UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 19961997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-25226
EMERSON RADIO CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3285224
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Entin Road, Parsippany, New Jersey 07054
(Address of principal executive offices) (Zip code)
(201)(973)884-5800
(Registrant's telephone number, including area code)
- -----------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of common stock as of September 30,
1996: 40,295,196.August 12,
1997: 41,916,567.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Six Months Ended Three Months Ended
SeptemberJune 30,
September 30,1997 1996
1995 1996 1995
Net revenues .. . . . . . . . . . $101,656 $144,406 $60,509 $87,348. . . . $30,443 $ 41,147
Costs and expenses:
Cost of sales . . . . . . . . . 96,536 130,692 57,752 79,807. . 28,399 38,784
Other operating costs and expenses 1,624 2,545 689 929expenses. 866 934
Selling, general & administrative
expenses. . . . . . . . . . . . 9,705 10,995 4,342 5,752
Restructuring and other nonrecurring
chargesexpenses . . . . . . . . . . . . 2,734 2,734
110,599 144,232 65,517 86,488
Operating profit (loss). . . . . . (8,943) 174 (5,008) 860
Interest expense . . . . .. . . . . 1,657 1,294 845 671
Earnings (loss) before income taxes. . (10,600) (1,120) (5,853) 189
Provision for income taxes . . .. . 166 154 190 63
Net earnings (loss)3,602 5,364
Restructuring and other nonrecurring
charges. . . . . . . . . . $(10,766). . . 52 -
32,919 45,082
Operating loss . . . . . . . . . . . . (2,476) (3,935)
Equity in earnings of affiliate. . . . 536 -
Interest expense . . . . . . . . . . . 741 812
Loss before income taxes . . . . . . . (2,681) (4,747)
Provision (benefit) for income taxes . 41 (24)
Net loss . . . . . . . . . . . . . . . $ (1,274) (6,043) $ 126(2,722) $(4,723)
Net earnings (loss)loss per common shareshare. . . . . . . $ (.28)(.07) $ (.04) $ (.15) $ -(.12)
Weighted average number of
common shares outstanding.outstanding . . . . . . 40,274 40,253 40,29540,592 40,253
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
Sept.June 30, March 31,
1996 19961997 1997
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . $ 15,0021,756 $ 16,133
Short-term investments . . . . . . . . . . . 4,050 1,8722,640
Accounts receivable (less allowances of
$4,813$4,429 and $6,139,$6,001, respectively) . . . . . 18,232 23,5836,900 12,452
Inventories . . . . . . . . . . . . . . . . 27,517 35,29213,201 13,329
Prepaid expenses and other current assets . 7,898 8,4347,016 6,497
Total current assets . . . . . . . . . . . 72,699 85,31428,873 34,918
Property and equipment - (at cost less
accumulated depreciation and amortization
of $5,166$3,685 and $4,422,$3,521, respectively). . . . . 2,823 3,5011,912 2,130
Investment in unconsolidated affiliate . . . . 16,537 16,033
Other assets . . . . . . . . . . . . . . . . . 7,111 7,7615,488 5,687
Total Assets . . . . . . . . . . . . . . . $ 82,63352,810 $ 96,57658,768
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . . . $ 19,1864,576 $ 21,1515,689
Current maturities of long-term debt . . . . 120 17381 85
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . 9,806 10,39111,310 13,053
Accrued sales returns . . . . . . . . . . . 3,016 3,0912,518 2,730
Income taxes payable . . . . . . . . . . . . 148 20289 103
Total current liabilities . . . . . . . . 32,276 35,00818,574 21,660
Long-term debt . . . . . . . . . . . . . . . . 20,895 20,88620,834 20,856
Other non-current liabilities . . . . . . . . 256 300224 223
Shareholders' Equity:
Preferred stock - $.01 par value, 1,000,00010,000,000
shares authorized, 9,700 and 10,000 shares
issued and outstanding, respectively . . . . .. . . . . . . . . 9,0008,730 9,000
Common stock - $.01 par value, 75,000,000
shares authorized, 40,295,19640,631,672 and 40,252,77240,335,642
shares issued and outstanding, respectively. 403406 403
Capital in excess of par value . . . . . . . . 109,243 108,991109,545 109,278
Accumulated deficit . . . . . . . . . . . . . (89,291) (78,175)
Unrealized loss on short-term investments. . . (256)(105,701) (102,843)
Cumulative translation adjustment . . . . . . 107 163198 191
Total shareholders' equity . . . . . . . 29,206 40,38213,178 16,029
Total Liabilities and Shareholders' Equity $ 82,63352,810 $ 96,57658,768
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
SixThree Months Ended
SeptemberJune 30,
1997 1996 1995
Cash Flows from Operating Activities:
Net cash provided (used) by operating
activities . . . . . . . . . . . . . . . . $ 3,322373 $ (4,295)5,308
Cash Flows from Investing Activities:
Purchases of investment securities. . . . . . (2,256)
Additions to property and equipment. . . . . (169) (1,145)
Other. . . . . . . . . . . . . . . . . . . . 113 (476)
Net cash usedprovided by investing
activities . . . . . . . . . . . . . . . . (2,312) (1,621)13 45
Cash Flows from Financing Activities:
Net repayments under line of
credit facilityfacility. . . . . . . . . . . . . . . . . . (1,965) (15,305)
Net proceeds from private placement of
Senior Subordinated Convertible
Debentures . . . . . . . . . . . . . . . . 19,233(1,113) (3,715)
Other . . . . . . . . . . . . . . . . . . . (176) (731)(157) (263)
Net cash provided (used)used by financing
activities . . . . . . . . . . . . . . . . (2,141) 3,197(1,270) (3,978)
Net decreaseincrease (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . (1,131) (2,719)(884) 1,375
Cash and cash equivalents at beginning
of year. . . . . . . . . . . . . . . . . . . 2,640 16,133 17,020
Cash and cash equivalents at end of period . . $ 15,002(a) $14,301(a)1,756(a) $17,508(a)
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . $ 1,661741 $ 1,564815
Income taxes paid . . . . . . . . . . . . . $ 31 $ 15
$ 133
(a) The balances at September 30, 1996 and 1995 include $4.0(a) The balances at June 30, 1997 and 1996, include $1.0 million and $9.0
million and $9.1
million, respectively, of cash and cash equivalents, respectively, pledged to assure the
availability of certain letter of credit facilities.
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
TheThese unaudited interim consolidated financial statements
reflect all normal and recurring adjustments that are, in the opinion of
management, believes necessary to present fairlya fair statement of Emerson Radio Corp.'s (the
"Company" or "Emerson") consolidated financial position as of June 30, 1997 and
the results of operations for the three month periods being reported. Certain prior year information has
been reclassified to conform with the current year presentation.June 30, 1997 and 1996.
The unaudited interim consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and accordingly do not include all of the disclosures normally made in the
Emerson Radio Corp.
(the "Company")Company's annual consolidated financial statements. It is suggested that these
unaudited interim consolidated financial statements be read in conjunction with
the consolidated financial statements and notes thereto for the year ended March
31, 1996,1997, included in the Company's annual report on Form 10-K filing.10-K.
The consolidated financial statements include the accounts of
the Company and all of its majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The preparation of the unaudited interim consolidated financial statements
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could materially differ from those estimates.
Due to the seasonal nature of the Company's consumer
electronics business, the results of operations for the three and six month periodsmonths ended
SeptemberJune 30, 19961997 are not necessarily indicative of the results of operations that
may be expected for the full year ending March 31, 1997.1998.
NOTE 2
Net earnings (loss)loss per common share for the three and six month periods ended
SeptemberJune 30, 19961997 and 19951996 are based on the net earnings (loss)loss and deduction of preferred
stock dividend requirements (resulting in a loss
attributable to common shareholders) and the weighted average number of shares of common
stock outstanding during the periods. Theseeach period. The net loss per share amounts dofor both periods
does not include common stock equivalents assumed outstanding since they are
anti-
dilutive.anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("FAS 128"), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of FAS 128 on
the calculation of primary earnings per share is not expected to be material.
NOTE 3
The provision for income taxes for the three and six month periodsmonths ended
SeptemberJune 30, 1996 and 19951997 consists primarily of taxes related to international operations.
The benefit for income taxes for the three months ended June 30, 1996
consists primarily of domestic tax refunds received. The Company did not
recognize tax benefits for losses incurred by its domestic operations during the
same periods.three months ended June 30, 1997 and 1996.
NOTE 4
The Company records short-term investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Investment securities consist of equity securities
which are classified as both trading securities and as available for sale
securities. Investments in trading securities are reported at fair value, with
unrealized gains and losses included in earnings. Unrealized holding losses on
trading securities as of September 30, 1996 were approximately $283,000 and are
included in the statement of operations. In the quarter ended September 30,
1996, the Company reclassified one of its short-term investments to available
for sale and accordingly, unrealized gains and losses are reported as a separate
component of shareholders' equity. The cost of investments sold and related
realized gains and losses are determined using the specific identification
method.
The amortized cost and estimated market value of investment securities
classified as available for sale at September 30, 1996 are as follows:
Amortized cost $3,938,659
Gross unrealized losses (256,409)
Estimated market value $3,682,250
NOTE 5
Spare parts inventories, net of reserves, aggregating
$1,823,000$1,337,000 and $2,042,000$1,469,000 at SeptemberJune 30, 19961997 and March 31, 1996,1997, respectively, are
included in "Prepaid expenses and other current assets".assets."
NOTE 6
NOTES PAYABLE:
The Company maintains a $30 million asset-based revolving line of credit
facility with a U.S. financial institution (the "Lender"). Pursuant to the terms
of the credit facility, as amended, effective September 30,5
On December 10, 1996, the Company is
required to maintain a minimum adjusted net worth, as defined,purchased from Sport Supply
Group, Inc. ("SSG") 1,600,000 shares of $30,000,000
excluding certain restructuring and nonrecurring charges. At September 30,
1996,newly issued common stock, $.01 par
value per share (the "SSG Stock"), for aggregate consideration of $11.5 million,
or approximately $7.19 per share. In addition, the Company purchased, for an
aggregate consideration of $500,000, five-year warrants (the "SSG Warrants") to
acquire an additional 1,000,000 shares of SSG Stock at an exercise price of
$7.50 per share, subject to standard anti-dilution adjustments, pursuant to a
Warrant Agreement. Prior to such purchase, the Company beneficially owned
approximately 9.9% of the outstanding shares of SSG Stock which it had an adjusted net worth, excludingpurchased
for $4,228,000 in open market transactions. Based upon the purchase of the SSG
Stock as set forth above, the Company owns approximately 27% of the outstanding
shares of the SSG Stock. If the Company exercises all of the SSG Warrants, it
will beneficially own approximately 35% of the SSG Stock. In addition, the
Company has arranged for foreign trade credit financing of $2 million for the
benefit of SSG to supplement SSG's existing credit facilities. In connection
with such charges,purchase, SSG appointed the Company's designees to become the majority
of $31,940,000the members of its Board of Directors and the Company's management is
directly involved in SSG's day-to-day operations. In March 1997, SSG's
stockholders elected Emerson's nominees as a majority of the members of its
Board of Directors.
The investment in, and results of operations of, SSG are
accounted for by the equity method. SSG's fiscal year end is October 31;
therefore, the Company's equity in earnings (losses) of SSG will be recorded on
a two-month delay basis. The Company's investment in SSG
includes goodwill of $3,967,000 which is being amortized on a straight line
basis over 40 years. Equity in earnings of SSG was in compliance with this covenant.
LONG-TERM DEBT:$536,000 for the three months
ended June 30, 1997. At June 30, 1997, the aggregate market value quoted on the
New York Stock Exchange of Emerson's shares of SSG Common Stock was
approximately $15,177,000. Summarized financial information derived from SSG's
financial reports to the Securities and Exchange Commission was as follows (in
thousands):
(Unaudited)
As of May 2, 1997
Current assets $35,364
Property, plant and equipment
and other assets 19,804
Current liabilities 8,410
Long-term debt 7,524
(Unaudited)
For the six months
ended May 2, 1997
Net sales $42,892
Gross Profit 16,622
Earnings from continuing operatins 618
Loss from discontinued operations (2,574)
Net loss (1,956)
NOTE 6
Long-term debt consists of the following:
(In thousands of dollars)
Sept.
June 30, March 31,
1996 19961997 1997
8 1/8-1/2% Senior Subordinated Convertible
Debentures Due 2002. . . . . .2002 . . . . . . $20,750 $20,750
Other . . . . . . . . . . . . . . 265 309
21,015 21,059165 191
20,915 20,941
Less current obligations. . . . . 120 173
$20,895 $20,88681 85
$20,834 $20,856
NOTE 7
SETTLEMENT OF LITIGATION REGARDING CERTAIN OUTSTANDING COMMON STOCK:
ThePursuant to the Company's bankruptcy restructuring plans on March 31, 1994,
30 million shares of Common Stock were issued to GSE Multimedia Technologies
Corporation ("GSE"), Fidenas International Limited, L.L.C. ("FIN") and Elision
International, Inc. ("Elision") on March 31, 1994, pursuant to. GSE, FIN and Elision (the "Affiliated
Entities") are all affiliates of Geoffrey P. Jurick, the bankruptcy
restructuring plan, wereCompany's Chairman of
the subject of certain legal proceedings.Board, Chief Executive Officer and President. On June 11, 1996, a
Stipulation of Settlement and Order (the "Settlement Agreement") was executed,
which settles various legal proceedings in Switzerland, the Bahamas and the
United States among Mr. Geoffrey P. Jurick, Emerson's Chairman and Chief
Executive Officer, certain of his affiliated entities (GSE, FIN and Elision) and
certain of their creditors (the "Creditors").States. The Settlement Agreement provides for, among other things, for the
payment by Mr. Jurick and such affiliated
entitieshis Affiliated Entities of $49.5 million to the Creditors,various
claimants of Mr. Jurick and Affiliated Entities (the "Creditors"), to be paid
from the proceeds of the sale of certain of the 29,152,542 shares of Emerson
common stock (the "Settlement Shares") owned by affiliated entities of Mr. Jurick.the Affiliated Entities. In
addition, Mr. Jurick willis to be paid the sum of $3.5 million from the sale of the
Settlement Shares. The Settlement Shares willare to be sold over an
indeterminate period of time by a financial advisor, initially TM
Capital (the "Advisor") to be proposed by Emerson and selected in
consultation with Mr. Jurick and the Creditors. TM Capital has initially been
selected as the Advisor. Such. The Advisor will formulateis formulating a marketing plan taking
into consideration (i) the interests of Emerson's minority stockholders, and
(ii) the goal of generating sufficient proceeds to pay the Creditors and Mr.
Jurick as quickly as possible. The Settlement Shares will be divided into two
pools. The Pool A Shares initially will consist of 15,286,172 Emerson shares.shares of
Emerson's common stock. The Pool B Shares will consist of the number of Settlement SharesEmerson
shares with respect to which Mr. Jurick must retain beneficial ownership of
voting power to avoid an event of default arising out of a change of control
pursuant to the terms of the Company's Loan and Security Agreement with a U.S.
financial institution (the "Lender") and/or the indenture governing the
Company's 8 1/8-1/2% Senior Subordinated Convertible Debentures Due 2002 (the
"Debentures"). Sales may be made of the Settlement Shares pursuant to a
registered offering if the sales price is not less than 90% of the average of
the three most recent closing prices (the "Average Closing Price"), or, other
than in a registered offering, of up to 1% of the Emerson common stock
outstanding per quarter, if the sales price is not less than 90% of the Average
Closing Price. Any other attempted sales are subject to the consent of the
Company, Mr. Jurick, and the Creditors, or,and, if necessary, the Court.
The Settlement Agreement will only become effective after, among other
things, receipt by the Court of certain share certificates currently held
in foreign jurisdictions and all documents required in the Settlement
Agreement. A hearing to approve the Settlement Agreement has been
scheduled for November 19, 1996 in the United States
District Court in Newark, New Jersey.
INTERNATIONAL JENSEN INCORPORATED LITIGATION:
On May 10, 1996, International Jensen Incorporated ("Jensen") filed an
action in the United States District Court for the Northern District of
Illinois, Eastern Division, against the Company and its President, Eugene I.
Davis, for violations of proxy solicitation rules and for breach of a
confidentiality agreement with Jensen. On May 14, 1996, the Court entered a
temporary restraining order against the Company and its President, which
subsequently lapsed, enjoining them from (i) further solicitation of Jensen's
stockholders or their representatives until the Company has filed a Proxy
Statement with the Securities and Exchange Commission which complies with the
provisions of Regulation 14A of the Securities Exchange Act of 1934; (ii) making
further solicitation containing false and misleading or misleading statements of
material fact or material omissions; and (iii) disclosing confidential
information in violation of the confidentiality agreement. On May 20, 1996, the
Company filed a counterclaim and third party complaint in this action alleging
that Jensen and its Chairman, Chief Executive Officer and President, Robert G.
Shaw, fraudulently induced the Company to enter into a confidentiality agreement
and failed to negotiate with the Company in good faith. On July 2, 1996, the
Company amended its third party complaint to include Recoton Corporation
("Recoton"), the competing bidder for Jensen, and William Blair
Leveraged Capital Fund, L.P. ("Blair") for conspiring in the
actions of Jensen and Mr. Shaw. The Company voluntarily dismissed Blair, without
prejudice, on August 2, 1996.
On August 8, 1996, the Company filed a Second Amended Counterclaim and
Third Party Complaint with the Chicago Federal Court alleging that disclosures
and omissions in Jensen's proxy materials constituted violations of the
antifraud provisions of the federal proxy rules and seeking a temporary
restraining order to enjoin Jensen from holding its August 28, 1996 Special
Meeting of Stockholders to approve the Recoton/Shaw transactions and from
utilizing any proxies solicited pursuant to such allegedly misleading proxy
materials. The Court determined to abstain from deciding on this matter on
August 26, 1996. On October 22, 1996, Emerson and Jensen further amended their
claims and Recoton filed a separate action alleging that Emerson tortuously
interfered with the Jensen/Recoton transaction which seeks damages of not less
than $5 million. The Company and its President intend to vigorously defend
Jensen's and Recoton's claims against the Company and its President and to
vigorously pursue its counterclaim against Jensen and its third party complaint
against Mr. Shaw and Recoton. The Company believes that Jensen's and
Recoton's claims are without basis, that it has meritorious defenses against
Jensen's and Recoton's claims and that the litigation or results thereof
will not have a material adverse effect on the Company's consolidated
financial position.
On July 30, 1996, the Company filed a complaint in the Court of Chancery of
the State of Delaware against Jensen, all of its directors, Blair, Recoton, and
certain affiliates of the foregoing alleging violations of Delaware law
involving Jensen's auction process, interference with prospective economic
advantage, and aiding and abetting breaches of fiduciary duties. In particular,
the complaint seeks an order enjoining the consummation of the Jensen/Recoton
merger and the sale of Jensen's Original Equipment Manufacturing business to Mr.
Shaw. The complaint also seeks to require Jensen and its Board of Directors to
provide relevant due diligence materials to the Company and to engage in good
faith negotiations with the Company by asking the Court to order Jensen and its
Board of Directors to conduct a fair auction on a level playing field. The
Company is also requesting the Court to award damages and further relief as
would be just and equitable. The Court ordered expedited discovery and held a
hearing on the matter and on a motion for preliminary injunction filed on behalf
of Jensen's stockholders on August 15, 1996. The Court denied the motions for
preliminary injunction, and the Recoton/Shaw transactions with Jensen were
consummated on or about August 28, 1996.
OTAKE LITIGATION:
On December 20, 1995, the Company filed suit in the United States District
Court for the District of New Jersey against Orion Sales, Inc., Otake Trading
Co. Ltd., Technos Development Limited, Shigemasa Otake, and John Richard
Bond, Jr., (collectively, the "Otake Defendants") alleging breach of
contract, breach of covenant of good faith and fair dealing, unfair
competition, interference with prospective economic gain,
and conspiracy in connection with certain activities of the Otake Defendants
under certain agreements between the Company and the Otake Defendants. Mr. Bond is a former officer and sales representative
of the Company, having served in the latter capacity until he began working for
the other Otake Defendants. Certain of the other Otake Defendants have supplied
the majority of the Company's purchases until the Company's most recent fiscal
year ended March 31, 1996. On
December 21, 1995, Orion Sales, Inc. and Orion Electric (America), Inc.
filed suit against the Company in the United States District Court,
Southern District of Indiana, Evansville Division,
alleging various breaches of certain agreements by the Company, including
breaches of the confidentiality provisions, certain payment breaches,
breaches of provisions relating to product returns, and other alleged breaches
of those agreements, and seeking damages in the amount of $2,452,656, together
with interest thereon, attorneys' fees, and certain other costs. While the
outcome of the New Jersey and Indiana actions are not certain at this time, the
Company believes it has meritorious defenses against the claims made by the
plaintiffs in the Indiana action. In any event, the Company believes the
results of that litigation should not have a material adverse effect on the
financial condition of the Company or on its operations.
BANKRUPTCY CLAIMS:
The Company is presently engaged in litigation regarding
several bankruptcy claims which have not been resolved since the restructuring
of the Company's debt. The largest claim was filed on or about July 25, 1994 in
connection with the rejection of certain executory contracts with two Brazilian
entities, Cineral Electronica de Amazonia Ltda. and Cineral Magazine Ltda.
(collectively, "Cineral"). The contracts were executed in August 1993, shortly before the
Company's filingamount currently claimed is for bankruptcy protection. The amount claimed was $93,563,457, of
which $86,785,000 represents a claim for lost profits and $6,400,000 for plant installation and establishment of offices,
which were installed and established prior to execution of the contracts.profits. The claim was filed as an unsecured claim and, therefore, will be
satisfied, to the extent the claim is allowed by the Bankruptcy Court, in the
manner other allowed unsecured claims were satisfied. The Company has objected
to the claim and hasintends to vigorously contested, thecontest such claim and believes it has
meritorious defenses to the highly speculative portion of the claim for lost
profits and the portion of the claim for actual damages for expenses incurred
prior to the execution of the contracts. Additionally, on or about September 30, 1994, the Company instituted
an adversary proceeding in the Bankruptcy Court asserting damages caused by
Cineral in early 1995 and seeking declaratory relief and replevin. A motion
filed by Cineral to dismiss the adversary proceeding has been denied. The
adversary proceeding and claim objection have been consolidated into one
proceeding and discovery commenced. This action has been stayed since June 1995
by order of the Bankruptcy Court pending settlement negotiations. An adverse final ruling on the Cineral
claim could have a material adverse effect on the Company, even though it would
be limited to 18.3% of the final claim determined by a court of competent
jurisdiction; however, with respect to the claim for lost profits, in light of
the foregoing, the Company believes the chances for recovery for lost profits
are remote.
NOTE 8
The Company recorded restructuringItem 2. Management's Discussion and other nonrecurring chargesAnalysis of $2,734,000 for the threeResults of
Operations and six month periods ended September 30, 1996. The
Company recognized $917,000 of restructuring charges related to the closure of
the Company's local Canadian office and distribution operations in favor of an
independent distributor. The charges include costs for employee severance,
asset write-downs, and facility and equipment lease costs. Additionally, the
Company recognized $1,817,000 of nonrecurring charges relating to the proposed
but unsuccessful acquisition of International Jensen Incorporated. These costs
primarily include investment banking, commitment and professional fees,
including litigation costs, relating to the proposed acquisition.
NOTE 9
The Company has a 50% investment in E & H Partners, a joint venture that
purchases, refurbishes and sells certain of the Company's product returns. The
results of this joint venture are accounted for by the equity method. The
Company's equity in the earnings of the joint venture is reflected as a
reduction of cost of sales in the Company's unaudited interim Consolidated
Statements of Operations. Summarized financial information relating to the joint
venture is as follows (in thousands):
Six Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
Income Statement data:
Net sales (a) $18,466 $13,556 $8,061 $6,282
Net earnings (loss) (74) 1,394 (654) 475
Sales by the Company
to E&H Partners 4,693 11,688 1,874 3,709
___________________________
(a) Sales to the
Company by
E&H Partners 6,070 1,799 2,099 374
Sept. 30, March 31,
1996 1996
Balance Sheet Data:
Current assets (a) $16,478 $19,326
Noncurrent assets 151 162
Total Assets $16,629 $19,488
Accounts Payable to the
Company (a) $ 6,226 $13,270
Other Current liabilities 7,947 3,688
Total Liabilities 14,173 16,958
Partnership Equity 2,456 2,530
Total Liabilities and
Partnership Equity $16,629 $19,488
Equity of the Company in net
assets of E&H Partners $ 1,295 $ 1,265
_______________
(a) Inventories of the Partnership had been assigned to the Lender as collateral
for the U.S. line of credit facility. In April 1996, the Company agreed to
equally share the lien on the partnership's inventory with the other party in
the joint venture, in exchange for, among other things, a $5.0 million loan by
such partner to the joint venture and a subsequent partial paydown of E&H
Partners' obligation to the Company of the same amount.
EMERSON RADIO CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITIONFinancial Condition
This report contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). The Company's actual results
may materially differ from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in this report. See Other Information - Part II,
Item 5.
GENERAL
In December 1996, the Company purchased from SSG 1,600,000 newly-issued
shares of common stock (the "SSG Stock") for aggregate consideration of $11.5
million, or approximately $7.19 per share. In addition, the Company purchased,
for aggregate consideration of $500,000, five year warrants (the "SSG Warrants")
to acquire an additional 1,000,000 shares of SSG Stock at an exercise price of
$7.50 per share, subject to standard anti-dilution adjustments. Prior to such
purchase, the Company beneficially owned 669,500 shares, or approximately 9.9%,
of SSG's outstanding common stock which it had purchased for $4,228,000 in open
market purchases. The Company owns 2,269,500 shares, or approximately 27%, of
SSG's outstanding common stock. Assuming the exercise of all the SSG Warrants,
the Company would beneficially own approximately 35% of the outstanding shares
of SSG Stock. As part of the securities acquisition, SSG appointed the
Company's designees to become the majority of the members of its Board of
Directors and certain members of the Company's management are directly involved
in SSG's day-to-day operations. In March 1997, SSG's stockholders elected
Emerson's nominees as a majority of the members of its Board of Directors. In
addition, the Company arranged for foreign trade credit financing of $2 million
for the benefit of SSG.
The $12 million purchase price paid by the Company for the SSG Stock and
SSG Warrants was obtained from the Lender (as hereinafter defined), under the
terms of its existing credit facility, and in accordance with the terms of the
consent obtained from such Lender. Pursuant to a Pledge and Security Agreement
dated December 10, 1996, the Company has pledged to the Lender the 1,600,000
shares of SSG Stock and the SSG Warrants acquired on December 10, 1996.
SSG is the largest direct mail distributor of sporting goods equipment and
supplies in the United States. SSG sells its products at margins significantly
higher than the average of Emerson's core business and to an institutional
market that does not require the significant after-market servicing costs
typical of Emerson's core business. The investment allows Emerson to diversify
from its core business of consumer electronics distribution to another
distribution business that offers what management believes
to be significant growth potential. SSG benefited from the
investment by gaining the liquidity needed to cure its then-existing
loan default with its senior lenders and amended its
secured credit facility on more favorable terms. Also, SSG now possesses the
capital necessary to take advantage of opportunities to increase its business in
the institutional sporting goods market both in the U.S. and internationally and
to continue marketing its products showcased at the 1996 Olympic games. Emerson
has negotiated a management services agreement which provides for certain
administrative services to be performed by SSG. These services should allow
both the Company and SSG to benefit from this additional cost sharing
arrangement.
In February 1997, the Company executed five-year license/supply
agreements, subject to renewals, with Cargil covering the Caribbean and Central
and South American markets. The agreements provide for the license of the
Emerson and G-Clef trademark for certain consumer electronics and other products
and the provision of sourcing and inspection services. Under the terms of the
agreements, the Company will receive minimum annual royalties through the life
of the agreements and will receive a separate fee for sourcing and inspection
services. Cargil assumes all costs and expenses associated with the purchasing,
marketing and after sales support of such products. The Company believes that
this transaction will have a positive impact on operating results by generating
royalty and servicing revenues with minimal costs while limiting the Company's
working capital risks.
In April 1997, Emerson executed a four-year agreement with Daewoo
Electronics Co. Ltd. and its U.S. affiliate (collectively, "Daewoo"). This
agreement provides that, subject to existing agreements relating
to sales to Wal-Mart Stores, Inc. (the "Customer"), Daewoo
will manufacture and sell television and video products bearing
the Emerson and G-Clef trademark to all customers in the U.S. market.
Daewoo will also be responsible for and assume all risks
associated with order processing, shipping, credit and collections, inventory,
returns and after-sale services. The Company will arrange sales and provide
marketing services and receive a commission for such services. Sales to the
Customer are currently subject to a license/supply agreement with the Supplier
(hereinafter defined), as more fully described below.
Additionally, in June 1997, the Company entered into a non-exclusive
license agreement with World Wide One, a Hong Kong corporation, for use of the
Emerson and G-Clef trademark in connection with the sale of certain consumer
electronics products and other products for sale exclusively to Makro
International Far East Ltd. in China, Indonesia, Malaysia, Philippines, South
Korea, Taiwan and Thailand. The term is initially for a six month trial
period, at which time the agreement will either be terminated or continue for an
additional twelve months. Emerson will provide sourcing and inspection services
for at least 50% of World Wide One's purchase requirements. World Wide One is
required to meet certain minimum sales requirements as well as ensuring the
establishment of adequate service centers or agents for after sales warranty
services for the goods.
Effective March 31, 1995, the Company and one of the Company's former
suppliers and certain of its affiliates (collectively, the "Supplier") entered
into a license/supply agreement (the "Agreements"). The Company granted a
license of certain trademarks to the Supplier for a three-year term which is
currently scheduled to expire on March 31, 1998. The license permits the
Supplier to manufacture and sell certain video products under the Emerson and G-
Clef trademark to the Customer, in the United States and Canada. As a result,
the Company receives royalties attributable to such sales over the three-year
term of the Agreements in lieu of reporting the full dollar value of such sales
and associated costs. Net sales of these products to the Customer accounted for
approximately 47% of consolidated net revenues for Fiscal 1995. The Company
continues to supply other products to the Customer directly. Further, these
agreements provided that the Supplier would supply the Company with certain
video products for sale to other customers at preferred prices for a three-year
term. Under the terms of these agreements, the Company receives non-refundable
minimum annual royalties from the Supplier to be credited against royalties
earned from sales of VCRs, VCPs, TV/VCR combination units, and color televisions
to the Customer. In addition, effective August 1, 1995, the Supplier assumed
responsibility for returns and after-sale and warranty services on all video
products manufactured by the Supplier and sold to the Customer, including video
products sold by the Company prior to August 1, 1995. As a result, the impact of
sales returns on the Company's operating results have been significantly
reduced, effective with the quarter ended September 30, 1995. The Company has
reported lower net direct revenues in Fiscal 1997 and Fiscal 1996 as a result of
these agreements, but its net operating results for such years have not been
impacted negatively. Over the term of the Agreements, the Company has realized
a more stable cash flow, as well as reduced short-term borrowings necessary to
finance accounts receivable and inventory and has thereby reduced interest
costs. However, royalties earned for the three month periods ended March 31,
1997 and June 30, 1997 have not been remitted subject to certain litigation in
Indiana.
The Company's operating results and liquidity are impacted by
the seasonality of its business. The Company records the majority of its
annual sales in the quarters ending September 30 and December 31 and receives
the largest percentage of customer returns in the quarters ending March 31
and June 30. Therefore, the results of operations discussed
below are not necessarily indicative of the Company's prospective
annual results of operations.
RESULTS OF OPERATIONS
Consolidated net revenues for the three and six month periodsperiod ended
SeptemberJune 30, 19961997 decreased $26,839,000 (31%) and $42,750,000 (30%$10,704,000 (or 26%) as compared to the same periodsperiod in
the fiscal year ended March 31, 19961997 ("Fiscal 1996"1997"),
respectively.. The decrease resulted
primarily from decreases in unit sales of video cassette recorders, televisions
and television/video cassette recorder combination units anddue to the Daewoo
agreement described above. Excluding video products, the Company's U.S. gross
sales increased by approximately 18% for the three month period ended June 30,
1997 as compared to the same period in Fiscal 1997. This increase in sales was
due primarily to an increase in unit sales of audio products and microwave ovens
due to higherlower retail stock levels, increased price
competition in these product categories, weak consumer demand and a softstrengthening of the retail market.
This was partially offset by increased sales of microwave ovens
attributable to a broader product line, larger size units and increased SKU
selections by customers, and by sales of home theater and car audio products
which were not introduced until the second and third quarters of Fiscal 1996.
Revenues recordedearned from the licensing of the Emerson &and G-Clef registered trademark were
$1,001,000$1,000,000 and $2,002,000$1,002,000 in the three and six month periods ended SeptemberJune 30, 1996 as compared to $1,356,0001997 and $2,401,000 in the same
periods in Fiscal
1996, respectively. The decline in royalty income is
attributable to lower aggregate sales reported by the licensees of the Emerson &
G-Clef registered trademark brand products. However, the Company has not
received the royalty report from the Company's largest licensee for the second
quarter ended September 30, 1996, and therefore, recorded only the minimum
royalties due pursuant to the license agreement. Such royalties may be higher
upon receipt of the report of the actual results from the licensee. Furthermore, the Company's Canadian and European sales
decreased $3.3$2.7 million in the first half of the
fiscal year ending March 31, 1997 ("Fiscal 1997") relating to the continued weak
Canadian economy and the closure of the Company's local office and Company
operated distributionthese operations in favor of
an independent distributor. This
was partially offset by an increase in European sales todistributors. Although the Company's new
distributor in Spain. The Company expects its United States sales
for the third
quarter of Fiscalending September 30, 1997 to be lower than the thirdsecond quarter of
Fiscal 19961997 due to continuing weak consumer demand, a soft retail marketthe Daewoo agreement, the Company expects its U.S. gross
sales, excluding video products, to continue to improve and its margins on such
sales to improve due to the increased level of
price competition.change in product mix to higher margin products.
Cost of sales, as a percentage of consolidated revenues, was
95%93% for both the three and six month periodsperiod ended SeptemberJune 30, 19961997 as compared to 91%94% for the
same periodsperiod in Fiscal 1996.1997. Gross profit margins in the three and six
month periodsperiod
ended SeptemberJune 30, 19961997 were unfavorablyfavorably impacted by a change in product mix lower sales prices (primarily video products), ato higher
proportion
of close-out sales,margin products partially offset by the allocation of reduced fixed costs over a
lower sales base in the current fiscal year, and the recognition of income relatingyear.
The Company's margins continue to reduced reserve requirements for sales returns in the first half of the prior
fiscal year. However, gross profit margins were favorablybe impacted by the pricing category of
the consumer electronics market in which the Company competes. The Company's
products are generally placed in the low-to-medium priced category of the
market. These categories tend to be the most competitive and generate the
lowest profits. The Company believes that the combination of (i) the new
television and video arrangement with Daewoo, (ii) the license agreement with
Cargil, and (iii) the introduction of its new home theater product,
CinemaSurround (TM), will all have a favorable impact on the Company's gross
profit margins. The Company intends to promote its direct import
programs to reduce its inventory levels and working capital
risks thereby reducing its inventory overhead costs. In addition,
the Company is focusing on its higher margin products -- home theater and car audio products,is
reviewing new product categories which can generate higher margins
than its current business, either through license arrangements,
acquisitions, joint ventures or on its own. The Company also
plans on expanding its sales and by a reduction indistribution channels into the
costs associated with product returns related to the
Company's agreements with a majority of its suppliers to return defective
productsCentral and receive in exchange an "A" quality unit.Southeast Asia markets.
Other operating costs and expenses declined $240,000 and $921,000$68,000 in the
three and six month periodsperiod ended SeptemberJune 30, 19961997 as compared to the same periodsperiod in Fiscal
1996, respectively,1997, primarily as a result of a decrease in compensation and other expenses
incurred to perform after-sale service costs relating toservices as a result of the Company's licensing of its Emerson & G-
Clef registered trademark for sale of video products to its largest customer .downsizing
program.
Selling, general and administrative expenses ("S,G&A") as a
percentage of revenues, was 7% and 10%12% for the three and six month periodsperiod ended SeptemberJune 30, 1996,1997,
as compared to 7% and 8%13% for the same periodsperiod in Fiscal 1996,
respectively.1997. In absolute terms, S,G&A
decreased by $1,410,000 and $1,290,000$1,762,000 in the three and six month periodsperiod ended SeptemberJune 30, 19961997 as
compared to the same periodsperiod in Fiscal 1996, respectively.1997. The decrease was primarily
attributable to (i) a reduction in fixed costs and compensation expense relating to the
Company's continuing cost reductiondownsizing program in both the U.S. and in its foreign offices,
lower selling expenses attributable to the lower sales and a lower provision on
trade receivables. This was partially offset by, (ii) a reduction in foreign currency
exchange gains. The increase in S,G&A as a percentage of revenues is due
primarily toprofessional fees
and (iii) the allocation of fixed S,G&A costs over a lower sales base.
Additionally, the Company's exposure to foreign currency fluctuations, primarily
in Canada and Spain, resultedunrealized losses incurred in the recognitionprior year's quarter
on investment securities.
The Company recorded restructuring and other nonrecurring
charges of net foreign currency
exchange gains aggregating $12,000 and $26,000$52,000 in the three and six month periodsperiod ended SeptemberJune 30, 1996 as compared1997. The charges
include costs for employee severances relating to $239,000 and $671,000further downsizing of the
Company's U.S. operations.
Equity in the
same periods in Fiscal 1996, respectively.
Interest expense increased by $174,000 and $363,000earnings of SSG amounted to $536,000 in the three
months ended June 30, 1997. SSG reported record earnings and six
month periods ended September 30, 1996double digit sales
growth in its first full quarter under Emerson's management team as compared to
the same periodsperiod a year ago.
Interest expense decreased by $71,000 in the three month
period ended June 30, 1997 as compared to the same period in Fiscal 1996, respectively.1997.
The increasedecrease was attributable to the interest
expense associated with the debentures issued in August 1995,
partially offset by lower average borrowings at lower interest rates on the U.S. revolving
line of credit facility. The average rate in effect on the credit facility for
both the three month periods ended SeptemberJune 30, 19961997 and 19951996 was approximately
9.5% and 10.75%, respectively.
The Company recorded restructuring and other nonrecurring charges of
$2,734,000 for the three and six month periods ended September 30, 1996. The
Company recognized $917,000 of restructuring charges related to the closure of
the Company's local Canadian office and distribution operations in favor of an
independent distributor. The charges include costs for employee severance,
asset write-downs, and facility and equipment lease costs. Additionally, the
Company recognized $1,817,000 of nonrecurring charges relating to the proposed
but unsuccessful acquisition of International Jensen Incorporated. These costs
primarily include investment banking, commitment and professional fees,
including litigation costs, relating to the proposed acquisition..
As a result of the foregoing factors, the Company incurred a
net loss of $6,043,000 and $10,766,000$2,722,000 for the three and six month periodsperiod ended SeptemberJune 30, 1996,1997, compared
to net earnings of $126,000 for the quarter ended September
30, 1996 and a net loss of $1,274,000$4,723,000 for the first half ofsame period in Fiscal 1996.1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3,322,000$373,000 for the
sixthree months ended SeptemberJune 30, 1996.1997. Cash was provided by decreasesthe decrease in accounts
receivables
and inventories partially offset by a loss from operations.
The decrease in
accounts receivable was due primarily to a one-time receipt of $5.0 million from
the Company's 50% owned joint venture (E & H Partners) in the first quarter of
Fiscal 1997 as a partial paydown of the joint venture's obligation to the
Company. The decrease in inventory is primarily due to a more cautious
purchasing strategy focusing on reducing inventory levels and the associated
carrying costs.
Net cash usedprovided by investing activities was $2,312,000$13,000 for the
sixthree months ended SeptemberJune 30, 1996. Cash was utilized primarily for the purchase of
investment securities.1997.
In the sixthree months ended SeptemberJune 30, 1996,1997, the Company's
financing activities utilized $2,141,000$1,270,000 of cash. The Company reduced
its borrowings under its U.S. line of credit facility by
$1,965,000$1,113,000 through the collection of accounts receivable.
The Company maintains an asset-based revolving line of credit
facility, as amended, with a U.S. financial institution (the "Lender"). The
facility as
amended through September 30, 1996, provides for revolving loans and letters of credit, subject to
individual maximums and,which, in the aggregate, not tocannot exceed the lesser of $30
million or a "Borrowing Base" amount based on specified percentages of eligible
accounts receivable and inventories. All credit extended under the line of
credit is secured by the U.S. and Canadian assets of the Company except for
trademarks, which are subject to a negative pledge covenant. The interest rate
on these borrowings is 1.25% above the stated prime rate. At SeptemberJune 30, 1996,1997,
there were approximately $19.2$4.6 million outstanding on the Company's revolving
loan facility and approximately $3.3 million of lettersfacility. At June 30, 1997, the Company's letter of credit outstanding for inventory purchases.facility was
not utilized. Based on the "Borrowing Base" amount at SeptemberJune 30, 1996, approximately $2.21997, $1.6
million of the credit facility was not utilized. Pursuant to the terms of the
credit facility, as amended, effective SeptemberJune 30, 1996,1997, the Company is required to
maintain a minimum adjusted net worth, as defined, of $30,000,000 excluding certain restructuring$15,000,000 and nonrecurring charges.a minimum
working capital of $10,000,000. At SeptemberJune 30, 1996,1997, the Company had an adjusted
net worth excluding such charges, of $31,940,000, and therefore, was in compliance
with this covenant.$16,002,000.
The Company's Hong Kong subsidiary maintains various credit
facilities, as amended, aggregating $59.1$28.5 million with a bank in Hong Kong
consisting of the following: (i) a $9.1$3.5 million credit facility generally used
for letters of credit for a foreign subsidiary's direct import business and
affiliates' inventory purchases, and (ii) a $50$25 million credit facility, for
the benefit of a foreign subsidiary, which is for the establishment of back-to-backback-to-
back letters of credit with the Customer. At SeptemberJune 30, 1996,1997, the Company's Hong
Kong subsidiary had pledged $4$1 million in certificates of deposit to this bank
to assure the availability of these credit facilities. At SeptemberJune 30, 1996,1997, there
were approximately $7.7$3.0 million and $8.9$14.1 million of letters of credit
outstanding on the $9.1$3.5 million and $50$25 million credit facilities, respectively.
InSince the third quarteremergence of Fiscal 1997, the Company made proposalsfrom bankruptcy, management
believes that it has been able to Sport
Supply Group, Inc. ("SSG"), a New York Stock Exchange listed companycompete more effectively in the highly
competitive consumer electronics and the
largest direct mail distributor of sporting goods equipment and suppliesmicrowave oven industries in the United
States in which the Company seeksby combining innovative approaches to acquire a significant interest in
SSG, though not a majority interest of SSG common stock, and control of SSG's
Board of Directors. Under the terms of its most recent proposal, the Company
would increase its investment in SSG (the Company currently owns 9.9%
of outstanding SSG common stock) through the purchase of 1,714,286 shares
of newly issued common stock (the "Stock") of SSG at a purchase price
of $7.00 per share, for aggregate consideration of approximately
$12 million. The Company would also purchase, for $600, warrants
to purchase 1,000,000 shares of Stock at an exercise price of $7.50 per share
(the "Warrants"), subject to adjustment and exercisable for a five year term.
In addition, the Company would arrange for foreign trade credit financing of $2
million for the benefit of SSG. As part of the proposal, SSG would cause a
majority of the members of its Board of Directors to consist of Emerson
designees. If the proposal is accepted, upon acquisition of the Stock, the
Company would beneficially own approximately 28% of the outstanding shares of
SSG common stock, and assuming exercise of all the Warrants, the Company would
beneficially own approximately 35% of SSG common stock. The Company is currently
negotiating with SSG on the price and terms of such a transaction. There can be
no assurance that such negotiations will be successful or that the transaction
will be completed on terms set forth in the Company's most recent proposal.
The proposed acquisition of a significant interest in SSG is part of
management's plan to grow the Company through diversification from the Company's
core business of consumer electronics. SSG sellscurrent product line
such as value-added promotions, and augmenting its product at margins
significantly higher than Emerson's core business and to an institutional market
that does not require the significant after-market servicing costs typical of
Emerson's core business.
The Company's strategic goals include growth through acquisitions and through
additions ofline with higher
margin consumer product lines which complement the Company's
business.complimentary products. The Company also intends to marketengage in the
marketing of distribution, sourcing and other services to third parties.parties similar
to the sales and marketing arrangements to be provided to Daewoo and the
sourcing and inspection services to be provided to Cargil.
In addition, the Company intends to undertake efforts to expand the
international distribution of its products into areas
where management believes low to moderately priced, dependable
consumer electronics and microwave oven products will have a broad appeal. The
Company has in the past and intends in the future to pursue such plans either
on its own or by forging new relationships, including license arrangements,
partnerships, joint ventures or strategic mergers and acquisitions of, or
controlling interests in, companies in similar or complementarycomplimentary businesses. In prior years,No
assurance can be made that the Company will be successful in implementing such
plans.
The Company successfully concluded several licensing agreements for
certainexisting core business products and new products, and intends to pursue
additional licensing opportunities andopportunities. The Company believes that such licensing
activities will have a positive impact on net operating results by generating
royalty income with minimal costs, if any, and without the necessity of
utilizing working capital or accepting customer returns.
Based on the operating losses reported for the first half of Fiscal 1997,
the continuing soft retail market and the trend in sales,At present, management believes that future cash flow from operations and
the institutional financing describednoted above may notwill be sufficient to fund all of the
Company's cash requirements for the next twelve months. Management plansHowever, the adequacy of
future cash flow from operations is dependent upon the Company achieving its
business plan. The Company's results of operations were substantially in line
with its business plan for the three months ended June 30, 1997. Current
trends show that the Company's results of operations for the three months
ended September 30, 1997, will be significantly improved as compared with
the second quarter of Fiscal 1997. During Fiscal 1997, the Company reduced
inventory levels approximately 62% and executed cost-reduction
programs in both its U.S. and foreign offices. The Company
intends to takefurther reduce inventory levels and shift a higher
proportion of its sales to direct import thereby reducing its
inventory and its needs for working capital. In Fiscal 1997, products
representing approximately 49% of net revenues were directly imported from
manufacturers to the Company's customers. The Company's business plan includes
an increase in this percentage to approximately 80% in Fiscal 1998 and was 91%
for the three months ended June 30, 1997. This increase in the direct import
portion of sales is critical in providing sufficient working capital to meet its
sales objectives. If the Company does not obtain this objective, it may not
have sufficient working capital to finance its sales plan. It may be necessary
stepsfor the Company to margin or sell some of the SSG Stock to adequately finance
the Company's operations which may include the following:
1. Reviewing strategic alternatives for its North American video business not
covered under the license agreement with the Supplier.
2. Reducing inventory levels and purchase higher margin products for inventory.
3. Shifting a higher proportion of sales to direct import.
4. Negotiating with the Lender to amend the U.S. revolving credit facility to
ensure continued compliance with all covenants.
5. Continuing cost reduction programs in both the U.S. and foreign offices.
6. Sale of non-operating or underperforming assets.
7. Private sale of equity and/or debt securities.operations.
There can be no assurance that the Company will be able to successfully
implement any of these stepsachieve its business plan in a time frame or manner whichthat will permit the
Company to fund current operations and other planned expenditures at current
and expected sales volumes, if at all. Additionally, at June 30,
1997 the Company was in arrears on $618,000 of dividends
on the Company's Series A Preferred Stock. The preferred stock is
convertible into common stock at any time during the period beginning on March
31, 1997 and ending on March 31, 2002 and at a price per share of common stock
equal to 80% of the market value of a share
of common stock on the date of conversion. The preferred stock dividend rate for
Fiscal 1998 is 5.6%.
The Company's liquidity is impacted by the seasonality of its business.
The Company records the majority of its annual sales in the quarters ending
September 30 and December 31. This requires the Company to open significantly
higher amounts of letters of credit during the quarters ending June 30 and
September 30, therefore significantly increasing the Company's working capital
needs during these periods. Additionally, the Company receivedreceives the largest
percentage of customer returns in the quarter ending March 31. The higher level
of returns during this period adversely impacts the Company's collection
activity during this period, and therefore its liquidity. The Company believes
that the licensing of the Emerson & G-Clef registered trademarkagreements with Daewoo and Cargil, as discussed above, and the
"return-
to-vendor" agreementsarrangements it has implemented over the past twelve months concerning returned
merchandise, should favorably impact the Company's cash flow over their
respective terms.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.Legal Proceedings.
The information required by this item is included in
Note 7 of Notes to Interim Consolidated Financial Statements
filed in Part I of Form 10-Q for the quarter ended SeptemberJune 30, 1996,1997,
and is incorporated herein by reference. Additionally, the Company,
Mr. Davis, International Jensen Incorporated, Recoton Corporation
and certain other related parties entered into a settlement agreement
settling all disputes among them and releasing each other from all
liability in connection with the subject matter of these actions
on terms Emerson believes to be beneficial to it. Please refer to
Part 1 Item-3-Legal Proceedings in the Company's most recent annual
report on Form 10-K.
ITEM 3. Preferred Stock Dividends.
As of the date of this report, the Company was in arrears
on $618,000 of dividends on its Series A Preferred Stock.
ITEM 5. OTHER INFORMATION.Other Information.
(a) Certain statements in this quarterly report on Form
10-Q under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in
this quarterly report and in future filings by the Company with
the Securities and Exchange Commission, constitute "forward
looking statements" with the meaning of the Reform Act. Such
forward looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual
results, performance or achievements of the Company to be
materially different from any future results, performance or
achievements expressed or implied by such forward looking
statements. Such factors include, among others, the following:
product supply and demand; general economic and business
conditions and condition of the retail consumer electronics market; price
competition and competition from companies with greater
resources; success of operating initiatives and new product
introductions;introductions, including CinemaSurround(TM); operating costs
including continuing the Company's cost reduction program and
Company's return to vendor program; effects of foreign trade;
effects of the reversion of Hong Kong to the sovereignty of the
Peoples' Republic of China; advertising and promotional efforts;
brand awareness; the existence or absence of adverse publicity;
success of the Company's acquisition strategy;strategy including results
of SSG's operations; changes in business strategy or development
plans; success of management's strategy to finance or refinance
the Company's operations; quality of management; availability, use and
termssuccess of
capital and compliance with debt covenants;licensing arrangements; business abilities and judgment of
personnel; availability of qualified personnel; labor and
employee benefit costs; changes in, or the failure to comply
with, government regulations and other factors referenced in this
quarterly report.
ITEM 6. EXHIBITS AND REPORTS ON FORMExhibits and Reports on Form 8-K.
(a) Exhibits:
(10)(a) Employment Agreement, dated as of January 29, 1996
between Emerson Radio Corp. ("Emerson") and Marino Andriani.
(10)(b) Amendment No. 3 to Financing Agreements, dated
as of August 20, 1996, amending the adjusted net worth covenant
of the Loan Agreement between Emerson and Congress Financial
Corp.
(10(c) Amendment No. 4 to Financing Agreements, dated
as of November 14, 1996, amending the adjusted net worth covenant
of the Loan Agreement between Emerson and Congress Financial
Corp.
(10)(d) License Agreement, dated as of August 23, 1996
between Emerson and REP Investment Limited Liability Company for
the exclusive license for proprietary technology for home
theater and stereo surround sound systems.
(10)(e) Distribution Agreement, dated as of September
11, 1996 between Emerson, Emerson Radio Canada Ltd. and AVS
Technologies Inc., appointing exclusive distributor for Canada.
(27) Financial Data Schedule for sixthe
three months ended SeptemberJune 30, 1996.1997.
(b) Reports on Form 8-K:
(1) During the three month period
ended SeptemberJune 30, 1996,1997, no Form 8-K was filed.
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION - CONTINUED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
EMERSON RADIO CORP.
(Registrant)
Date: November 19,1996August 14, 1997 /s/ Eugene I. Davis
Eugene I. DavisGeoffrey P. Jurick
Geoffrey P. Jurick
Chairman, Chief Executive Officer and
President
Date: November 19, 1996August 14, 1997 /s/ John P. Walker
John P. Walker
Executive Vice President and
Chief Financial Officer