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, 19951996
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)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
PROCEEDINGPROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by SectionSections 12, 13 andor 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,
1995: 40,252,772,1996: 40,295,196.
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,
1996 1995 19941996 1995 1994
Net sales .............................. 144,406 334,778 87,348 197,638revenues .. . . . . . . . . . $101,656 $144,406 $60,509 $87,348
Costs and Expenses:expenses:
Cost of sales.......................sales . . . . . . . . . 96,536 130,692 311,75157,752 79,807 182,845
Other operating costs and expenses..expenses 1,624 2,545 4,867689 929 2,115
Selling, general & administrative
expenses.........................expenses. . . . . . . . . . . . 9,705 10,995 16,1774,342 5,752
8,322Restructuring and other nonrecurring
charges . . . . . . . . . . . . 2,734 2,734
110,599 144,232 332,79565,517 86,488 193,282
Operating profit .....................(loss). . . . . . (8,943) 174 1,983(5,008) 860 4,356
Interest expense ...................... . . . .. . . . . 1,657 1,294 1,174845 671 720
Earnings (loss) before income taxes...taxes. . (10,600) (1,120) 809(5,853) 189 3,636
Provision for income taxes............taxes . . .. . 166 154 114190 63
47
Net Earningsearnings (loss)................... $(1,274). . . . . . . . . $(10,766) $ 695(1,274) (6,043) $ 126
$ 3,589
Net Earningsearnings (loss) per common share..share $ (.28) $ (.04) $ .02(.15) $ .00 $ .08-
Weighted average number of common
and common equivalent shares outstanding ........................outstanding. . . . . . . 40,274 40,253 45,33240,295 40,253 44,875
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,
1995 1995
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . $ 14,301 $ 17,020
Accounts receivable (less allowances of
$6,972 and $9,350, respectively) . . . . 37,187 34,309
Inventories . . . . . . . . . . . . .. . . 33,205 35,336
Prepaid expenses and other current assets . 11,014 15,715
Total current assets . . . . . . . . . . . 95,707 102,380
Property and equipment - (at cost less
accumulated depreciation and amortization
of $6,282 and $7,102, respectively) . . . . . 4,520 4,676
Other assets. . . . . . . . . . . . . . . . . . 9,396 6,913
Total Assets . . . . . . . . . . . . . . . $109,623 $113,969
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . . . $ 11,991 $ 27,296
Current maturities of long-term debt . . . . 459 508
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . 17,222 18,982
Accrued sales returns . . . . . . . . . . . . 6,706 12,713
Income taxes payable. . . . . . . . . . . . . 237 283
Total current liabilities . . . . . . . . 36,615 59,782
Long-term debt . . . . . . . . . . . . . . . 20,931 214
Other non-current liabilities . . . . . . . 315 322
Shareholders' Equity:
Preferred stock - $.01 par value,
1,000,000 shares authorized, 10,000
shares issued and outstanding. . . . . . 9,000 9,000
Common stock - $.01 par value, 75,000,000
shares authorized, 40,252,772. . . . . . . .
shares issued and outstanding. . . . . . . . 403 403
Capital in excess of par value . . . . . . . . . 107,969 107,969
Accumulated deficit . . . . . . . . . . . . . (65,710) (64,086)
Cumulative translation adjustment . . . . . . 100 365
Total shareholders' equity . . . . . . . 51,762 53,651
Total Liabilities and Shareholders' Equity $ 109,623 $ 113,969
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
Sept. 30, March 31,
1996 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . $ 15,002 $ 16,133
Short-term investments . . . . . . . . . . . 4,050 1,872
Accounts receivable (less allowances of
$4,813 and $6,139, respectively) . . . . . 18,232 23,583
Inventories . . . . . . . . . . . . . . . . 27,517 35,292
Prepaid expenses and other current assets . 7,898 8,434
Total current assets . . . . . . . . . . . 72,699 85,314
Property and equipment - (at cost less
accumulated depreciation and amortization
of $5,166 and $4,422, respectively) . . . . . 2,823 3,501
Other assets . . . . . . . . . . . . . . . . . 7,111 7,761
Total Assets . . . . . . . . . . . . . . . $ 82,633 $ 96,576
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . . . $ 19,186 $ 21,151
Current maturities of long-term debt . . . . 120 173
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . 9,806 10,391
Accrued sales returns . . . . . . . . . . . 3,016 3,091
Income taxes payable . . . . . . . . . . . . 148 202
Total current liabilities . . . . . . . . 32,276 35,008
Long-term debt . . . . . . . . . . . . . . . . 20,895 20,886
Other non-current liabilities . . . . . . . . 256 300
Shareholders' Equity:
Preferred stock - $.01 par value, 1,000,000
shares authorized, 10,000 shares issued
and outstanding . . . . .. . . . . . . . . 9,000 9,000
Common stock - $.01 par value, 75,000,000
shares authorized, 40,295,196 and 40,252,772
shares issued and outstanding, respectively. 403 403
Capital in excess of par value . . . . . . . . 109,243 108,991
Accumulated deficit . . . . . . . . . . . . . (89,291) (78,175)
Unrealized loss on short-term investments. . . (256)
Cumulative translation adjustment . . . . . . 107 163
Total shareholders' equity . . . . . . . 29,206 40,382
Total Liabilities and Shareholders' Equity $ 82,633 $ 96,576
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,
1995 1994
Cash Flows from Operating Activities:
Net cash used by operating activities. . . . $ (4,295) $(26,907)
Cash Flows from Investing Activities:
Redemption of certificates of deposit. . . . 45 8,482
Additions to property and equipment. . . . . (1,145) (2,444)
Other. . . . . . . . . . . . . . . . . . . . (521) 12
Net cash provided (used) by investing
activities . . . . . . . . . . . . . . . . (1,621) 6,050
Cash Flows from Financing Activities:
Net proceeds from private placement of
Senior Subordinated Convertible Debentures. 19,233 -
Net borrowings (repayments) under
line of credit facility. . . . . . . . . . . . . . (15,305) 9,337
Net proceeds from public offering of
common stock. . . . . . . . . . . . . . . . . . . - 5,648
Other . . . . . . . . . . . . . . . . . . . . . . . (731) (1,123)
Net cash provided by financing activities . . . . . 3,197 13,862
Net decrease in cash and cash equivalents . . . . (2,719) (6,995)
Cash and cash equivalents at beginning of year. . . 17,020 21,623
Cash and cash equivalents at end of period. . . . . $ 14,301(a)$ 14,628(a)
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
Six Months Ended
September 30,
1996 1995
Cash Flows from Operating Activities:
Net cash provided (used) by operating
activities . . . . . . . . . . . . . . . . $ 3,322 $ (4,295)
Cash Flows from Investing Activities:
Purchases of investment securities. . . . . . (2,256)
Additions to property and equipment. . . . . (169) (1,145)
Other. . . . . . . . . . . . . . . . . . . . 113 (476)
Net cash used by investing
activities . . . . . . . . . . . . . . . . (2,312) (1,621)
Cash Flows from Financing Activities:
Net repayments under line of credit
facility . . . . . . . . . . . . . . . . . (1,965) (15,305)
Net proceeds from private placement of
Senior Subordinated Convertible
Debentures . . . . . . . . . . . . . . . . 19,233
Other . . . . . . . . . . . . . . . . . . . (176) (731)
Net cash provided (used) by financing
activities . . . . . . . . . . . . . . . . (2,141) 3,197
Net decrease in cash and cash
equivalents . . . . . . . . . . . . . . . . (1,131) (2,719)
Cash and cash equivalents at beginning
of year. . . . . . . . . . . . . . . . . . . 16,133 17,020
Cash and cash equivalents at end of period . . $ 15,002(a) $14,301(a)
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . $ 1,564 $ 1,245
Income taxes paid . . . . . . . . . . . . . . . $ 1,661 $ 1,564
Income taxes paid . . . . . . . . . . . . . $ 15 $ 133
$ 275
(a) The balances at September 30, 1996 and 1995 and 1994 include $9.1$4.0 million and $3.0$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
The unaudited interim consolidated financial statements reflect all
adjustments that management believes are necessary to present fairly the results of
operations for the periods being reported. Certain prior year information has
been reclassified to conform with the current year presentation. 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") 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, 1995,1996, included in the Company's annual Form 10-K filing.
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 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, 19951996 are not necessarily indicative of the results of operations for the
full year ending March 31, 1996.1997.
NOTE 2
Net earnings (loss) per common share for the three and six month periods
ended September 30, 1996 and 1995 are based on the net earnings (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. These per share amountamounts do not
include common stock equivalents assumed outstanding since they are anti-
dilutive. Net earnings per common share for the three and six month
periods ended September 30, 1994 are based on the weighted average number of
shares outstanding of common stock and common stock equivalents outstanding
during each period. Common stock equivalents include shares issuable
upon conversion of the Company's Series A Preferred Stock and shares issued
(in February 1995) for the three and six month periods ended
September 30, 1994 to former creditors primarily to satisfy an anti-dilution
provision.
NOTE 3
The provision for income taxes for the three and six month periods ended
September 30, 19951996 and 19941995 consists primarily of taxes related to international
operations. The Company did not recognize tax benefits for losses incurred by
its domestic operations (after tax recognition of
prior year book deductions) during the same periods.
EMERSON RADIO CORP. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS -CONTINUED
(Unaudited)
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 $2,522,000$1,823,000 and
$2,763,000$2,042,000 at September 30, 19951996 and March 31, 1995,1996, respectively, are included
in "Prepaid expenses and other current assets".
NOTE 5
Long-term debt consists6
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 following:
(In thousands of dollars)
Sept.credit facility, as amended, effective September 30, March 31,
1995 1995
8-1/2% Senior Subordinated Convertible
Debentures Due 2002. . . . . $ 20,750 $ -
Notes payable to unsecured
creditors . . . . . . . . . . . 358 465
Equipment notes and other . . . . . 282 257
______ ___
21,390 722
Less current obligations. . . . . 459 508
______ ___
$20,931 $ 214
______ ___
The 8-1/2% Senior Subordinated Convertible Debentures Due 2002 (the
"Debentures") were issued in August 1995. The Debentures bear interest at
the rate of 8-1/2% per annum, payable quarterly on March 15, June
15, September 15 and December 15, in each year. The Debentures mature
on August 15, 2002. The Debentures are convertible into shares of the
Company's Common Stock at any time prior to redemption or maturity at an
initial conversion price of $3.9875 per share, subject to adjustment
under certain circumstances. The Debentures are redeemable, at the
option of1996, the Company after the expirationis
required to maintain a minimum adjusted net worth, as defined, of three years from the date
of issuance, in whole or in part, at an initial redemption price of 104% of
principal, decreasing by 1% per year until maturity. The Debentures are
subordinated to all existing$30,000,000
excluding certain restructuring and future Senior Indebtedness (as defined
in the Indenture governing the Debentures). The Debentures restrict,
among other things, the amount of Senior Indebtedness and other indebtedness
thatnonrecurring charges. At September 30,
1996, the Company had an adjusted net worth, excluding such charges, of
$31,940,000 and, therefore was in certain instances, its subsidiaries, may incur.
Each holder of Debentures has the right to cause the Company to redeem
the Debentures if certain Designated Events (as defined) should occur.
The Debentures are subject to certain restrictions on transfer.compliance with this covenant.
LONG-TERM DEBT:
Long-term debt consists of the following:
(In thousands of dollars)
Sept. 30, March 31,
1996 1996
8 1/2% Senior Subordinated
Convertible Debentures
Due 2002. . . . . . . . . . . . $20,750 $20,750
Other . . . . . . . . . . . . . . 265 309
21,015 21,059
Less current obligations. . . . . 120 173
$20,895 $20,886
NOTE 67
SETTLEMENT OF LITIGATION REGARDING CERTAIN OUTSTANDING COMMON STOCK:
The 30 million shares of Common Stock 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 the Company's bankruptcy
restructuring plan, arewere the subject of certain legal proceedings. TransferOn June 11,
1996, a Stipulation of certain shares owned by Fidenas International Limited L.L.C. have been
enjoined by court orders issuedSettlement and Order (the "Settlement Agreement") was
executed, which settles various legal proceedings in Switzerland, the Bahamas
and the United States Bankruptcy Courtamong 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"). The Settlement Agreement
provides, among other things, for the Southern Districtpayment by Mr. Jurick and such affiliated
entities of New York$49.5 million to 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. In addition,
Mr. Jurick will be paid the sum of $3.5 million from the sale of Settlement
Shares. The Settlement Shares will be sold over an indeterminate period of time
by a financial advisor (the "Advisor") to be proposed by Emerson and selected in
consultation with Mr. Jurick and the CommonwealthCreditors. TM Capital has initially been
selected as the Advisor. Such Advisor will formulate 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.
The Pool B Shares will consist of the Bahamas. The
Company is not a partynumber of Settlement Shares with
respect to anywhich Mr. Jurick must retain beneficial ownership of the proceedings described herein; it is
possible that a courtvoting power
to avoid an event of competent jurisdiction may order the turnover of
all or a portion of the shares of Common Stock owned by such persons
to a third party. A turnoverdefault arising out of a substantial portionchange of the Common Stock
could result in a "change of controlling ownership" prohibitedcontrol pursuant to
the terms of the Company's loanLoan and securitySecurity 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, 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 primary United
States lenderPresident, 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 termsJensen/Recoton transaction which seeks damages of the Debentures. Additionally,
such a change in controlling ownership could result in a second "ownership
change" under Internal Revenue Code Section 382, which could affect the
Company's ability to use its net operating loss and tax credit carryforwards
and may cause an adjustment of the conversion price of the Debentures.not less
than $5 million. The Company does not believeand 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 the 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 the Company's financial
position. The Company has filed a shelf registration statement covering
5,000,000 shares of common stock owned by Fidenas International Limited L.L.C.
which has reserved the right to sell certain of the shares to be registered
to Elision International, Inc. and/or GSE Multimedia Technologies
Corporation to finance a settlement of the litigation. The shares covered
by the shelf registration are subject to certain contractual restrictions
and may be offered for sale or sold only by means of a prosepctus following
registration under the Securities Act of 1933.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 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 filing 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. 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 arewere satisfied. The Company has objected to, the
claim and intends tohas
vigorously contest suchcontested, the 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 has instituted
an adversary proceeding in the Bankruptcy Court asserting damages caused by
Cineral.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.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 78
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.
NOTE 9
The Company has a 50% investment in E & H Partners, a joint venture that
purchases, refurbishes and sells allcertain 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):
Sept. 30, March 31,
1995 1995
Accounts receivable from
joint venture
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) $16,219(a) $15,283
Six Months Ended
September 30,
1995 1994
Condensed income statement (c):
Net sales $13,556(b) $6,944
Net earnings 1,394 1,155
____________________
(a) Secured by a lien onInventories of the partnership's inventory. Such lien hasPartnership had been assigned to the Company's primary lenderLender as collateral
for the U.S. line of credit facility. (b) Includes salesIn 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 $1,799,000 and $856,000 for the six
months ended September 30, 1995 and 1994, respectively.
(c) E&H Partners was inactive for substantially all of the three month
period ended June 30, 1994.
The Company filed suit on July 5, 1995 in the State Court of New Jersey
alleging Hopper Radio of Florida, Inc. ("Hopper"), the Company's partner in
E&H Partners, Barry Smith, the President of Hopper, and three former
employees of the Company (collectively, the "Defendants") have formed a
business entity for the purpose of engaging in the distribution of
consumer electronics and that the action of the Defendants in connection
therewith violated certain duties owed to and rights of the Company.
E & H Partners has continued to operate since the filing of said lawsuit.
However, the Company cannot predict at this time how this suit will, if
at all, affect the joint venture or the Company.same amount.
EMERSON RADIO CORP. AND SUBSIDIARIES
ItemITEM 2. Management's Discussion and AnalysisMANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
This report contains forward-looking statements under the Private Securities
Litigation Reform Act of Results of
Operations and Financial Condition
General
On August 30, 1995 (the "Reform Act"). The Company's actual results
may differ from the Company completedresults discussed in the forward-looking statements.
Factors that might cause such a private placement of
$20,750,000 aggregate principal amount of Debentures, resulting in net
proceedsdifference include, but are not limited to,
the Company of approximately $19,233,000 after
the payment of commissions and other expenses of such offering. The
proceeds of this offering were initially applied against the Company's
United States secured credit facility to reduce present working capital
costs. See Note 5 of Notes to Interim Consolidated Financial Statements
included elsewherethose discussed in this Form 10-Q. Management's intention is to utilize
its new capital to repay an intercompany balance with a foreign subsidiary,
exploit new business opportunities via product line additionsreport. See Other Information - Part II, Item 5.
RESULTS OF OPERATIONS
Consolidated net revenues for the three and extensions and the expansion of its distribution base and acquisitions.
The Company also amended its United States secured credit facility
effective as of August 24, 1995. The amendment includes, among other things, a
reduction of 1% in the interest rate charged on borrowings, down to 1.25%
above the stated prime rate, an extension on the term of the facility for
one additional year to March 1998, an increase in working capital
requirements, a reduction of other loan fees and charges under such
facility and the release of the Lender's security interests in the trademarks
of the Company. The trademarks are subject to a negative pledge covenant.
The modifications to its United States secured credit facility, together with
the net proceeds from the sale of the Debentures should enable the Company to
significantly reduce its costs of borrowings while permitting the Company to
expand its product lines and distribution base.
On February 22, 1995, the Company and Otake Trading Co. Ltd. and certain
affiliates ("Otake"), previously the Company's largest supplier, entered into
two mutually contingent agreements (the "Agreements"). Effective March 31,
1995, the Company granted a license of certain trademarks to Otake for a
three-year term. The license permits Otake to manufacture and sell certain
video products under the Emerson trademark to Wal-Mart Stores, Inc.
("Wal-Mart"), the Company's largest customer, in the U.S. and Canada.
As a result, the Company will receive 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. The Company will continue
to supply other products to Wal-Mart directly. Further, the Agreements
provide that Otake will supply the Company with certain video products for
sale to other customers at preferred prices for a three-year term. Under
the terms of the Agreement, the Company will receive non-refundable minimum
annual royalties from Otake to be credited against royalties earned from sales
of video cassette recorders and players, television/video cassette recorder
and player combination units, and color televisions to Wal-Mart. In
addition, effective August 1, 1995, Otake assumed responsibility for returns
and after-sale and warranty services on all video products manufactured by
Otake and sold to Wal-Mart, including video products sold by the Company
prior to August 1, 1995. As a result, the impact of sales returns on the
Company's net sales and operating results are expected to be significantly
reduced, effective with the quartersix month periods ended
September 30, 1995 ("Fiscal
1996"). The Company expects to report lower direct sales in the fiscal
year ending March 31, 1996 ("Fiscal 1996"decreased $26,839,000 (31%) as a result of the Agreements,
but no negative material impact is expected on its net operating results
for such year. The Company expects to realize a more stable cash flow
over the three-year term of the Agreements, and expects to reduce short-
term borrowings used to finance accounts receivable and inventory,
thereby reducing interest costs.
The Company reported a significant decline in its net direct sales
for the first and second quarters of Fiscal 1996$42,750,000 (30%) as compared
to the same periods in the fiscal year ended March 31, 19951996 ("Fiscal 1995"1996") primarily,
respectively. The decrease resulted from decreases in unit sales of video
cassette recorders, televisions, television/video cassette recorder combination
units and audio products due to the licensed video sales. However, the Company's United States sales
to other customers also declined due to increased price competition,
primarily in video product categories, higher retail stock levels, increased price
competition in these product categories, weak consumer demand and a slowdownsoft
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 recorded from the licensing of the Emerson & G-Clef registered
trademark were $1,001,000 and $2,002,000 in retail activitythe three and six month periods
ended September 30, 1996 as compared to $1,356,000 and $2,401,000 in the extremely high levelsame
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 sales achieveddecreased $3.3 million in the first six monthshalf of the
fiscal year ending March 31, 1997 ("Fiscal 1995.1997") 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 Fiscal 19961997 to be lower than the third quarter of Fiscal 1995, exclusive of the licensed video sales,1996 due to
the
continuing weak consumer demand, a soft retail climatemarket and the increased level of
price competition in
video product categories. Net sales of video product to Wal-Mart in the
third quarter of Fiscal 1995 (quarter ended December 31, 1994) were
$86,625,000 or 45% of consolidated net sales.
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 sales for the three and six months ended September
30, 1995 decreased $110,291,000 (or 56%) and $190,372,000 (or 57%) as
compared to the same periods in Fiscal 1995, respectively. The effects of
the Agreements described above accounted for substantially all of the
decrease in sales (approximately 98%, or $107,964,000, and 91%, or
$173,773,000, net of licensing revenues received), and as a result,
sales to Wal-Mart were reduced to 24% and 21% of consolidated net sales
for the three and the six month periods ended September 30, 1995,
respectively, as compared to 58% and 54% for the same periods in Fiscal
1995. Net sales to Wal-Mart of video products bearing the Emerson trademark
were reported by Otake to the Company to be $74,847,000 and $136,154,000 for
the three and the six month periods ended September 30, 1995, respectively,
or 28% and 18% lower than recorded by the Company in the same periods in
Fiscal 1995. In addition, sales for the three and six months ended
September 30, 1995 decreased as a result of lower unit sales of televisions
and television/video cassette recorder combination units due to increased
price competition in these product categories substantially offset by an
increase in unit sales of video cassette recorders, microwave ovens and
audio products. The Company's Canadian operations reported a decline of
$5.1 million and $6.5 million in net sales for the three and six month
periods ended September 30, 1995, respectively, due to declines in unit
volume and sales prices due to a weak Canadian economy. The Company's
European sales decreased $1.7 million and $8.2 million for the three and
six month periods ended September 30, 1995, respectively, relating to
the Company's discontinuance of its Spanish branch, and plan to sell
products in Spain through a distributor.competition.
Cost of sales, as a percentage of consolidated sales,revenues, was 91%95% for both
the three and six month periods ended September 30, 19951996 as compared to 93%91% for
the same periods in Fiscal 1995.1996. Gross profit margins in the three and the six month periods ended September 30,
1995 were favorably impacted by a change in product mix, the recognition
of licensing income, reduced reserve requirements for sales returns due
primarily to the Agreements with Otake, and reduced fixed costs
associated with the downsizing of the Company's foreign offices,
partially offset by lower sales prices, and lower realization on the
resale of returned product due to increased price competition.
The improvement in gross margins was also partially offset by the
accrual of $3.9 million in the quarter ended September 30, 1994 of purchase
discounts received from one of the Company's suppliers based on purchases
from the supplier in calendar 1993. Due to the increase in the value of
the Japanese Yen in 1995, and its impact on the cost of certain raw materials
and subassemblies of the Company's suppliers, the Company has not received
any purchase discounts from its suppliers in the first half of Fiscal 1996,
and the Company has also absorbed certain price increases from its suppliers.
Additionally, the Company has not been able to recover such price increases
from its customers due to the increased price competition. To mitigate the
impact of the Yen, the Company has been able to negotiate lower prices
(including purchase discounts) from various sources of supply for certain
audio products, commencing primarily in the second half of Fiscal 1996.
Other operating costs and expenses declined $1,186,000 and $2,322,000 in the three and six
month periods ended September 30, 19951996 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, 1996 as compared to the same
periods in Fiscal 1995,1996, respectively, primarily as a result of a decrease in
compensation expense and other expenses incurred to process product
returns and after-sale services,service costs relating to the Company's downsizing
program, lower product returns and change in the resale arrangementlicensing of its Emerson & G-
Clef registered trademark for product returns (See Note 7sale of Notesvideo products to Interim Consolidated Financial
Statements) and to lower warranty expense related to the decline in sales.its largest customer .
Selling, general and administrative expenses ("S,G & A"&A") as a percentage of
sales,revenues, was 7% and 8%10% for the three and six month periods ended September 30,
1995,1996, as compared to 4%7% and 5%8% for the same periods in Fiscal 1995.1996,
respectively. In absolute terms, S,G & A&A decreased by $2,570,000$1,410,000 and $5,182,000$1,290,000 in
the three and six month periods ended September 30, 19951996 as compared to the same
periods in Fiscal 1995.1996, respectively. The decrease for the
three months ended September 30, 1995 was primarily attributable to
lower selling expenses attributable to the lower sales, lower professional
fees due to bankruptcy costs incurred in the prior year and a reduction in fixed overhead costs and compensation expense relating to the Company's
downsizingcontinuing cost reduction program in both the U.S. and in its foreign offices. Additionally, the decrease for the six
months ended September 30, 1995 also includedoffices,
lower compensation expense
relatingselling expenses attributable to the downsizing.lower sales and a lower provision on
trade receivables. This was partially offset by a reduction in foreign currency
exchange gains. The increase in the S,G & A&A as a percentage of salesrevenues is due
primarily to the allocation of fixed S,G & A&A costs over a significantly lower sales base resulting from the licensing of video sales.base.
Additionally, the Company's exposure to foreign currency fluctuations, primarily
in Canada and Spain, resulted in the recognition of net foreign currency
exchange gains aggregating $239,000$12,000 and $671,000$26,000 in the three and six month
periods ended September 30, 19951996 as compared to $431,000$239,000 and $832,000$671,000 in the
same periods in Fiscal 1995,1996, respectively.
Interest expense decreasedincreased by $49,000$174,000 and $363,000 in the three and six
month periodperiods ended September 30, 19951996 as compared to the same periodperiods in
Fiscal 1995.1996, respectively. The decrease in interest expenseincrease was attributable to the paydown of $19.2 million
of the Company's borrowings under its United States secured credit facilityinterest
expense associated with the proceeds of the lower rate Debentures,debentures issued in August 1995,
partially offset by a higherlower average borrowings at lower interest rates on the U.S.
revolving line of credit facility. The average rate in effect on these borrowings. Interest expensethe credit
facility for the six
monthsthree month periods ended September 30, 1996 and 1995 increased $120,000 due to higher average
borrowings under this credit facility at a higher average interest rate
on these borrowings.
As a resultwas
approximately 9.5% and 10.75%, respectively.
The Company recorded restructuring and other nonrecurring charges of
the foregoing factors, the Company generated net
earnings of $126,000 and incurred a net loss of $1,274,000$2,734,000 for the three and six month periods ended September 30, 1995,1996. 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 for the three and six month periods ended September
30, 1996, compared to a net earnings of $3,589,000 and $695,000$126,000 for the same periods inquarter ended September
30, 1996 and a net loss of $1,274,000 for the first half of Fiscal 1995, respectively.
Liquidity and Capital Resources1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash utilizedprovided by operating activities was $4,295,000$3,322,000 for the six months
ended September 30, 1995.1996. Cash was used to fund the loss
from operationsprovided by decreases in accounts receivables
and higher accounts receivable balances,inventories partially offset by thea loss from operations. The decrease in
accounts receivable was due primarily to a one-time receipt of funds for purchase discounts accrued$5.0 million from
the Company's 50% owned joint venture (E & H Partners) in the first quarter of
Fiscal 1995.1997 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 utilizedused by investing activities was $1,621,000$2,312,000 for the six months
ended September 30, 1995. Investing activities consisted1996. Cash was utilized primarily
of capital expenditures for the purchase of
new product molds.investment securities.
In the six months ended September 30, 1995,1996, the Company's financing
activities provided $3,197,000utilized $2,141,000 of cash. Cash was provided by the private
placement of $20,750,000 aggregate principal amount of Debentures. The proceeds of approximately $19,233,000, net of issuance costs, was
initially used to reduceCompany reduced its
borrowings under theits U.S. line of credit facility.facility by $1,965,000
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, in the aggregate, not to exceed the
lesser of $60$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 allthe U.S. and Canadian assets of the
Company except for trademarks, which are subject to a negative pledge covenant.
The interest rate on allthese borrowings is 1.25% above the stated prime rate. At
September 30, 1995,1996, there were approximately $12.0$19.2 million outstanding on the
Company's revolving loan facility and approximately $6.7$3.3 million of letters of
credit outstanding issued for inventory purchases. Based on the "Borrowing Base" amount
at September 30, 1995, $16.11996, approximately $2.2 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 $42,000,000$30,000,000 excluding net
proceeds ($5.7 million throughcertain restructuring and
nonrecurring charges. At September 30, 1995) received by1996, the Company from the sale of equity securities. This minimum will increase
to $50,000,000 effective January 1, 1996. However, no assurance can be
given that the Company will be able to meet the increasedhad an adjusted net
worth, requirement.excluding such charges, of $31,940,000, and therefore, was in compliance
with this covenant.
The Company's Hong Kong subsidiary maintains various credit facilities
aggregating $114.3$59.1 million with a bank in Hong Kong consisting of the following:
(i) a $12.3$9.1 million credit facility generally used for letters of credit for a
foreign subsidiary's direct import business and affiliates' inventory purchases,
and (ii) a $2 million standby letter of credit facility,
and (iii) a $100$50 million credit facility, for the benefit of a foreign subsidiary,
which is for the establishment of back-to-back letters of credit with the
Company's largest customer.Customer. At September 30, 1995,1996, the Company's Hong Kong subsidiary had pledged
$4 million in certificates of deposit to this bank to assure the availability of
these credit facilities. At September 30, 1995,1996, there were approximately $9.6$7.7
million and $10.4$8.9 million of letters of credit outstanding on the $12.3$9.1 million
and $100$50 million credit facilities, respectively.
The Company's Hong Kong subsidiary maintains an additional credit
facility with another bank in Hong Kong. The facility provides forIn the third quarter of Fiscal 1997, the Company made proposals to Sport
Supply Group, Inc. ("SSG"), a $10 million line of credit for documentary letters of credit and a
$10 million back-to-back letter of credit line collateralized by a $5 million
certificate of deposit. At September 30, 1995, the Company's Hong Kong
subsidiary had pledged $5.1 million in certificates of deposit to assure
the availability of these credit facilities. At September 30, 1995, there
were approximately $4.0 million of letters of credit outstanding on these
credit facilities.
In November 1995, the Company's Board of Directors approved a plan
to repurchase up to 2 million of its common shares, or about 20
percent of the Company's current float of approximately 10 million shares,
from time to time in the open market. The Company pointed out that although
there are 40,252,772 shares outstanding, approximately 30 million shares
are held directly or indirectly by its Chairman Geoffrey JurickNew York Stock Exchange listed company and the
Company has agreed with Mr. Jurick that such shares will not be subject
to repurchase. The stock repurchase program is subject to consentlargest direct mail distributor of certain of the Company's lenders, pricesporting goods equipment and availability of shares,
compliance with securities laws and alternative capital spending programs,
including new acquisitions. The repurchase of common shares is intended
to be funded by available working capital.
Management's strategy to compete more effectively in the highly
competitive consumer products marketsupplies in the
United States, in which the Company seeks to acquire a significant interest in
SSG, though not a majority interest of SSG common stock, and Canada,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 to
combine innovative approaches toaccepted, 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 current product line, such
as value-added promotions, augmentmost 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 line on its own orat 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 withand through
additions of higher margin complementary products, including personal
and home security products, a home theater system, ready-to-assemble
furniture, clocks and watches, and car audio products.consumer product lines which complement the Company's
business. The Company also intends to engage in the marketing ofmarket distribution, sourcing and other
services to third parties. Management believes that these new products and
services will contribute toIn addition, the Company's sales and operating results
commencing in the second half of Fiscal 1996. The Company also 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 through
license arrangements, partnerships, joint ventures or
joint ventures.
Managementstrategic mergers and acquisitions of companies in similar or complementary
businesses.
In prior years, the Company successfully concluded licensing agreements for
certain business products and intends to pursue additional licensing
opportunities and 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, management believes
that future cash flow from operations the proceeds from the
Debentures and the institutional financing described
above willmay not be sufficient to fund all of the Company's cash requirements for
the next yeartwelve months. Management plans to take the necessary steps to
adequately finance the Company's operations which may include the following:
1. Reviewing strategic alternatives for its coreNorth American video business not
covered under the license agreement with the Supplier.
2. Reducing inventory levels and to exploit new business opportunities. Cash
flow from operations may be negatively impacted bypurchase higher margin products for inventory.
3. Shifting a decrease in thehigher proportion of the Company's direct import sales to consolidated sales.
A lower percentage of direct import sales may require increased use
of the Company's credit facilityimport.
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 may restrict growthforeign offices.
6. Sale of non-operating or underperforming assets.
7. Private sale of equity and/or debt securities.
There can be no assurance that the Company will be able to successfully
implement any of these steps in a time frame or manner which will permit the
Company to fund current operations and other planned expenditures at current and
expected sales volumes, if at all.
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 received 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 trademark and the "return-
to-vendor" agreements should favorably impact the Company's sales. However, Management believes that it has sufficient
working capital to finance its sales plan for the next year.cash flow over their
respective terms.
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings.LEGAL PROCEEDINGS.
The information required by this item is included in Notes 6 andNote
7 of Notes to Interim Consolidated Financial Statements
filed in Part I of Form 10-Q for the quarter ended September 30,
1995,1996, and is incorporated herein by reference.
ITEM 6. Exhibits and Reports5. OTHER INFORMATION.
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; operating costs including continuing the
Company's cost reduction program and Company's return to vendor
program; advertising and promotional efforts; brand awareness;
the existence or absence of adverse publicity; success of the
Company's acquisition strategy; changes in business strategy or
development plans; quality of management; availability, use and
terms of capital and compliance with debt covenants; 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 FORM 8-K.
(a) Exhibits pursuantExhibits:
(10)(a) Employment Agreement, dated as of January 29, 1996
between Emerson Radio Corp. ("Emerson") and Marino Andriani.
(10)(b) Amendment No. 3 to provisionsFinancing Agreements, dated
as of Item 601August 20, 1996, amending the adjusted net worth covenant
of Regulation
S-K are not applicable.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 six months ended
September 30, 1996.
(b) Reports on Form 8-K:
(1) Current Report onDuring the three month period ended September
30, 1996, no Form 8-K dated July 10,
1995, reporting matters under Item 5.
(2) Current Report on Form 8-K dated August 30,
1995, reporting matters under Items 5 and 7.was filed.
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 14, 199519,1996 /s/Geoffrey P. Jurick
Geoffrey P. Jurick
Chief Executive Officer
Date: November 14 , 1995 /s/Eugene I. Davis
Eugene I. Davis
President
InterimDate: November 19, 1996 /s/ John P. Walker
John P. Walker
Executive Vice President,
Chief Financial Officer