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,December 31, 1995
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 (Zip code)
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 outstanding as of
September 30,December 31, 1995: 40,252,772,40,252,772.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
SixNine Months Ended Three Months Ended
September 30, September 30,December 31, December 31,
1995 1994 1995 1994
Net sales .............................. 144,406 334,778 87,348 197,638. . . . . . . . . . . . . $214,720 $529,111 $ 70,314 $194,333
Costs and Expenses:
Cost of sales....................... 130,692 311,751 79,807 182,845sales . . . . . . . . . . 198,184 490,803 67,491 179,052
Other operating costs
and expenses.. 2,545 4,867 929 2,115expenses. . . . . . . . . . . 3,529 6,777 983 1,910
Selling, general & administrative
expenses......................... 10,995 16,177 5,752 8,322
144,232 332,795 86,488 193,282expenses. . . . . . . . . . . . . 16,332 23,858 5,338 7,681
______ _______ ______ _______
218,045 521,438 73,812 188,643
_______ _______ ______ _______
Operating profit ..................... 174 1,983 860 4,356(loss). . . . . . . . (3,325) 7,673 (3,498) 5,690
Interest expense ..................... 1,294 1,174 671 720. . . . . . . . . . . 2,322 2,124 1,029 950
_____ _____ _____ _____
Earnings (loss) before income taxes... (1,120) 809 189 3,636taxes. . . (5,647) 5,549 (4,527) 4,740
Provision for income taxes............ 154 114 63 47taxes . . 26 196 (129) 82
Net Earningsearnings (loss)................... $(1,274). . . . . . . . . . $(5,673) $ 6955,353 $ 126(4,398) $ 3,5894,658
======= ======= ======= =====
Net Earningsearnings (loss) per common share..share . $ (.04)(.15) $ .02.12 $ .00(.11) $ .08.10
======= ======= ======= =====
Weighted average number of common
and common equivalent shares
outstanding ......................... . . . . . . . . . . 40,253 45,33246,537 40,253 44,87548,879
====== ====== ====== ======
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
Dec. 31, March 31,
1995 1995
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . $ 19,041 $ 17,020
Accounts receivable (less allowances of
$7,140 and $9,350, respectively) . . . . 29,576 34,309
Inventories . . . . . . . . . . . . . . . 42,385 35,336
Prepaid expenses and other current assets 10,974 15,715
_______ _______
Total current assets . . . . . . . . . . 101,976 102,380
Property and equipment - (at cost less
accumulated depreciation and amortization
of $5,753 and $7,102, respectively) . . . . 4,298 4,676
Other assets . . . . . . . . . . . . . . . . . 8,053 6,913
_______ _______
Total Assets . . . . . . . . . . . . . . $ 114,327 $ 113,969
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . . $ 24,735 $ 27,296
Current maturities of long-term debt . . . 240 508
Accounts payable and other current
liabilities . . . . . . . . . . . . . . 14,083 18,982
Accrued sales returns . . . . . . . . . . 6,489 12,713
Income taxes payable . . . . . . . . . . . 214 283
_______ ______
Total current liabilities . . . . . . . 45,761 59,782
Long-term debt . . . . . . . . . . . . . . . 20,993 214
Other non-current liabilities . . . . . . . 354 322
Shareholders' Equity:
Preferred stock - $.01 par value, 10,000,000
and 1,000,000 shares authorized,
respectively, 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 . . . . . . . 107,944 107,969
Accumulated deficit . . . . . . . . . . . . (70,284) (64,086)
Cumulative translation adjustment . . . . . 156 365
______ _______
Total shareholders' equity . . . . . . 47,219 53,651
Total Liabilities and Shareholders' Equity $ 114,327 $ 113,969
======== =======
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)
SixNine Months Ended
September 30,December 31,
1995 1994
Cash Flows from Operating Activities:
Net cash used by operating activities. . . . $ (4,295) $(26,907)(11,478) $(28,287)
________ ________
Cash Flows from Investing Activities:
Redemption of certificates of deposit. . . . 45 8,482137 8,469
Additions to property and equipment. . . . . (1,145) (2,444)(1,490) (2,733)
Other. . . . . . . . . . . . . . . . . . . . (521) 12(522) 29
Net cash (used) provided (used) by investing ______ _____
activities . . . . . . . . . . . . . . . . (1,621) 6,050(1,875) 5,765
______ _____
Cash Flows from Financing Activities:
Net proceeds from private placement of
Senior Subordinated Convertible
Debentures. 19,233Debentures . . . . . . . . . . . . . . . 19,220 -
Net (repayments) borrowings (repayments) under line of
credit facility. . . . . . . . . . . . . . (15,305) 9,337(2,561) 14,271
Net proceeds from public offering of common
stock. . . . . . . . . . . . . . . . . . . - 5,6485,701
Other . . . . . . . . . . . . . . . . . (1,285) (1,155)
Net cash provided by financing _______ ______
activities . . . . . . (731) (1,123)
Net cash provided by financing activities . . . . . 3,197 13,862. . . 15,374 18,817
________ ______
Net decreaseincrease (decrease) in cash and cash
equivalents . . . . (2,719) (6,995). . . . . . . . . . . 2,021 (3,705)
Cash and cash equivalents at beginning
of year. . . . . . . . . . . . . . . . . 17,020 21,623
______ ______
Cash and cash equivalents at end of period.period . . . ..$ 19,041(a) $ 14,301(a)$ 14,628(a)17,918(a)
======= =======
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . $ 1,5642,751 $ 1,2452,198
======== ======
Income taxes paid . . . . . . . . . . . . . . . $ 133153 $ 275298
======== ======
(a) The balances at September 30,December 31, 1995 and 1994 include $9.1$9.0 million and
$3.0$6.0 million, respectively, of cash and cash equivalents pledged
to assure the availability of certain letter ofletterof 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. 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,
included in the Company's annual Form 10-K filing.
Due to the seasonal nature of the Company's consumer
electronics business, the results of operations for the three and
sixnine month periods ended September 30,December 31, 1995 are not necessarily
indicative of the results of operations for the full year ending
March 31, 1996.
NOTE 2
Net earnings (loss)loss per common share for the three and sixnine month
periods ended September 30,December 31, 1995 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. 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 sixnine month
periods ended September 30,December 31, 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, exercise of stock options and warrants 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 (benefit) for income taxes for the three and sixnine month
periods ended September 30,December 31, 1995 and 1994 consists primarily of
taxes related to international operations. The provision (benefit) for the
three and nine month periods ended December 31, 1995 also
includes a refund for overpayment of Federal alternative minimum
taxes and a reversal of an overaccrual of prior year taxes on
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
Spare parts inventories, net of reserves, aggregating
$2,522,000$2,321,000 and $2,763,000 at September 30,December 31, 1995 and March 31,
1995, respectively, are included in "Prepaid expenses and other
current assets".
NOTE 5
Long-term debt consists of the following:
(In thousands of dollars)
Sept. 30,Dec. 31, March 31,
1995 1995
8-1/2% Senior Subordinated
Convertible Debentures
Due 2002. . . . . $ 20,750. . . . . . . $20,750 $ -
Notes payable to unsecured
creditors . . . . . . . . . . . 35894 465
Equipment notes and other . . . . . 282389 257
______ ___
21,39021,233 722
Less current obligations. . . . . 459240 508
______ ___
$20,931____
$20,993 $ 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 of
the Company, after the expiration 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 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 that the
Company and, 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.transfer, although the Company has registered the transfer of
the Debentures and the underlying Common Stock.
NOTE 6
The 30 million shares of Common Stock issued to GSE
Multimedia Technologies Corporation, Fidenas International
Limited L.L.C. and Elision International, Inc. on March 31, 1994,
pursuant to the Company's bankruptcy restructuring plan, are the
subject of certain legal proceedings. Transfer of certain shares
owned by Fidenas International Limited L.L.C. have been enjoined
by court orders issued in the United States Bankruptcy Court for
the Southern District of New York and the Commonwealth of the
Bahamas. The Company is not a party to any of the proceedings
described herein;in this paragraph; it is possible that a court 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 turnover of a substantial portion of the Common Stock
could result in a "change of controlling ownership" prohibited
pursuant to the terms of the Company's loan and security
agreement with its primary United States lender and pursuant to
the terms 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. The Company does not believe the litigation or
the results thereof will have a material adverse effect on the
Company or on the Company's financial position.position, but may result in certain changes
in ownership of the Company with any resulting consequences as
described in this paragraph.
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 ability
to assign the right to sell certain of thesuch shares to be registered to Elision
International, Inc. and/or GSE Multimedia Technologies Corporation,
to finance a settlement, if any, of the litigation.litigation described in the
immediately preceding paragraph. 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 prosepctusprospectus
following registration under the Securities Act of 1933.
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 are satisfied. The Company has objected to the
claim and intends to vigorously contest 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, the Company has
instituted an adversary proceeding in the Bankruptcy Court
asserting damages caused by Cineral. 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. 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.
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 (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
a license agreement covering the use of the "Emerson and G-Clef"
trademark on sales of certain video products by the Otake
Defendants to a significant customer of the Company and a supply
agreement for the manufacture and sale of certain video products
for the Company by certain of the Otake Defendants (collectively,
the "Otake Agreements"). Mr. Bond is a former officer and sales
representative of the Company, having served in the latter
capacity until he became involved 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. During the nine months ended
December 31, 1995, such Otake Defendants supplied approximately
16% of the Company's total purchases.
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 the Otake 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 the
Otake Agreements, and seeking damages in the amount of
$2,452,656, together with interest thereon, attorneys' fees,
and certain other costs. The plaintiffs in this action
have also filed for certain injunctive relief relating to certain
of the allegations in their complaint. The Company is seeking to
have the Indiana action moved to the New Jersey court having
jurisdiction over the Company's previously-filed suit relating
to the Otake Agreements and consolidating the actions in such
court. The Company believes that the Indiana Court should so
transfer the Indiana suit, and should do so prior to ruling
on certain requests for injunctive relief sought by the
plaintiffs in the Indiana action. As noted earlier, the Company
is not as dependent on the Otake Defendants for its purchases as
in previous years, and, while the outcome of the New Jersey and
Indiana actions is 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. Also, the Company cannot determine
at this time the impact of the final outcome of the New Jersey
and Indiana actions on either of the Otake Agreements, or
whether any of the Otake Defendants will retain any rights to
license certain products with the "Emerson and G-Clef" trademark.
NOTE 7
The Company has a 50% investment in E & H Partners, a joint
venture that purchases, refurbishes and sells all 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,Dec. 31, March 31,
1995 1995
Accounts receivable from
joint venture (a) $16,219(a)$ 13,255(a) $15,283
SixNine Months Ended
September 30,December 31,
1995 1994
Condensed income statement (c)(d):
Net sales $13,556(b) $6,944$21,147(b) $17,142
Net earnings 1,394 1,155240(c) 2,396
____________________
(a) Secured by a lien on the partnership's inventory. Such lien
has been assigned to the Company's primary lender as collateral
for the U.S. line of credit facility.
(b) Includes sales to the Company of $1,799,000$3,731,000 and $856,000$2,384,000
for the sixnine months ended September 30,December 31, 1995 and 1994,
respectively.
(c) Net earnings for the nine months ended December 31, 1995
includes a bad debt provision of approximately $1,575,000 for one
customer.
(d) E&H Partners was inactive for substantially all of the three
month period ended June 30, 1994.
The Company filed suita complaint on July 5, 1995 in the
StateSuperior Court of New Jersey, Morris County, 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""Hopper Defendants")
have formed a business entity for the purpose of engaging in the
distribution of consumer electronics and that the action of the
Hopper Defendants in connection therewith violated certain duties
owed to, and rights, including contractual rights arising from
two agreements, of the Company. E & H Partners has continued to
operate since the filing of said lawsuit. However,On January 25, 1996,
the New Jersey Court dismissed the Company's complaint as to
certain of the Hopper Defendants based upon the Court's
determination that certain clauses contained in the agreements
between the parties mandated Delaware as the more proper forum
for Emerson's lawsuit. The Company is considering an appeal
of this determination. The Company also filed suit on
January 27, 1996, in the Delaware Chancery Court, New Castle
County, as to those Hopper Defendants who do not reside in
New Jersey, which contains similar allegations to those
contained in the New Jersey suit. The Delaware suit also
seeks a preliminary injunction against those Hopper Defendants
covered by the Delaware suit. The Company is considering its
alternatives in this litigation, in light of certain procedural
requirements of the Delaware Chancery Court. The Company cannot predict
at this time how thisthe New Jersey suit or the Delaware suit will, if at
all, affect the joint venture or the Company.
Note 8
Effective December 31, 1995, the Company and its primary
U.S. lender agreed to recast the adjusted net worth covenant of
its United States secured credit facility. The adjusted net
worth covenant, as amended, requires the Company to maintain
a net worth of not less than the sum of (i) the "Base Amount", plus
(ii) any proceeds received by the Company after December 31, 1995
from the sale of any equity or debt securities. The Base Amount is
defined to be the amount of (i) $38,000,000 through September 30,
1996, (ii) $40,000,000 from October 1, 1996 through and including
March 31, 1997 and (iii) $45,000,000 from and after April 1, 1997.
EMERSON RADIO CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
General
On August 30, 1995, the CompanyEmerson Radio Corp. (the "Company")
completed a private placement of $20,750,000 aggregate principal
amount of Debentures, resulting in net proceeds to the Company of
approximately $19,233,000$19,220,000 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 elsewhere in this Form 10-Q. Management's intentionManagement is to utilizeutilizing its
new capital to repay an intercompany balance with a foreign
subsidiary, exploit new business opportunities via product line
additions and extensions and the expansion of its distribution
base, and may use such capital for acquisitions.
The Company also amended its United States secured credit facility with
its primary United States lender (the "Lender") 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. In addition, the Company
recast its adjusted net worth covenant on such facility effective December 31,
1995 (See Note 8 of Notes to Interim Consolidated Financial Statements).
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 costseffective cost of
borrowingsborrowing while permitting the Company to expand its product
lines and distribution base.
On February 22, 1995, the Company and Otake Trading Co. Ltd.one of the Company's suppliers
and certain of its affiliates ("Otake"), previously(collectively, the Company's largest supplier,"Supplier") entered into
two mutually contingent agreements (the "Agreements"). Effective
March 31, 1995, the Company granted a license of certain trademarks to
Otakethe Supplier for a three-year term. The license permits Otakethe Supplier to
manufacture and sell certain video products under the Emerson"Emerson and G-Clef"
trademark to Wal-Mart Stores, Inc.
("Wal-Mart"),one of the Company's largest customer,significant customers (the "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-Martthe Customer directly. Further, the Agreements provide that Otakethe
Supplier 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,Agreements, the Company will
receive non-refundable minimum annual royalties from Otakethe Supplier 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.the Customer. In
addition, effective August 1, 1995, Otakethe Supplier assumed responsibility
for returns and after-sale and warranty services on all video
products manufactured by Otakethe Supplier and sold to Wal-Mart,the Customer, including
video products sold by the Company prior to August 1, 1995. As a
result, the impact of sales returns on the Company's net sales
and operating results are expected to behave been significantly reduced, effective
with the quarter ended September 30, 1995 ("Fiscal
1996").1995. The Company expects to
report lower direct sales in the fiscal year ending March 31,
1996 ("Fiscal 1996") 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-
termshort-term borrowings used to finance accounts
receivable and inventory, thereby reducing interest costs. The
Company and the Supplier are currently involved in litigation over
certain matters concerning the terms of the Agreements.
(See Note 6 of Notes to Interim Consolidated Financial
Statements).
The Company reported a significant decline in its net direct
sales for the first and second quarters of Fiscal 1996nine month period ended December 31, 1995 as
compared to the same periodsperiod in the fiscal year ended March 31,
1995 ("Fiscal 1995") primarily 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, a slowdown
in retail activity and the extremely high level of sales achieved
in the first sixnine months of Fiscal 1995. The Company expects its
United States sales for the thirdfourth quarter of Fiscal 1996 to be
lower than the thirdfourth quarter of Fiscal 1995, exclusive of the
licensed video sales, due to the continuing weak retail climate
and the increased level of price competition in video product
categories. Net sales of video product to Wal-Martthe Customer in the thirdfourth
quarter of Fiscal 1995 (quarter ended DecemberMarch 31, 1994)1995) were
$86,625,000$54,270,000 or 45%43% of consolidated net sales. On a pro forma
basis, the Company's consolidated net sales, excluding video
product sold to the Customer, for the quarter ended March 31, 1995,
was $71,290,000.
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 sixnine months ended
September
30,December 31, 1995 decreased $110,291,000$124,019,000 (or 56%64%) and
$190,372,000$314,391,000 (or 57%59%), respectively, as compared to the same
periods in Fiscal 1995, respectively.1995. The effects of the Agreements described
above accounted for substantially alla substantial portion of the
decrease in sales (approximately 98%75%, or $107,964,000,$93,500,000, and 91%85%, or
$173,773,000,$267,273,000, net of licensing revenues received), and as a
result, sales to Wal-Martthe Customer were reduced to 24%19% and 21%20% of
consolidated net sales for the three and the sixnine month periods
ended September 30,December 31, 1995, respectively, as compared to 58%51% and 54%53%
for the same periods in Fiscal 1995. Net sales to Wal-Martthe Customer of
video products bearing the Emerson"Emerson and G-Clef" trademark were
reported by Otakethe Supplier to the Company to be $74,847,000$64,309,000 and
$136,154,000$200,536,000 for the three and the sixnine month periods ended
September 30,December 31, 1995, respectively, or 28%32% and 18%27% lower than recorded by
the Company in the same periods in Fiscal 1995. In addition, sales for
the three and six monthsnine month periods ended September 30,December 31, 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 substantiallypartially offset by an
increase in unit sales of video cassette recorders and audio
products. Furthermore, a decrease in unit sales of microwave
ovens for the three months ended December 31, 1995 was partially
offset by sales of new product line introductions including a
home theater system, car audio and audiopersonal and home security
products. The Company's Canadian operations reported a decline of
$5.1$9.3 million and $6.5$15.8 million in net sales for the three and
sixnine month periods ended September 30,December 31, 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$4.9 million and
$8.2$13.1 million for the three and sixnine month periods ended September 30,December
31, 1995, respectively, relating to the Company's discontinuance
of its Spanish branch, and plan to sell products in Spain through
a distributor.
Cost of sales, as a percentage of consolidated sales, was
91%96% and 92% for
both the three and sixnine month periods ended September 30,December
31, 1995 as compared to 92% and 93%, respectively for the same
periods in Fiscal 1995. Gross profit margins in the three and
the sixnine month periods ended September 30,December 31, 1995 were favorably impactedlower on a
comparative basis due primarily to the recognition of large
purchase discounts in the prior year periods and the recognition
of a loss experienced by the Company's 50% owned joint venture
that sells product returns in the third quarter of the current
fiscal year. Additionally, the Company experienced lower sales
prices and the allocation of reduced fixed costs over a lower sales
base in the current fiscal year which were substantially offset 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.offices.
The improvementreduction in gross margins was also partially offsetunfavorably impacted
by the accrual of $3.9$3.8 million and $7.7 million in the quarterthree and
nine month periods ended September 30,December 31, 1994, respectively, of
purchase discounts received from one of the Company's
suppliers based on purchases from the supplier in calendar 1993.years
1993 and 1994. 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 value 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$927,000 and
$2,322,000$3,248,000 in the three and sixnine month periods ended September 30,December 31,
1995 as compared to the same periods in Fiscal 1995, primarily as
a result of a decrease in (i) handling and freight charges
associated with customer returns and exchanges due to the Agreements,
(ii) compensation expense and other expenses incurred
to process product returns and after-sale services, relating to
the Company's downsizing program lower product returns and change in the resale arrangement
for product returns (See Note 7 of Notes to Interim Consolidated
Financial Statements) and to lower warranty expense related to the decline in sales..
Selling, general and administrative expenses ("S,G & A") as
a percentage of sales, was 7% and 8% for both the three and sixnine month
periods ended September 30,December 31, 1995, as compared to 4% and 5% for
the same periods in Fiscal 1995.1995, respectively. In absolute
terms, S,G & A decreased by $2,570,000$2,343,000 and $5,182,000$7,526,000 in the
three and sixnine month periods ended September 30,December 31, 1995 as compared
to the same periods in Fiscal 1995.1995, respectively. The decrease
for the three monthsand nine month periods ended September 30,December 31, 1995 was
primarily attributable to lower selling expenses attributabledue to the lower
sales, lower professional
fees due to bankruptcy costs incurred in the prior year and a reduction in compensation and fixed overhead costs
relating to the Company's downsizing program in both the U.S. and
in its foreign offices.offices and lower provisions for accounts
receivable reserves due to higher realization of accounts
receivable. Additionally, the decrease for the sixnine months ended
September 30,December 31, 1995 also included lower compensation expense
relatingprofessional fees due to
bankruptcy costs incurred in the downsizing.prior year. The increase in the
S,G & A as a percentage of sales is due primarily to the
allocation of fixed S,G & A costs over a significantly lower
sales base resulting from the licensing of video sales.
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 and $671,000$497,000 in the three
and sixnine month periodsperiod ended September 30,December 31, 1995
as compared to $431,000 and
$832,000$72,000 in the same periodsperiod in Fiscal 1995, respectively.
Interest expense decreased by $49,0001995. However,
the Company incurred net foreign currency exchange losses
aggregating $174,000 in the three month period ended September 30,December 31,
1995 as compared to $753,000 for the same period in Fiscal 1995.
Interest expense increased by $79,000 and $198,000 in the
three and nine month periods ended December 31, 1995,
respectively, as compared to the same periods in Fiscal 1995. The
decreaseincrease in interest expense was attributable to interest incurred
on the paydown of $19.2 million
ofDebentures issued in August 1995, partially offset by lower
average borrowings and lower average interest rates associated
with the Company's borrowings under its United States secured credit facility
with the proceeds of the lower rate Debentures, partially offset by a higher
average interest rate on these borrowings. Interest expense for the six
months ended September 30, 1995 increased $120,000 due to higher average
borrowings under this credit facility at a higher average interest rate
on these borrowings.facility.
As a result of the foregoing factors, the Company generatedincurred
net earningslosses of $126,000$4,398,000 and incurred a net loss of $1,274,000$5,673,000 for the three and sixnine
month periods ended September 30,December 31, 1995, as compared to a net
earnings of $3,589,000$4,658,000 and $695,000$5,353,000 for the same periods in
Fiscal 1995, respectively.
Liquidity and Capital Resources
Net cash utilized by operating activities was $4,295,000$11,478,000
for the sixnine months ended September 30,December 31, 1995. Cash was used to
fund the loss from operations and higher accounts receivable balances,inventory levels,
partially offset by a decrease in accounts receivable and the
receipt of funds for purchase discounts accrued in Fiscal 1995.
License revenues earned from sales of video products by the Supplier to
the Customer have not generated any cash in Fiscal 1996, since the
minimum royalty payment received by the Company in Fiscal 1995
has not been exceeded as of December 31, 1995.
Net cash utilized by investing activities was $1,621,000$1,875,000 for
the sixnine months ended September 30,December 31, 1995. Investing activities
consisted primarily of capital expenditures for the purchase of
new product molds.
In the sixnine months ended September 30,December 31, 1995, the Company's
financing activities provided $3,197,000$15,374,000 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,$19,220,000, net of issuance costs, was initially used to reduce
borrowings under the U.S. line of credit facility.facility, and have since
been used to repay an intercompany balance with a foreign
subsidiary, and to fund costs for product line additions and
extension and expansion of the Company's distribution base.
The Company maintains an asset-based revolving line of
credit facility with a U.S. financial institution (the "Lender").the Lender. The facility provides for
revolving loans and letters of credit, subject to individual
maximums and, in the aggregate, not to exceed the lesser of
$60 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 all U.S. and Canadian assets
of the Company except for trademarks, which are subject to a negative
pledge covenant. The interest rate on all borrowings is 1.25% above the
prime rate. At September 30,December 31, 1995, there werewas approximately
$12.0$24.7 million outstanding on the Company's revolving loan
facility, and approximately $6.7$2.5 million of letters of credit
outstanding issued for inventory purchases. Based on the "Borrowing
Base" amount at September 30,December 31, 1995, $16.1$6.1 million of the credit facility
was not utilized. Pursuant to the terms of the credit facility, as
amended, the Company is required to maintain a minimum adjusted net
worth of $42,000,000 excluding net
proceeds ($5.7 million through September 30, 1995) received by the
Company from the sale of equity securities.$38,000,000, effective December 31, 1995. This minimum
will increase to $50,000,000$40,000,000 effective JanuaryOctober 1, 1996. However, no assurance can be
given that the Company will be able1996 and then to
meet the increased net worth
requirement.$45,000,000 effective April 1, 1997.
The Company's Hong Kong subsidiary maintains various credit
facilities aggregating $114.3 million with a bank in Hong Kong
consisting of the following: (i) a $12.3 million credit facility
generally used for letters of credit for a foreign subsidiary's
direct import business and affiliates' inventory purchases, (ii)
a $2 million standby letter of credit facility, and (iii) a $100
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. At September 30,December 31, 1995, 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,December 31, 1995, there were
approximately $9.6$4.2 million and $10.4$2.7 million of letters of credit
outstanding on the $12.3 million and $100 million credit
facilities, respectively.
The Company's Hong Kong subsidiary maintains an additional
credit facility with another bank in Hong Kong. The facility
provides for 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,December 31, 1995, the Company's Hong Kong subsidiary had pledged
$5.1$5.0 million in certificates of deposit to assure the
availability of these credit facilities. At September 30,December 31, 1995,
there were approximately $4.0$3.3 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 althoughAlthough there are 40,252,772 shares outstanding, approximately
3029.2 million shares are held directly or indirectly by
its Chairmanaffiliated entities of Geoffrey Jurick, Chairman and Chief Executive
Officer of the Company. The Company has agreed with Mr. Jurick
that such shares will not be subject to repurchase. The stock repurchase
program is subject to consent of certain of the Company's lenders,
certain court imposed restrictions, price 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.capital,
if and when available. It is uncertain at this time when the
Company might be able to so repurchase any of its shares of Common
Stock.
Management's strategy to compete more effectively in the
highly competitive consumer products market in the United States
and Canada is to combine innovative approaches to the
Company's current product line, such as value-added promotions, augment
its product line on its own or through acquisitions with higher
margin complementary products, including higher-end consumer
electronics products, personal and home security products, a
home theater system, ready-to-assemble
furniture, clocks and watches, and car audio products.
The Company also also intends to engage in the marketing of
distribution, sourcing and other services to third parties. Management believes that these new products and
services will contribute to the Company's sales and operating results
commencing in the second half of Fiscal 1996. TheIn addition,
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 or joint ventures.
Management believes that future cash flow from operations the proceeds from the
Debentures
and the institutional financing described above will be
sufficient to fund all of the Company's cash requirements for
the next year for its core business and to exploit certain new
business opportunities. Cash flow from operations may be
negatively impacted by a decrease in the 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 facility with the Lender and may restrict
growth of the Company's sales. However, Managementmanagement believes that
it has sufficient working capital to finance its sales plan for
the next year.
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings.
The information required by this item is
included in Notes 6 and 7 of Notes to Interim
Consolidated Financial Statements filed in Part I
of Form 10-Q for the quarter ended September 30,December 31,
1995, and is incorporated herein by reference.
ITEM 2. Changes in Securities.
(a) On February 14, 1996, the Company filed
a certificate of Amendment to its Certificate of
Incorporation to increase the number of authorized
shares of preferred stock from one million to ten
million.
ITEM 4. Submission of Matters to a Vote of Security
Holders.
(a) An Annual Meeting of Stockholders was
held on November 28, 1995.
(b) The following directors were elected at
the Annual Meeting of Stockholders and constituted
the entire Board of Directors following the
Meeting:
Robert H. Brown, Jr.
Peter G. Bunger
Raymond L. Steele
Jerome H. Farnum
Geoffrey P. Jurick
Eugene I. Davis
(c) Other matters voted at Annual Meeting:
(i) Election of Directors:
For Against
Robert H. Brown, Jr. 37,730,390 129,984
Peter G. Bunger 37,730,270 130,194
Raymond L. Steele 37,729,129 131,265
Jerome H. Farnum 37,730,629 129,745
Geoffrey P. Jurick 37,730,390 129,984
Eugene I. Davis 37,730,270 130,194
(ii) Amendment of certificate of
incorporation to increase the number of
authorized shares of preferred stock from one
million to ten million - 31,990,968 shares for,
1,554,343 shares against and 60,775 shares
abstained.
(iii) Adoption of 1994 Non-Employee
Director Stock Plan - 37,331,250 shares for,
371,241 shares against and 102,128 shares
abstained.
(iv) Appointment of Ernst & Young, LLP
to audit financial statements of the Company for
the fiscal year ending in 1996 - 37,758,853
shares for, 43,238 shares against and 58,553
shares abstained.
ITEM 5. Other Information.
(a) The Company and First Cambridge
Securities Corporation ("First Cambridge")
entered into a one-year consulting agreement
dated as of December 8, 1995. Pursuant to the
consulting agreement, First Cambridge agreed to
provide financial consulting services in exchange
for $6,000 per month and stock purchase warrants
to be issued to First Cambridge, and/or officers
of First Cambridge it so designates (see Exhibits
10 e and 10 f below). The stock purchase warrants
were issued to two officers of First Cambridge and
entitle the holders thereof to purchase an aggregate
of 250,000 shares of the Company's common stock at
an exercise price of $4.00 per share, and expire on
December 8, 2000.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits pursuantExhibits:
3(a) Amendment dated February 14, 1996
to provisionsthe Certificate of Item 601Incorporation of Regulation
S-K are not applicable.Emerson
Radio Corp. ("Emerson").
3(b) Amendment dated November 28, 1995
to the By-Laws of Emerson adopted March 1994.
10(a) Agreement dated as of January 1, 1996,
between Emerson and Albert G. McGrath, Jr.
relating to termination of employment and agreement on
consulting services.
10(b) Agreement dated as of January 31,
1996, between Emerson and Merle Eakins relating
to termination of employment and agreement on
consulting services.
10(c) Amendment No. 2 to Financing
Agreements, dated as of February 13, 1996.
10(d) Consulting Agreement, dated as of
December 8, 1995 between Emerson and First
Cambridge Securities Corporation.
10(e) Common Stock Purchase Warrant
Agreement to purchase 50,000 shares of Common
Stock, dated as of December 8, 1995
between Emerson and Michael Metter.
10(f) 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.
27 Financial Data Schedule for the nine
months ended December 31, 1995.
(b) Reports on Form 8-K:
(1) Current Report onDuring the three month period ended
December 31, 1995, 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 by the
Company.
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: NovemberFebruary 14, 19951996 /s/Geoffrey P. Jurick
Geoffrey P. Jurick
Chief Executive Officer
Date: NovemberFebruary 14, , 19951996 /s/Eugene I. Davis
Eugene I. Davis
President
Interim ChiefINDEX TO EXHIBITS
PAGE NUMBER
IN SEQUENTIAL NUMBERING
EXHIBIT DESCRIPTION SYSTEM
3(a) Amendment dated February 14,
1996 to the Certificate of
Incorporation of Emerson Radio Corp.
("Emerson").
3(b) Amendment dated November 28,
1995 to the By-Laws of Emerson
adopted March 1994.
10(a) Agreement dated as of January 1,
1996, between Emerson and Albert G.
McGrath, Jr. relating to termination
of employment and agreement on
consulting services.
10(b) Agreement dated as of January 31,
1996, between Emerson and Merle
Eakins relating to termination of
employment and agreement on
consulting services.
10(c) Amendment No. 2 to Financing
Agreements, dated as of February 13,
1996.
10(d) Consulting Agreement, dated as of
December 8, 1995 between Emerson and
First Cambridge Securities
Corporation.
10(e) Common Stock Purchase Warrant
Agreement to purchase 50,000 shares
of Common Stock, dated as of
December 8, 1995 between Emerson and
Michael Metter.
10(f) 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.
27 Financial OfficerData Schedule for the
nine months ended December 31, 1995.