------------- ----------- 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 The tax provisions and analysis of effective income tax rates are comprised of the following items: Years Ended June 30 ($000s omitted) 2001 2000 1999 --------------------------------------------------------------------------- Provision for Federal income taxes before credits at statutory rate $ 15,785 35,990 5,056 State income taxes 314 276 (182) Difference between Federal statutory rate and foreign effective rate 1,086 (384) (3,863) Permanent differences between financial and tax accounting income 683 624 654 Tax exempt foreign sales corporation earnings (1,336) (1,139) (1,483) Change in valuation allowance (2,927) (2,422) - Change in other tax liabilities (1,325) (1,257) 966 Losses without income tax benefit 2,419 673 3,158 Federal income tax credits (2,000) (1,875) (1,500) Other 4 (563) (100) --------- -------- -------- Total $ 12,703 29,923 2,706 --------- -------- -------- 34 Income tax expense (benefit) consists of the following: Years Ended June 30 ($000s omitted) 2001 2000 1999 ---------------------------------------------------------------------------- Current: Federal $ (1,247) 10,158 (2,847) State 209 368 305 Foreign 1,261 21,528 14,638 --------- -------- -------- 223 32,054 12,096 --------- -------- -------- Deferred: Federal (216) (2,039) (8,903) State 146 (92) (487) Foreign 12,550 -- -- --------- -------- -------- 12,480 (2,131) (9,390) --------- -------- -------- Total $ 12,703 29,923 2,706 --------- -------- -------- 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) June 30 ($000s omitted) 2001 2000 ------------------------------------------------------------------ Federal tax credits $ 5,228 -- Inventory costing differences 7,485 6,387 Foreign net operating loss 7,343 7,862 Valuations and other allowances 9,381 9,863 --------- -------- Total gross deferred tax asset $ 29,437 24,112 Less valuation allowance (3,640) (5,440) --------- -------- Deferred tax asset $ 25,797 18,672 Total gross deferred tax liability from fixed asset depreciation $(12,906) (9,554) Foreign statutory accounting (16,253) - --------- -------- Total gross deferred tax liability $(29,159) (9,554) --------- -------- Net deferred tax asset (liability) $ (3,362) 9,118 --------- -------- 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 Company manufactures high fidelity audio and video 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 reproduction in the home, in vehicles, and with computers. Home applications include two-channel audio, multi-channel 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. 35 The Professional Group manufactures loudspeakers and electronics used by audio professionals in concert halls, cinemas, recordingstudios, 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
Years ended June 30 ($000s omitted) 2001 2000 1999 ----------------------------------------------------------------- Net sales: Consumer $ 1,267,358 1,228,259 1,091,300 Professional 449,189 449,680 408,802 Other - - 33 ----------- --------- --------- Total $ 1,716,547 1,677,939 1,500,135 ----------- --------- --------- Operating income: Consumer $ 80,126 99,632 30,724 Professional 18,739 34,083 18,846 Other (27,637) (11,993) (10,907) ----------- --------- --------- Total $ 71,228 121,722 38,663 ----------- --------- --------- Assets: Consumer $ 828,861 777,900 770,963 Professional 292,839 320,277 256,403 Other 40,685 39,328 38,389 ----------- --------- --------- Total $ 1,162,385 1,137,505 1,065,755 ----------- --------- --------- Capital expenditures: Consumer $ 74,649 71,098 53,057 Professional 12,406 8,840 14,010 Other 1,028 417 763 ----------- --------- --------- Total $ 88,083 80,355 67,830 ----------- --------- --------- Depreciation and amortization: Consumer $ 49,074 48,943 48,345 Professional 13,934 14,124 15,574 Other 4,193 1,551 2,861 ----------- --------- --------- Total $ 67,201 64,618 66,780 ----------- --------- ---------
Net sales and long-lived assets by geographic area for the years ended June 30, 2001, 2000 and 1999 were as follows. Years Ended June 30 ($000s omitted) 2001 2000 1999 ----------------------------------------------------------------- Net sales: U.S. $ 715,449 786,296 593,004 Europe 665,421 652,295 652,446 Other 335,677 239,348 254,685 ----------- --------- --------- Total $ 1,716,547 1,677,939 1,500,135 ----------- --------- --------- Long-lived assets: U.S. $ 170,139 211,212 161,476 Europe 232,897 223,811 233,947 Other 44,337 8,072 4,326 ----------- --------- --------- Total $ 447,373 443,095 399,749 ----------- --------- --------- 10. Commitments and Contingencies 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 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 36 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 Under the Retirement Savings Plan, domestic employees may contribute up to 15.0% of their pretax compensation. With the approval of the Board of Directors, each division may make a safe harbor contribution equal to 3.0% of a participant's eligible compensation; a matching contribution of up to 3.0% (50.0% on the first 6.0% of an employee's tax-deferred contribution); and a profit sharing contribution. Profit sharing and matching contributions vest at a rate of 25.0% for each year of service with the employer, beginning with the second year of service. Expenses related to the Retirement Savings Plan for the years ended June 30, 2001, 2000 and 1999 totaled $6,740,129, $5,818,409 and $5,654,000, respectively. 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 non-domestic subsidiaries maintain defined benefit pension plans. These plans are not material to the accompanying consolidated financial statements. 12. Fair Value of Financial Instruments The estimated fair value of the Company's financial instruments was determined using market information and valuation methodologies. In the measurement of the fair value of certain financial instruments, quoted market prices were unavailable and other valuation techniques were utilized. These derived fair value estimates are significantly affected by the assumptions used. 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. 37 13. 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 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 In March 2000, the Company acquired professional amplifier manufacturer Crown International (Crown), located in Elkhart, Indiana. In December 1999, the Company acquired Innovative Systems GmbH (IS), a leading developer of route guidance, positioning and navigation software, located in Hamburg, Germany. The acquisitions of Crown and IS were not material to the consolidated financial statements. 38 15. Earnings Per Share Information
Years Ended June 30 ($000s omitted except per share amounts) 2001 2000 1999 ----------------------------------------------------------------------------------------------- Basic Diluted Basic Diluted Basic Diluted ------- ------- ------- ------- ------- ------- Net income $32,364 32,364 72,838 72,838 11,723 11,723 ------- ------- ------- ------- ------- ------- Shares of Harman common stock outstanding 32,296 32,296 34,452 34,452 35,794 35,794 Employee stock options -- 1,441 -- 848 -- 328 ------- ------- ------- ------- ------- ------- Total average equivalent shares 32,296 33,737 34,452 35,300 35,794 36,122 ------- ------- ------- ------- ------- ------- Earnings per share $ 1.00 0.96 2.11 2.06 0.33 0.32 ------- ------- ------- ------- ------- -------
16. Quarterly Summary of Operations (unaudited) The following is a summary of operations by quarter for fiscal 2001 and 2000: Three months ended: ($000s omitted except per share amounts)
Fiscal 2001 Sept 30 Dec 31 Mar 31 Jun 30 ----------------------------------------------------------------- Net sales $ 394,976 438,176 435,658 447,737 Gross profit $ 109,710 121,593 96,342 120,390 Net income $ 7,245 24,154 (18,392) 19,357 EPS-basic* $ 0.22 0.75 (0.57) 0.60 EPS-diluted* $ 0.21 0.72 (0.57) 0.58 Note: Quarter ended March 31, 2001, included restructuring and other charges totaling $36.3 million, equal to $0.76 per diluted share. Fiscal 2000 Net sales $ 356,773 450,826 423,931 446,409 Gross profit $ 96,243 126,491 124,179 122,423 Net income $ 4,894 22,307 22,317 23,320 EPS-basic* $ 0.14 0.65 0.65 0.68 EPS-diluted* $ 0.14 0.64 0.63 0.66
* Quarters do not add to full year due to changes in shares outstanding. 39 Shareholder Information Harman International Industries, Incorporated and Subsidiaries
Market Price Fiscal 2001 Fiscal 2000 Fiscal 1999 ------------------------------------------------------------------------------------------------ High Low High Low High Low First quarter ended September 30 $ 41.375 30.250 23.594 20.469 21.063 16.250 Second quarter ended December 31 48.000 32.300 28.063 18.375 22.250 15.750 Third quarter ended March 31 37.050 24.900 31.875 27.500 21.344 17.907 Fourth quarter ended June 30 39.730 24.800 34.250 28.000 23.750 17.125
Share prices have been adjusted for the two-for-one stock split effective August 2000. The Common Stock of the Company is listed on the New York Stock Exchange and is reported on the New York Stock Exchange Composite Tape under the symbol HAR. As of June 30, 2001, the Company's Common Stock was held by approximately 189 record holders. The table above sets forth the reported high and low sales prices of the Company's Common Stock, as reported on the New York Stock Exchange, for each quarterly period for fiscal years ended June 30, 2001, 2000, and 1999. The Company paid dividends during fiscal years 2001, 2000 and 1999 of $.10 per share, with a dividend of $.025 paid in each of the four quarters. 40 Corporate Officers Sidney Harman Executive Chairman Bernard A. Girod Vice Chairman and Chief Executive Officer Gregory Stapleton President and Chief Operating Officer Frank Meredith Executive Vice President and Chief Financial Officer Erich Geiger Chief Technical Officer William S. Palin Vice President - Controller Sandra B. Robinson Vice President - Financial Operations Edwin Summers Vice President and General Counsel Floyd E. Toole Vice President - Acoustics Securities Traded New York Stock Exchange Symbol: HAR Corporate Headquarters 1101 Pennsylvania Avenue, NW Suite 1010 Washington, D.C. 20004 202-393-1101 www.harman.com Directors Bernard A. Girod Sidney Harman Shirley Mount Hufstedler Ann McLaughlin Korologos Edward H. Meyer Gregory Stapleton Stanley A. Weiss Annual Meeting The annual meeting of shareholders will be held on November 5, 2001, at Tavern on the Green, Central Park at West 67th Street, New York, NY 10023 at 11:00 a.m. EST. A proxy statement was sent to shareholders on or about September 14, 2001, at which time proxies for the meeting were requested. Registrar and Transfer Agent Mellon Investor Services 400 South Hope Street, 4th Floor Los Angeles, CA 90071 213-553-9720 Independent Auditor KPMG LLP 355 South Grand Avenue Los Angeles, CA 90071 213-972-4000 Except for the historical information contained in this Annual Report, the matters discussed herein contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements, including without limitation, the effect of economic conditions, product demand, currency exchange rates, labor disputes, competitive products and other risks detailed herein and in the Company's other filings with the Securities and Exchange Commission. 41