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 September 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.November 13,
1997: 45,739,099.
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
September 30, September 30,
1997 1996 19951997 1996 1995
Net revenues .. . . . . . . . . . . . $ 75,543 $101,656 $144,406$45,100 $60,509 $87,348
Costs and expenses:
Cost of sales . . . . . . . . . 67,186 96,536 130,69238,787 57,752 79,807
Other operating costs and expenses 1,503 1,624 2,545637 689 929
Selling, general & administrative
expenses. . . . . . . . . . . . 7,154 9,705 10,9953,552 4,342 5,752
Restructuring and other nonrecurring
charges . . . . . . . . . . . . 52 2,734 0 2,734
75,895 110,599 144,23242,976 65,517 86,488
Operating profit (loss). . . . . . . (352) (8,943) 1742,124 (5,008)
860Equity in earnings of affiliate. . . 1,089 - 553 -
Interest expense . . . . .. . . . . . . 1,399 1,657 1,294658 845 671
Earnings (loss) before income taxes. . . (662) (10,600) (1,120)2,019 (5,853) 189
Provision for income taxes . . .. . . . . 41 166 1540 190 63
Net earnings (loss). . . . . . . . . $ (703) $(10,766) $ (1,274) (6,043) $ 1262,019 $(6,043)
Net earnings (loss) per common share $ (.02) $ (.28) $ (.04).03 $ (.15) $ -
Weighted average number of common and
common equivalent shares outstanding. . . . . . .outstanding 41,487 40,274 40,25359,684 40,295 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. 30, March 31,
1996 19961997 1997
(Unaudited)
ASSETS
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . $ 15,0022,726 $ 16,133
Short-term investments . . . . . . . . . . . 4,050 1,8722,640
Accounts receivable (less allowances of
$4,813$4,591 and $6,139,$6,001, respectively) . . . . . 18,232 23,5838,165 12,452
Inventories . . . . . . . . . . . . . . . . 27,517 35,29212,643 13,329
Prepaid expenses and other current assets . 7,898 8,4348,140 6,497
Total current assets . . . . . . . . . . . 72,699 85,31431,674 34,918
Property and equipment - (at cost less
accumulated depreciation and amortization
of $5,166$3,342 and $4,422,$3,521, respectively). . . . . 2,823 3,5011,721 2,130
Investment in unconsolidated affiliate . . . . 17,022 16,033
Other assets . . . . . . . . . . . . . . . . . 7,111 7,7615,319 5,687
Total Assets . . . . . . . . . . . . . . . $ 82,63355,736 $ 96,57658,768
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . . . $ 19,1863,830 $ 21,1515,689
Current maturities of long-term debt . . . . 120 17386 85
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . 9,806 10,39112,800 13,053
Accrued sales returns . . . . . . . . . . . 3,016 3,0913,094 2,730
Income taxes payable . . . . . . . . . . . . 148 20290 103
Total current liabilities . . . . . . . . 32,276 35,00819,900 21,660
Long-term debt . . . . . . . . . . . . . . . . 20,895 20,88620,804 20,856
Other non-current liabilities . . . . . . . . 256 300201 223
Shareholders' Equity:
Preferred stock - $.01 par value, 1,000,00010,000,000
shares authorized, 8,016 and 10,000 shares
issued and outstanding, respectively . . . . .. . . . . . . . . 9,0007,214 9,000
Common stock - $.01 par value, 75,000,000
shares authorized, 40,295,19644,091,698 and 40,252,77240,335,642
shares issued and outstanding, respectively. 403441 403
Capital in excess of par value . . . . . . . . 109,243 108,991110,769 109,278
Accumulated deficit . . . . . . . . . . . . . (89,291) (78,175)
Unrealized loss on short-term investments. . . (256)(103,791) (102,843)
Cumulative translation adjustment . . . . . . 107 163198 191
Total shareholders' equity . . . . . . . 29,206 40,38214,831 16,029
Total Liabilities and Shareholders' Equity $ 82,63355,736 $ 96,576
58,768
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)
Six Months Ended
September 30,
1997 1996
1995
Cash Flows from Operating Activities:
Net cash provided (used) by operating
activities . . . . . . . . . . . . . . . . $ 3,3222,005 $ (4,295)3,322
Cash Flows from Investing Activities:
Purchases of investment securities. . . . . . - $ (2,256)
Additions to property and equipment. . . . . (169) (1,145)
Other. . . . . . . . . . . . . . . . . . . . 113 (476)13 (56)
Net cash usedprovided (used) by investing
activities . . . . . . . . . . . . . . . . 13 (2,312) (1,621)
Cash Flows from Financing Activities:
Net repayments under line of credit
facility . . . . . . . . . . . . . . . . . (1,859) (1,965)
(15,305)
Net proceeds from private placement of
Senior Subordinated Convertible
Debentures . . . . . . . . . . . . . . . . 19,233
OtherOther. . . . . . . . . . . . . . . . . . . . (73) (176) (731)
Net cash provided (used)used by financing
activities . . . . . . . . . . . . . . . . (1,932) (2,141)
3,197
Net decreaseincrease (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . 86 (1,131) (2,719)
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)2,726(a) $15,002(a)
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . $ 1,6611,399 $ 1,5641,661
Income taxes paid . . . . . . . . . . . . . $ 31 $ 15
$ 133
(a) The balances at September 30, 1997 and 1996 include $1.7 million and 1995 include $4.0 million and $9.1
million, respectively, of cash and cash equivalents 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 September 30, 1997 and the
results of operations for the three and six month periods being reported. Certain prior year information has
been reclassified to conform with the current year presentation.ended September 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 periods ended September
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)per common share for the three months ended September 30, 1997
is based on the weighted average number of shares and related common stock
equivalents outstanding during the period. Common Stock equivalents include
17,312,000 shares assuming conversion of $8.0 million of Series A Preferred
Stock at a price equal to 80% of the weighted average market value of a share of
Common Stock, determined on a quarterly basis.
Net loss per common share for the three and six month periods ended
September 30, 1996 and 1995the six month period ended September 30, 1997 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.each
period. These per share amounts do 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 periods ended
September 30, 1997 and 1996 and 1995 consistsconsist primarily of taxes related to international
operations. The Company did not recognize tax benefits for losses incurred by
its domestic operations during the same periods.
NOTE 4
The Company records short-term investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debtthree months ended June 30, 1997 or the three
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 quartersix month periods 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
1996.
NOTE 54
Spare parts inventories, net of reserves, aggregating $1,823,000$1,259,000 and
$2,042,000$1,469,000 at September 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 purchased from Sport Supply Group, Inc.
("SSG") 1,600,000 shares of 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 purchased
for $4,228,000 in open market transactions. Based upon the Company's purchase
of the SSG Stock as set forth above, and SSG's open market repurchases of SSG
Stock through August 1, 1997, the Company owns approximately 28% of SSG's issued
and outstanding shares of Common Stock. If the Company exercises all of the
SSG Warrants, it will beneficially own approximately 36% of SSG's issued
and outstanding Common 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 purchase, SSG appointed the
Company's designees to become the majority of the members of its Board of
Directors and the Company's management is requireddirectly 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 was October 31; therefore, the
Company's equity in earnings (losses) of SSG has been recorded on a two-month
delay basis. SSG subsequently changed its year end to maintainSeptember 30, therefore,
the Company's equity in earnings (losses) of SSG will be recorded on a minimum adjusted net worth, as defined,three-
month delay basis. The Company's investment in SSG includes goodwill of
$30,000,000
excluding certain restructuring$3,967,000 which is being amortized on a straight line basis over 40 years.
Equity in earnings of SSG was $553,000 and nonrecurring charges.$1,089,000 for the three and six
month periods ended September 30, 1997. At September 30, 1996,1997, the Company had an adjusted net worth, excluding such charges,aggregate
market value quoted on the New York Stock Exchange of $31,940,000Emerson's shares of SSG
Common Stock was approximately $17,730,000. Summarized financial information
derived from SSG's financial reports to the Securities and thereforeExchange Commission
was in compliance with this covenant.
LONG-TERM DEBT:as follows (in thousands):
(Unaudited)
As of August 1, 1997
Current assets $34,112
Property, plant and equipment
and other assets 18,491
Current liabilities 7,149
Long-term debt 6,414
(Unaudited)
For the nine months
ended August 1, 1997
Net revenues $66,117
Gross Profit 26,144
Earnings from continuing operations 3,580
Loss from discontinued operations (2,574)
Net earnings 21
NOTE 6
Long-term debt consists of the following:
(In thousands of dollars)
Sept. 30, March 31,
1996 19961997 1997
8 1/2% Senior Subordinated Convertible
Debentures Due 2002. . . . . 2002
(the "Debentures"). . . . . . . $20,750 $20,750
Other . . . . . . . . . . . . . . 265 309
21,015 21,059140 191
20,890 20,941
Less current obligations. . . . . 120 173
$20,895 $20,88686 85
$20,804 $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 the Company's 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 various
claimants of Mr. Jurick and the Creditors,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 behave been divided into two pools.
The Pool A Shares initially willcurrently consist of 15,286,172 Emerson shares.shares of Emerson's common
stock. The Pool B Shares willcurrently 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 1/2% 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 inAll of the United States DistrictSettlement Shares secure payment of the $49.5 million owed to
the Creditors on a first priority basis. Any Creditor may apply to the Court
for an order to terminate the Northern DistrictSettlement Agreement if certain events occur.
Such events include, without limitation, delisting of Illinois, Eastern Division, againstthe Settlement Shares from
a national securities exchange or a determination that there is no reasonable
prospect that the goals contemplated by the Settlement Agreement can be
achieved. If the Court enters an order terminating the Settlement Agreement,
the Creditors may take any action permitted by law to execute the Consent
Judgments given to them in connection with the Settlement Agreement to collect
the unpaid balance (including, without limitation, foreclosing on the Settlement
Shares). Such termination of the Settlement Agreement and execution of the
Consent Judgments would likely result in a change of ownership control of the
Company and its President, Eugene I.
Davis, for violationswhich is an event of proxy solicitation rules and for breachdefault under the Company's borrowing facilities.
Such default entitles the holders, in certain circumstances, to accelerate
payment 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 toall 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 notindebtedness. Any such acceleration would 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:Company.
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,$2,453,000, 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,$93,563,000, 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 8On September 24, 1997, pursuant to the terms of his Employment Agreement,
as amended, Eugene I. Davis, former Vice Chairman of the Company, was requested
to resign as a director. On September 25, 1997 the Company terminated Mr.
Davis' employment. The circumstances surrounding such termination of employment
are the subject of two proceedings filed in the Superior Court of the State of
New Jersey ("Superior Court"). The Company recorded restructuringfiled an action in the Chancery
Division of the Superior Court against Mr. Davis on October 2, 1997, seeking
injunctive and other nonrecurring chargesrelief arising from claims of $2,734,000 forbreach of contract, breach of
good faith and fair dealing and breach of fiduciary duty. On or about October
1, 1997, Mr. Davis filed an action against the threeCompany, its affiliate SSG and
six month periods ended September 30, 1996. The
Company recognized $917,000 of restructuring charges related tovarious unnamed "Johns Doe" in the closureLaw Division 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,Superior Court seeking
damages against the Company, recognized $1,817,000its affiliates and the unnamed "Johns Doe",
jointly and severally, alleging breach of nonrecurring charges relating to the proposed
but unsuccessful acquisition of International Jensen Incorporated. These costs
primarily include investment banking, commitmentcontract, tortious interference with
contractual relationships and professional fees,
including litigation costs, relating to the proposed acquisition.
NOTE 9compelled defamation. The Company has a 50% investment in E & H Partners, a joint venture that
purchases, refurbishesfiled and
sellsserved an answer to Mr. Davis' claims and has counterclaimed for injunctive and
declaratory relief, and money damages, arising from Mr. Davis' breaches of
contract, fiduciary duty, conversion, tortious interference with contract and
unjust enrichment. While the outcome of these actions are not certain at this
time, the Company believes it has meritorious defenses against the claims made
by Mr. Davis. In any event, the Company believes the results of the Company's product returns. Thelitigation
should not have a material adverse effect on the financial condition of the
Company or on its results of this joint venture are accounted for by the equity method. The
Company's equity in the earningsoperations.
Item 2. Management's Discussion and Analysis of the joint venture is reflected as a
reductionResults 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 ventureOperations 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.
RESULTS OF OPERATIONSGeneral
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 of
certain products to Wal-Mart Stores, Inc. ("Wal-Mart"), Daewoo manufactures and
sells television and video products bearing the Emerson and G-Clef trademark to
all customers in the U.S. market. The Company arranges sales and provides
marketing services and receives commissions for such services. Such commissions
are recorded as licensing revenues. Sales of television and video products to
Wal-Mart are currently subject to an existing license/supply agreement which
expires on March 31, 1998. No assurance can be made that the Company will be
able to renew, renegotiate or replace such license/supply agreements on
terms favorable to it or if at all, the loss of which would result in a loss
of the licensing revenues thereon and would have a material adverse effect
on the financial condition of the Company.
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. In
November 1997, this agreement was amended to expand World Wide One's sales to
two additional parties. The term is initially for 18 months, subject to a six
month trial period. Emerson provides sourcing and inspection services for at
least 50% of World Wide One's purchase requirements.
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 periods ended
September 30, 19961997 decreased $26,839,000 (31%$15,409 (or 25%) and $42,750,000 (30%$26,113 (or 26%) as compared
to the same periods 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 Company's agreement with Daewoo described above.
The decrease also resulted from decreases in unit sales of (i) audio products,
due to higher retail stock levels, increased price
competitiondemand on foreign suppliers which are producing at or near
capacity and shortages of component parts, and (ii) car audio products, which
were discontinued in the current year. Furthermore, the Company's Canadian and
European sales decreased $1.4 and $4.1 million for the three and six month
periods ended September 30, 1997, respectively, relating to the closure of
these product categories, weak consumer demand and a soft
retail market. This wasoperations in favor of independent distributors. The reduced revenues
were partially offset by increased sales of microwave ovens which was
attributable to a broader product line larger size units and increased SKU
selections by customers, and by salesthe introduction of the Company's new
home theater product, CinemaSurround(trademark), into France, Germany, the UK
and car audio products
which were not introduced untilSwitzerland, as well as the second and third quarters of Fiscal 1996.U.S. market. Revenues recordedearned from the licensing
of the Emerson &and G-Clef registered trademark were $1,001,000$1,507,000 and $2,002,000$2,507,000 in the three
and six month periods ended September 30, 19961997 as compared to $1,356,000$1,001,000 and
$2,401,000$2,002,000 in the same periods in Fiscal 1996,1997, respectively.
The declineCompany reports royalty and commission revenues earned from its
licensing arrangements, covering various products and territories, in royalty income is
attributable to lower aggregatelieu of
reporting the full dollar value of such sales reported by the licensees of the Emerson &
G-Clef registered trademark brand products. However, the Company has not
received the royalty report fromand associated costs.
Consequently, the Company's largest licensee for the second
quarter ended September 30, 1996, and therefore, recorded only the minimum
royalties due pursuantfuture related revenues, as compared to the license agreement. Such royalties maypre-Fiscal
1997, are expected to be higher
upon receipt of the report of the actual results from the licensee. Furthermore,lower but the Company's Canadian sales decreased $3.3 million ingross profit margins should
improve. Although 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 distribution operations in favor of an independent distributor. This
was partially offset by an increase in European sales to the Company's new
distributor in Spain. The Company expects its United States sales for the third
quarter
of Fiscalending December 31, 1997 to be lower than the third 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 improve and its margins on such sales to also 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%86% and 89%
for both the three and six month periods ended September 30, 19961997 as compared to 91%95%
for the same periods in Fiscal 1996. Gross1997, respectively. The significant improvement
in gross profit margins for the three and six month periods ended September 30,
1997 as compared to the same periods in the prior year were primarily
attributable to the change in product mix to higher margin products and the
reduction of inventory overhead costs due to the Company's successful efforts to
shift a higher proportion of its sales to its customers on a direct import
basis. For the three and six month periods ended September 30, 1997, products
representing approximately 83% and 86% of net revenues were directly imported
from manufacturers to the Company's customers as compared to 60% and 51% for the
same periods in the prior year, respectively.
The Company's gross profit margins continue to be 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 which tend to be the most competitive and generate the lowest
profits. The Company believes that the combination of the (i) arrangement with
Daewoo, (ii) license agreement with Cargil, (iii) introduction of its new home
theater product, CinemaSurround(trademark), and (iv) distributor agreements in
Canada, Europe and parts of Southeast Asia will all have a favorable impact on
the Company's gross profit margins. The Company continues 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 continues to
focus on its higher margin products and is reviewing new products which can
generate higher margins than its current business, either through license
arrangements, acquisitions, joint ventures or on its own.
Other operating costs and expenses declined $52,000 and $121,000 in the
three and six month periods ended September 30, 1996 were unfavorably impacted by a change in
product mix, lower sales prices (primarily video products), a higher proportion
of close-out sales, the allocation of reduced fixed costs over a lower sales
base in the current fiscal year, and the recognition of income relating to
reduced reserve requirements for sales returns in the first half of the prior
fiscal year. However, gross profit margins were favorably impacted by the
introduction of higher margin products -- home theater and car audio products,
and by a reduction in the costs associated with product returns related to the
Company's agreements with a majority of its suppliers to return defective
products and receive in exchange an "A" quality unit.
Other operating costs and expenses declined $240,000 and $921,000 in the
three and six month periods ended September 30, 19961997 as compared to the same
periods in Fiscal 1996,1997, respectively, primarily as a result of a decrease in
after-sale service costs relating tothe closure of
the Company's licensing of its Emerson & G-
Clef registered trademark for sale of video products to its largest customer .Canadian operations.
Selling, general and administrative expenses ("S,G&A") as a percentage of
revenues, was 7%8% and 10%9% for the three and six month periods ended September 30,
1996,1997, as compared to 7% and 8%10% for the same periods
in Fiscal 1996,1997, respectively. In absolute terms, S,G&A decreased by $1,410,000$790,000 and
$1,290,000$2,551,000 in the three and six month periods ended September 30, 19961997 as
compared to the same periodsperiod in Fiscal 1996,1997, respectively. TheIn the three and six
month periods ended September 30, 1997, the decrease was primarily attributable
to 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. ThisThe decrease was partially offsetalso favorably impacted by a reduction in
foreign currency
exchange gains.professional fees for the six months ended September 30, 1997.
The increaseCompany recorded restructuring and other nonrecurring charges of
$52,000 and $2,734,000 in S,G&A as a percentagethe six month periods ended September 30, 1997 and
1996, respectively. The charges recorded in the six months ended September 30,
1997 include costs for employee severances relating to further downsizing of revenues is due
primarilythe
Company's U.S. operations. The charges recorded for the six months ended
September 30, 1996 included (i) costs for employee severance, asset writedowns,
and facility and equipment lease costs totaling $917,000 related to the allocationclosure
of fixed S,G&A costs over a lower sales base.
Additionally, the Company's exposurelocal Canadian office and distribution operations in favor of
an independent distributor, and (ii) $1,817,000 of non-recurring charges related
to foreign currency fluctuations, primarilythe proposed but unsuccessful acquisition of International Jensen
Incorporated.
Equity in Canadaearnings of SSG amounted to $553,000 and Spain, resulted in the recognition of net foreign currency
exchange gains aggregating $12,000 and $26,000$1,089,000 in the three
and six month periods ended September 30, 19961997, respectively. SSG reported two
consecutive quarters of record earnings as compared to $239,000 and $671,000 in the same periods a year
ago in Fiscal 1996, respectively.its first two full quarters under Emerson's management.
Interest expense increaseddecreased by $174,000$187,000 and $363,000$258,000 in the three and six
month periods ended September 30, 19961997 as compared to the same periods in
Fiscal 1996,1997, respectively. 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 the three month periods ended September 30,
19961997 and 19951996 was approximately 9.5%9.75% and 10.75%9.50%, 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 generated net earnings of
$2,019,000 for the three month period ended September 30, 1997 and incurred a
net loss of $703,000 for the six month period ended September 30, 1997, as
compared to a net loss of $6,043,000 and $10,766,000 for the threesame periods in
Fiscal 1997, respectively.
Liquidity and six month periods ended September
30, 1996, compared to net earnings of $126,000 for the quarter ended September
30, 1996 and a net loss of $1,274,000 for the first half of Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCESCapital Resources
Net cash provided by operating activities was $3,322,000$2,005,000 for the six months
ended September 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 levelspayable and the associated
carrying costs.other current
liabilities.
Net cash usedprovided by investing activities was $2,312,000$13,000 for the six months
ended September 30, 1996. Cash was utilized primarily for the purchase of
investment securities.1997.
In the six months ended September 30, 1996,1997, the Company's financing
activities utilized $2,141,000$1,932,000 of cash. The Company reduced its borrowings
under its U.S. line of credit facility by $1,965,000$1,859,000 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"). which expires on March
31, 1998. 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 September 30, 1996,1997,
there werewas approximately $19.2$3.8 million outstanding on the Company's revolving loan
facility and approximately $3.3 million of lettersfacility. At September 30, 1997, the Company's letter of credit outstanding for inventory purchases.facility was
not utilized. Based on the "Borrowing Base" amount at September 30, 1996, approximately $2.21997, $1.1
million of the credit facility was not utilized. Pursuant to the terms of the
credit facility, as amended, effective
September 30, 1996, the Company is required to maintain a minimum adjusted net
worth, as defined, of $30,000,000 excluding certain
restructuring and
nonrecurring charges.financial covenants. At September 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.all such covenants. The Company plans to renegotiate or replace its asset-based
revolving line of credit facility by March 31, 1998. No assurance can be made
that the Company will be able to renegotiate or replace its credit facility with
the Lender on terms favorable to it or if at all. Although the Company believes
that its relationship with the Lender is good, failure by the Company to
maintain an asset based lending facility would be an event of default pursuant
to the terms of the Indenture governing the Debentures. Such a default, if not
cured, would have a material adverse effect on the financial condition of the
Company.
The Company's Hong Kong subsidiary maintains various credit facilities, as
amended, aggregating $59.1$30.0 million with a bank in Hong Kong consisting of the
following: (i) a $9.1$3.5 million credit facility and a $1.5 million seasonal credit
facility which expires on December 15, 1997, both of which are 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-back
letters of credit with the Customer. At September 30, 1996,1997, the Company's Hong
Kong subsidiary had pledged $4$1.7 million in certificates of deposit to this bank
to assure the availability of these credit facilities. At September 30, 1996,1997,
there were approximately $7.7$3.9 million and $8.9$12.3 million of letters of credit
outstanding on the $9.1combined $5.0 million and $50$25 million credit facilities,
respectively. In the third quarter of Fiscal 1997,The Hong Kong credit facilities are subject to an annual review
in April 1998. No assurance can be made that the Company made proposalswill be able to
Sport
Supply Group, Inc. ("SSG"), a New York Stock Exchange listed company and the
largest direct mail distributor of sporting goods equipment and supplies in the
United States, in whichmaintain these credit facilities. Although the Company seeks to acquire a significant interestbelieves that its
relationship with its bank 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,Hong Kong is good, failure by the Company would increase its investmentto
renew, renegotiate or replace these credit facilities in SSG (the Company currently owns 9.9%April 1998 may have a
material adverse effect on the financial condition 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 sells 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 of higher margin consumer product lines which complement the Company's
business. The Company also intends to market distribution, sourcing and other
services to third parties. In addition, the Company intends 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 companies in similar or complementary
businesses.
In prior years, theoperations.
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 (i) operations is dependent upon the Company achieving its
business plan and (ii) institutional financing is dependent upon the
Company's ability to takerenegotiate, or refinance its credit facilities. The
Company's results of operations were substantially in line with its business
plan for the six months ended September 30, 1997. Current trends show that the
Company's results of operations for the three months ended December 31, 1997,
will be significantly improved as compared with the third 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 further 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 86% for the six months ended
September 30, 1997. This increase in the direct import portion of sales is
critical in providing sufficient working capital to meet its sales and liquidity
objectives. If the Company does not obtain these objectives, it may not have
sufficient working capital to finance its operations. It may be necessary stepsfor
the Company to reduce its investment in 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 September 30, 1997 the
Company was in arrears on $727,000 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% times the average of the
daily market prices of a share of the Company's common stock for the 60
consecutive days immediately preceding 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. The Company's liquidity could also be adversely affected by an
adverse outcome of certain matters discussed in Note 7 to the Interim
Consolidated Financial Statements included herein.
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 September 30, 1996,1997, and
is incorporated herein by reference. Please refer to Part 1 Item-
3-Legal Proceedings in the Company's most recent annual report on
Form 10-K and Part III - Item 1 - Legal Proceedings in the
Company's quarterly report on Form 10-Q for the quarterly period
ended June 30, 1997.
ITEM 2. Changes in Securities and Use of Proceeds.
The Company's U.S. Senior Secured Credit Facility and the
Indenture governing the Company's 8-1/2% Senior Subordinated
Convertible Debentures due 2002 contain certain dividend payment
restrictions on the Company's common stock. In addition, the
Company's Certificate of Incorporation defining the rights of the
Series A Preferred Stock prohibits payment of dividends on the
common stock unless the Series A dividends are paid or put aside.
The Series A Preferred Stock accrues dividends payable on a
quarterly basis at a 7% dividend rate through March 31, 1997,
then declining by a 1.4% dividend rate each succeeding year until
March 31, 2001 when no further dividends are payable. The
Company is currently in arrears on $727,000 of dividends on the
Company's Series A Preferred Stock.
The Series A Preferred Stock is convertible into shares of
the Company's common stock at any time during the period
beginning on March 31, 1997 and ending on March 31, 2002. The
conversion rate is equal to 80% times the average of the daily
market prices of a share of the Company's common stock for the 60
consecutive days immediately preceding the conversion date.
During the three and six months ended September 30, 1997,
the Company issued a total of 3,460,026 and 3,756,056 shares of
the common stock, respectively, upon conversion of 1684 and 1984
shares of Series A Preferred Stock, respectively. No
consideration was received by the Company for the issuance of the
shares of common stock. The shares of common stock were issued
by the Company to certain of its existing holders of Series A
Preferred Stock where no commission or other remuneration was
paid or given directly or indirectly for soliciting such
exchange. The shares of common stock were issued pursuant to
Section 3(a)(9) of the Securities Act of 1933, as amended.
ITEM 3. Preferred Stock Dividends.
As of the date of this report, the Company was in arrears on
$727,000 of dividends on its Series A Preferred Stock.
ITEM 4. Not Applicable.
ITEM 5. OTHER INFORMATION.Other Information.
(a) Certain statements in this quarterly report on Form 10-Q10-
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" withwithin 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(trademark); 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;
outcome of the events described in Note 7 to the Interim
Consolidated Financial Statements which is incorporated by
reference herein; success of the Company's acquisition strategy;strategy
including results of SSG's operations; changes in business
strategy or development plans; maintaining important agreements
such as the agreement with Daewoo and the Management Services
Agreement with SSG; 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)(2) Confirmation Order and Fourth Amended Joint Plan of
Reorganization of Emerson Radio Corp. ("Old Emerson") and certain
subsidiaries under Chapter 11 of the United States Bankruptcy Code,
dated March 31, 1994 (incorporated by reference to Exhibit (2) of
Emerson's Registration Statement on Form S-1, Registration No. 33-
53621, declared effective by the Securities and Exchange Commission
("SEC") on August 9, 1994).
(3) (a) EmploymentCertificate of Incorporation of Emerson (incorporated
by reference to Exhibit (3) (a) of Emerson's Registration Statement on
Form S-1, Registration No. 33-53621, declared effective by the SEC on
August 9, 1994).
(3) (b) Certificate of Designation for Series A Preferred Stock
(incorporated by reference to Exhibit (3) (b) of Emerson's
Registration Statement on Form S-1, Registration No. 33-53621,
declared effective by the SEC on August 9, 1994).
(3) (c) Plan of Reorganization and Agreement of Merger by and
between Old Emerson and Emerson Radio (Delaware) Corp. (incorporated
by reference to Exhibit (3) (c) of Emerson's Registration Statement on
Form S-1, Registration No. 33-53621, declared effective by the SEC on
August 9, 1994).
(3) (d) Certificate of Merger of Old Emerson with and into
Emerson Radio (Delaware) Corp. (incorporated by reference to Exhibit
(3) (d) of Emerson's Registration Statement on Form S-1, Registration
No. 33-53621, declared effective by the SEC on August 9, 1994).
(3) (e) Amendment dated February 14, 1996 to the Certificate of
Incorporation of Emerson (incorporated by reference to Exhibit (3) (a)
of Emerson's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1995).
(3) (f) By-Laws of Emerson adopted March 1994 (incorporated by
reference to Exhibit (3) (e) of Emerson's Registration Statement on
Form S-1, Registration No. 33-53621, declared effective by the SEC on
August 9, 1994).
(3) (g) Amendment dated November 28, 1995 to the By-Laws of
Emerson adopted March 1994 (incorporated by reference to Exhibit (3)
(b) of Emerson's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1995).
(4) (a) Warrant Agreement to Purchase 750,000 shares of Common
Stock, dated as of January 29, 1996March 31, 1994 (incorporated by reference to
Exhibit (4) (a) of Emerson's Registration Statement on Form S-1,
Registration No. 33-53621, declared effective by the SEC on August 9,
1994).
(4) (b) Indenture, dated as of August 17, 1995 between Emerson
Radio Corp.and Bank One, Columbus, NA, as Trustee (incorporated by reference to
Exhibit (1) of Emerson's Current Report on Form 8-K filed with the SEC
on September 8, 1995).
(4) (c) Common Stock Purchase Warrant Agreement to purchase
50,000 shares of Common Stock, dated as of December 8, 1995 between
Emerson and Michael Metter (incorporated by reference to Exhibit (10)
(e) of Emerson's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1995).
(4) (d) Common Stock Purchase Warrant Agreement to purchase
200,000 shares of Common Stock, dated as of December 8, 1995 between
Emerson and Kenneth A. Orr (incorporated by reference to Exhibit (10)
(f) of Emerson's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1995).
(10) (a) Loan and Security Agreement, dated March 31, 1994, by
and among Emerson, Majexco Imports, Inc. and Congress Financial
Corporation ("Emerson"Congress") (incorporated by reference to Exhibit (10)
(f) of Emerson's Registration Statement on Form S-1, Registration No.
33-53621, declared effective by the SEC on August 9, 1994).
(10) (b) Amendment No. 1 to Financing Agreements, dated as of
August 24, 1995, among Emerson, Majexco Imports, Inc. and Marino Andriani.Congress
(incorporated by reference to Exhibit (2) of Emerson's Current Report
on Form 8-K filed with the SEC on September 8, 1995).
(10)(b) (c) Amendment No. 2 to Financing Agreements, dated as of
February 13, 1996 (incorporated by reference to Exhibit (10) (c) of
Emerson's Quarterly Report on Form 10-Q for the quarter ended December
31, 1995).
(10) (d) Amendment No. 3 to Financing Agreements, dated as of
August 20, 1996 amending(incorporated by reference to Exhibit (10) (b) of
Emerson's Quarterly Report on Form 10-Q for the adjusted net worth covenant
of the Loan Agreement between Emerson and Congress Financial
Corp.
(10(c)quarter ended December
31, 1995).
(10) (e) Amendment No. 4 to Financing Agreements, dated as of
November 14, 1996 amending(incorporated by reference to Exhibit (10) (c) of
Emerson's Quarterly Report on Form 10-Q for the adjusted net worth covenantquarter ended
September 30, 1996).
(10) (f) Amendment No. 5 to Financing Agreements, dated as of
February 18, 1997 (incorporated by reference to Exhibit (10) (e) of
Emerson's Quarterly Report on Form 10-Q for the Loanquarter ended December
31, 1996).
(10) (g) Amendment No. 6 to Financing Agreements, dated as of
August 14, 1997.*
(10) (h) Emerson Radio Corp. Stock Compensation Program
(incorporated by reference to Exhibit (10) (i) of Emerson's
Registration Statement on Form S-1, Registration No. 33-53621,
declared effective by the SEC on August 9, 1994).
(10) (i) Employment Agreement between Emerson and Congress Financial
Corp.Eugene I.
Davis (incorporated by reference to Exhibit 6(a)(4) of Emerson's
Quarterly Report on Form 10-Q for quarter ended June 30, 1992).
(10)(d) (j) Extension of Employment Agreement between Emerson and
Eugene I. Davis dated April 16, 1997 (incorporated by reference to
Exhibit (10)(n) of Emerson's Annual Report on Form 10-K for the year
ended March 31, 1997).
(10) (k) Employment Agreement between Emerson and Geoffrey P.
Jurick (incorporated by reference to Exhibit 6(a)(6) of Emerson's
Quarterly Report on Form 10-Q for quarter ended June 30, 1992).
(10) (l) Employment Agreement between Emerson Radio (Hong Kong)
Ltd. and Geoffrey P. Jurick (incorporated by reference to Exhibit
6(a)(6) of Emerson's Quarterly Report on Form 10-Q for quarter ended
June 30, 1992).
(10) (m) Employment Agreement between Emerson Radio
International Ltd. (formerly Emerson Radio (B.V.I.), Ltd.) and
Geoffrey P. Jurick (incorporated by reference to Exhibit 6(a)(6) of
Emerson's Quarterly Report on Form 10-Q for quarter ended June 30,
1992).
(10) (n) Extension of Employment Agreement between Emerson and
Geoffrey P. Jurick dated April 16, 1997 (incorporated by reference to
Exhibit (10)(r) of Emerson's Annual Report on Form 10-K for the year
ended March 31, 1997).
(10) (o) Lease Agreement dated as of March 26, 1993, by and
between Hartz Mountain Parsippany and Emerson with respect to the
premises located at Nine Entin Road, Parsippany, NJ (incorporated by
reference to Exhibit (10) (ww) of Emerson's Annual Report on Form 10-K
for the year ended December 31, 1992).
(10) (p) Employment Agreement, dated April 1, 1994, between
Emerson and John Walker (incorporated herein by reference to Exhibit
(10)(ee) of Emerson's Statement on Form S-1, Registration No. 33-
53621, declared effective by the SEC on August 9, 1994).
(10) (q) Amendment No. 1 to Employment Agreement between Emerson
and John P. Walker dated April 16, 1997 (incorporated by reference to
Exhibit (10)(u) of Emerson's Annual Report on Form 10-K for the year
ended March 31, 1997).
(10) (r) Employment Agreement, dated January 29, 1996 between
Emerson and Marino Andriani (incorporated herein by reference to
Exhibit (10) (a) of Emerson's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996).
(10) (s) Partnership Agreement, dated April 1, 1994, between
Emerson and Hopper Radio of Florida, Inc (incorporated by reference to
Exhibit (10) (q) of Emerson's Annual Report on Form 10-K for the year
ended March 31, 1995).
(10) (t) Agreement, dated as of April 24, 1996 by and among
Emerson and E & H Partners relating to amendments of the Partnership
Agreement dated April 1, 1994 and the Sales Agreement dated April 1,
1994 and the settlement of certain outstanding litigation.
(10) (u) License Agreement, dated February 22, 1995, between
Emerson and Otake Trading Co. Ltd. and certain affiliates ("Otake")
(incorporated by reference to Exhibit 6(a)(1) of Emerson's Quarterly
Report on Form 10-Q for quarter ended December 31, 1994).
(10) (v) Supply Agreement, dated February 22, 1995, between
Emerson and Otake (incorporated by reference to Exhibit 6(a)(2) of
Emerson's Quarterly Report on Form 10-Q for quarter ended December 31,
1994).
(10) (w) 1994 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit (10) (y) of Emerson's Annual
Report on Form 10-K for the year ended March 31, 1995).
(10) (x) License Agreement, dated as of August 23, 1996 between
Emerson and REP Investment Limited Liability Company (incorporated by
reference to Exhibit (10) (d) of Emerson's Quarterly Report on
Form 10-Q for the exclusive license for proprietary technology for home
theater and stereo surround sound systems.quarter ended September 30, 1996).
(10)(e) (y) Distribution Agreement, dated as of September 11, 1996
between Emerson, Emerson Radio Canada Ltd. and AVS Technologies Inc.
(incorporated by reference to Exhibit (10) (e) of Emerson's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996).
(10) (z) Stipulation of Settlement and Order dated June 11, 1996
by and among the Official Liquidator of Fidenas International Bank
Limited, Petra Stelling, Barclays Bank PLC, the Official Liquidator of
Fidenas Investment Limited, Geoffrey P. Jurick, Fidenas International
Limited, L.L.C., appointing exclusive distributorElision International, Inc., GSE Multimedia
Technologies Corporation and Emerson.
(10) (aa) Pledge Agreement dated as of February 4, 1997 by
Fidenas International Limited, L.L.C. ("FIN") in favor of TM Capital
Corp. (incorporated by reference to Exhibit (10) (a) of Emerson's
Quarterly Report on Form 10-Q for Canada.the quarter ended December 31,
1996).
(10) (ab) Registration Rights Agreement dated as of February 4,
1997 by and among Emerson, FIN, the Creditors, FIL and TM Capital
Corp. (incorporated by reference to Exhibit (10) (b) of Emerson's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1996).
(10) (ac) License and Exclusive Distribution Agreement with
Cargil International Corp. dated as of February 12, 1997 (incorporated
by reference to Exhibit (10) (c) of Emerson's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996).
(10) (ad) Supply and Inspection Agreement with Cargil
International Corp. dated as of February 12, 1996 (incorporated by
reference to Exhibit (10) (d) of Emerson's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1996).
(10) (ae) Agreement dated April 10, 1997 between Emerson and
Daewoo Electronics Co., Ltd. (incorporated by reference to Exhibit
(10)(ak) of Emerson's Annual Report on Form 10-K for the year ended
March 31, 1997).
(10) (af) Securities Purchase Agreement dated as of November 27,
1996, by and between Sport Supply Group, Inc. ("SSG") and Emerson
(incorporated by reference to Exhibit (2)(a) of Emerson's Current
Report on Form 8-K dated November 27, 1996).
(10) (ag) Form of Warrant Agreement by and between SSG and
Emerson (incorporated by reference to Exhibit (4)(a) of Emerson's
Current Report on Form 8-K dated November 27, 1996).
(10) (ah) Form of Registration Rights Agreement by and between
SSG and Emerson (incorporated by reference to Exhibit (4)(b) of
Emerson's Current Report on Form 8-K dated November 27, 1996).
(10) (ai) Consent No. 1 to Financing Agreements among Emerson,
certain of its subsidiaries, and Congress (incorporated by reference
to Exhibit (10)(b) of Emerson's Current Report on Form 8-K dated
November 27, 1996).
(10) (aj) License Agreement dated as of June 16, 1997 by and
between World Wide One Ltd. and Emerson (incorporated by reference to
Exhibit (10)(ap) of Emerson's Annual Report on Form 10-K for the year
ended March 31, 1997).
(10) (ak) Agreement dated as of July 2, 1997 by and between Hi
Quality International (U.S.A.) Inc. and Emerson (incorporated by
reference to Exhibit (10)(aq) of Emerson's Annual Report on Form 10-K
for the year ended March 31, 1997).
(10) (al) Form of Indemnification Agreement dated
September 23, 1997 by and between the Company and Terrence
M. Babilla.*
(10) (am) Consulting Agreement effective as of July 1, 1997 by
and between the Company and Jerome E. Ruzicka.*
(11) Computation of Primary Earnings Per Share.*
(27) Financial Data Schedule for the six months ended
September 30, 1996.1997.*
(b) Reports on Form 8-K:
(1) During the three month period ended September
30, 1996,1997, no Form 8-K was filed.
__________________
* Filed herewith.
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 19,199614, 1997 /s/ Eugene I. Davis
Eugene I. DavisGeoffrey P. Jurick
Geoffrey P. Jurick
Chairman, Chief Executive Officer and
President
Date: November 19, 199614, 1997 /s/ John P. Walker
John P. Walker
Executive Vice President and
Chief Financial Officer