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 December 31, 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)
executive offices)
(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
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of common stock outstanding as of December 31,
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)
Nine Months Ended Three Months Ended
December 31, December 31,
1996 1995 19941996 1995 1994
Net revenues . . . . . . . . . $151,284 $214,720 $49,628 $70,314
Costs and expenses:
Cost of sales . . . . . . . 145,354 198,184 48,818 67,491
Other operating costs and
expenses. 2,111 3,529 488 983
Selling, general &
administrative expenses . 14,698 16,332 4,993 5,338
Restructuring and other
nonrecurring charges. . . 2,811 - 77 -
164,974 218,045 54,376 73,812
Operating loss . . . . . . . . (13,690) (3,325) (4,748) (3,498)
Interest expense . . . . . . . 2,525 2,322 867 1,029
Loss before income taxes . . . (16,215) (5,647) (5,615) (4,527)
Provision (benefit) for income
taxes . . . . . . . . . . . . . $214,720 $529,111 $ 70,314 $194,333
Costs and Expenses:
Cost of sales . . . . . . . . . . 198,184 490,803 67,491 179,052
Other operating costs
and expenses. . . . . . . . . . . 3,529 6,777 983 1,910
Selling, general & administrative
expenses.194 26 28 (129)
Net loss . . . . . . . . . . . . 16,332 23,858 5,338 7,681
______ _______ ______ _______
218,045 521,438 73,812 188,643
_______ _______ ______ _______
Operating profit (loss)$(16,409) $(5,673) $(5,643) $(4,398)
Net loss per common share. . . . . . . . . (3,325) 7,673 (3,498) 5,690
Interest expense . . . . . . . . . . . 2,322 2,124 1,029 950
_____ _____ _____ _____
Earnings (loss) before income taxes. . . (5,647) 5,549 (4,527) 4,740
Provision for income taxes . . 26 196 (129) 82
Net earnings (loss). . . . . . . . . . $(5,673) $ 5,353 $ (4,398) $ 4,658
======= ======= ======= =====
Net earnings (loss) per common share .(.42) $ (.15) $ .12(.14) $ (.11) $ .10
======= ======= ======= =====
Weighted average number of
common and common equivalent shares outstandingoutstanding. . . . . . . . . . . .40,281 40,253 46,53740,295 40,253 48,879
====== ====== ====== ======
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)
Dec. 31, March 31,
1995 19951996 1996
(Unaudited)
ASSETS
Current Assets:
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . $ 19,0416,121 $ 17,02016,133
Short-term investments. . . . . . . . . 155 1,872
Accounts receivable (less allowances of
$7,140$4,531 and $9,350,$6,139, respectively). . . . 29,576 34,30921,673 23,583
Inventories . . . . . . . . . . . . . . . 42,385 35,33623,917 35,292
Prepaid expenses and other current assets 10,974 15,715
_______ _______
Total current
assets . . . . . . . . . . 101,976 102,380. . . . . 6,328 8,434
Total current assets . . . . . . . . 58,194 85,314
Property and equipment - (at cost less
accumulated depreciation and
amortization of $5,753$5,546 and
$7,102,$4,422, respectively) . . . . 4,298 4,676. . . . 2,455 3,501
Investment in unconsolidated affiliate . . . 15,884 -
Other assets . . . . . . . . . . . . . . . . . 8,053 6,913
_______ _______6,927 7,761
Total Assets . . . . . . . . . . . . . .$83,460 $ 114,327 $ 113,969
======= =======96,576
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . .$14,733 $ 24,735 $ 27,29621,151
Current maturities of long-term debtdebt. . . . 240 50884 173
Accounts payable and other current
liabilitiesliabilities. . . . . . . . . . . . . . . 14,083 18,98219,574 10,391
Accrued sales returns . . . . . . . . . . 6,489 12,7134,097 3,091
Income taxes payablepayable. . . . . . . . . . . . 214 283
_______ ______177 202
Total current liabilitiesliabilities. . . . . . . . 45,761 59,78238,665 35,008
Long-term debt . . . . . . . . . . . . . . . 20,993 21420,878 20,886
Other non-current liabilitiesliabilities. . . . . . . . 354 322258 300
Shareholders' Equity:
Preferred stock - $.01 par value, 10,000,000
and 1,000,000
shares authorized,
respectively, 10,000 shares issued
and outstanding. . . .outstanding . . . . . . . . . . . . 9,000 9,000
Common stock - $.01 par value, 75,000,000
shares authorized, 40,252,772.40,295,196 and
40,252,772 shares issued and outstanding,
respectively . . . . . . .
shares issued and outstanding. . . . . . . . 403 403
Capital in excess of par value . . . . . . . 107,944 107,969109,238 108,991
Accumulated deficitdeficit. . . . . . . . . . . . . (70,284) (64,086)(95,109) (78,175)
Cumulative translation adjustmentadjustment. . . . . . 156 365
______ _______127 163
Total shareholders' equityequity. . . . . . . 47,219 53,65123,659 40,382
Total Liabilities and Shareholders' EquityEquity. $83,460 $ 114,327 $ 113,969
======== =======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)
Nine Months Ended
December 31,
1995 1994
Cash Flows from Operating Activities:
Net cash used by operating activities. . . $ (11,478) $(28,287)
________ ________
Cash Flows from Investing Activities:
Redemption of certificates of deposit. . . . 137 8,469
Additions to property and equipment.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
Nine Months Ended
December 31,
1996 1995
Cash Flows from Operating Activities:
Net cash provided (used) by operating
activities . . . . . . . . . . . . $ 11,317 $(11,478)
Cash Flows from Investing Activities:
Investment in unconsolidated company (14,398) -
Additions to property and equipment. (218) (1,490) (2,733)
Other. . . . . . . . . . . . . . . . . . . (522) 29
Net cash (used) provided by investing ______ _____
activities . . . . . . . . . . . . . . . . (1,875) 5,765
______ _____
Cash Flows from Financing Activities:
Net proceeds from private placement of
Senior Subordinated Convertible
Debentures . . . . . . . . . . . . . . . 19,220 -
Net (repayments) borrowings under line of
credit facility. . . . . . . . . . . . . (2,561) 14,271
Net proceeds from public offering of common
stock. . . . . . . . . . . . . . . . . . - 5,701
Other . . . . . . . . . . . . . . . . . (1,285) (1,155)
Net cash provided by financing _______ ______
activities . . . . . . . . . . . . . . 15,374 18,817
________ ______
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . 2,021 (3,705)
Cash and cash equivalents at beginning
of year. . . . . . . . . . . . . . . . . 17,020 21,623
______ ______
Cash and cash equivalents at end of period . .$ 19,041(a) $ 17,918(a)
======= =======
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . $ 2,751 $ 2,198
======== ======
Income taxes paid . . . . . . . . . . . . . . . 112 (385)
Net cash used by investing
activities . . . . . . . . . . . . (14,504) (1,875)
Cash Flows from Financing Activities:
Net repayments under line of credit
facility . . . . . . . . . . . . . (6,418) (2,561)
Net proceeds from private placement
of Senior Subordinated Convertible
Debentures . . . . . . . . . . . . - 19,220
Other . . . . . . . . . . . . . . . 407 (1,285)
Net cash provided (used) by financing
activities . . . . . . . . . . . . (6,825) 15,374
Net increase (decrease) in cash and
cash equivalents. . . . . . . . . . . (10,012) 2,021
Cash and cash equivalents at beginning
of year. . . . . . . . . . . . . . . 16,133 17,020
Cash and cash equivalents at end of
period . . . . . . . . . . . . . . . $6,121(a) $19,041(a)
Supplemental disclosure of cash flow
information:
Interest paid . . . . . . . . . . . $ 2,532 $ 2,751
Income taxes paid . . . . . . . . . $ 15 $ 153
$ 298
======== ======
(a) The balances at December 31, 1996 and 1995 and 1994 include $9.0$4.0 million and $6.0$9.0
million, respectively, of cash and cash equivalents pledged to assure the
availability of certain letterofforeign 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 nine month periods ended December
31, 19951996 are not necessarily indicative of the results of operations for the
full year ending March 31, 1996.1997.
NOTE 2
Net loss per common share for the three and nine month periods ended
December 31, 1996 and 1995 are based on the net loss and deduction of preferred
stock dividend requirements and the weighted average number of shares of common
stock outstanding during the periods. These per share amounts do not include
common stock equivalents assumed outstanding since they are anti-
dilutive.
Net earnings per common share for the three and nine month
periods ended December 31, 1994 are based on the weighted average
number of shares 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) to former creditors primarily to
satisfy an anti-dilution provision.anti-dilutive.
NOTE 3
The provision (benefit) for income taxes for the three and nine month periods ended
December 31, 19951996 and 19941995 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.
NOTE 4
On December 10, 1996, the Company purchased from Sport Supply Group, Inc.
("SSG") 1,600,000 shares of newly issued common stock, $.01 par value per share
(the "Common Stock"), for aggregate consideration of $11.5 million, or
approximately $7.19 per share. In addition, the Company purchased, for an
aggregate consideration of $500,000, 5-year warrants (the "Warrants") to acquire
an additional 1,000,000 shares of Common Stock at an exercise price of $7.50 per
share, subject to standard anti-dilution adjustments, pursuant to a Warrant
Agreement. Prior to such purchase, the Company beneficially owned approximately
9.9% of SSG's outstanding Common Stock which it had purchased for $4,228,000 in
open market transactions. Based upon the purchase of the Common Stock as set
forth above, the Company owns approximately 27.1% of the outstanding shares of
the Common Stock. If the Company exercises all of the Warrants, it will
beneficially own approximately 34.9% of the Common Stock. In addition, the
Company has arranged for foreign trade credit financing of $2 million for the
benefit of SSG to supplement SSG's existing credit facilities. In connection
with such purchase, SSG appointed the Company's designees to become the majority
of the members of its Board of Directors. Election of the Board of Directors is
subject to a vote of SSG's stockholders at its next annual meeting of
stockholders.
The investment in, and results of operations, of SSG will be accounted for
by the equity method. SSG's fiscal year end is October 31; therefore, the
Company's equity in earnings (losses) of SSG will be recorded on a two-month
delay basis. The Company's investment in SSG includes goodwill of $4,617,000 and
is being amortized on a straight line basis over 40 years.
Prior to the acquisition of the newly issued common stock, the Company
accounted for its investment in SSG and currently accounts for other marketable
securities as 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 trading securities. Investments in trading securities are
reported at fair value, with unrealized gains and losses included in earnings.
Unrealized holding losses on trading securities for the nine months ended
December 31, 1996 were approximately $51,000 and are included in the statement
of operations. The cost of investments sold and related realized gains and
losses are determined using the specific identification method.
NOTE 5
Spare parts inventories, net of reserves, aggregating $2,321,000$1,668,000 and
$2,763,000$2,042,000 at December 31, 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)
Dec.credit facility, as amended, effective December 31, March 31,
1995 1995
8-1/2% Senior Subordinated
Convertible Debentures
Due 2002. . . . . . . . . . . . $20,750 $ -
Notes payable to unsecured
creditors . . . . . . . . . . . 94 465
Equipment notes and other . . . . 389 257
______ ___
21,233 722
Less current obligations. . . . . 240 508
______ ____
$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 of1996, the Company after the expirationis
required to maintain a minimum adjusted net worth, as defined, of three years from the date$17,000,000
excluding certain restructuring and nonrecurring charges and working capital 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$10,000,000. At December 31, 1996, the Company had an adjusted net worth,
excluding such charges, of $26,441,000, and working capital of $19,529,000, 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, although the Company has registered the transfer of
the Debentures and the underlying Common Stock.compliance with this covenant.
LONG-TERM DEBT:
Long-term debt consists of the following:
(In thousands of dollars)
Dec. 31, March 31,
1996 1996
8 1/2% Senior Subordinated
Convertible Debentures
Due 2002. . . . . . . . . . . . $20,750 $20,750
Other . . . . . . . . . . . . . . 212 309
20,962 21,059
Less current obligations. . . . . 84 173
$20,878 $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, Fidenas International
Limited L.L.C.affiliates of Geoffrey
Jurick, the Chairman and Elision International, Inc.Chief Executive Officer of the Company, 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 Settlement and Order (the
"Settlement Agreement") was executed, was approved by
order of the Court on November 19, 1996, and became effective on February 4,
1997. The Settlement Agreement reflects the settlement of various legal
proceedings in Switzerland, the Bahamas and the United States among Mr. Jurick,
certain of his affiliated entities and certain of their creditors (the
"Creditors") (together with the Company, the "Lead Parties"). The Settlement
Agreement provides, among other things, for the payment by Mr. Jurick and
such affiliated entities of $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 such affiliated entities of Mr. Jurick, all
of which are being registered in the name of Fidenas International Limited
L.L.C. have been enjoined("FIN"). 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 court orders issueda financial advisor (the "Advisor"), initially
TM Capital Corp. The Advisor is formulating a marketing plan taking into
consideration (i) the interests of Emerson's minority stockholders, and (ii) the
goal of generating sufficient proceeds to pay the Creditors and Mr. Jurick as
quickly as possible. 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. No
assurance can be given that a sufficient number of Settlement Shares will be
sold at prices which would or could result in the payment in full of the
settlement amount. Further, sales of Settlement Shares, or the perception that
such sales may occur, may adversely effect the prevailing market prices, if
any, of the Common Stock and also create a potential large block of Settlement
Shares coming into the market at substantially the same time.
INTERNATIONAL JENSEN INCORPORATED LITIGATION:
On May 10, 1996, International Jensen Incorporated ("Jensen") filed an
action in the United States BankruptcyDistrict Court for the SouthernNorthern District of
New YorkIllinois, 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 CommonwealthCourt entered a
temporary restraining order against the Company and its
President, which subsequently lapsed, enjoining them from (i) further
solicitation of Jensen's stockholders or their representatives until the Company
has filed a Proxy Statement with the Securities and Exchange Commission which
complies with the provisions of Regulation 14A of the Bahamas.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, which has subsequently been amended to allege 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 and that Recoton Corporation
("Recoton"), the competing bidder for Jensen, aided in such actions. On October
22, 1996, Recoton filed a separate action alleging that Emerson tortiously
interfered with the Jensen/Recoton transaction, which seeks damages of not less
than $5 million. Such action is subject to a motion to dismiss filed by
Emerson. The Company is not aand 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 to any of the proceedings
described 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 loancomplaint against Mr. Shaw
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.Recoton. The Company does not believebelieves 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, but may resultposition.
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, William Blair
Leverage Capital Fund, L.P., Recoton, and certain changesaffiliates 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. The Court held a hearing on motions for
preliminary injunction 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 ownershipthe 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, with any resulting consequences as
describedhaving 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. The New Jersey Court has found that it has jurisdiction over all the
defendants in this paragraph.
Thelitigation.
On December 21, 1995, Orion Sales, Inc. and Orion Electric (America), Inc.
filed suit against the Company has filed a shelf registration statement
covering 5,000,000 sharesin the United States District Court, Southern
District of common stock ownedIndiana, Evansville Division, alleging various breaches of certain
agreements by Fidenas
International Limited L.L.C., which has reserved the ability
to assign the right to sell certain of such shares to Elision
International, Inc. and/or GSE Multimedia Technologies Corporation,
to finance a settlement, if any,Company, including breaches of the litigation describedconfidentiality provisions,
certain payment breaches, breaches of provisions relating to product returns,
and other alleged breaches of those agreements, and seeking damages in the
immediately preceding paragraph. The shares coveredamount 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 shelf
registration are subject to certain contractual restrictions and may
be offered for saleplaintiffs 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 sold only by means of a prospectus
following registration under the Securities Act of 1933.on its operations.
BANKRUPTCY CLAIMS:
The Company is presently engaged in litigation regarding several bankruptcy
claims which have not been resolved since the restructuring of the Company's
debt. The largest claim was filed 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 currently claimed was $93,563,457, ofis for
approximately $86,785,000 which
$86,785,000 represents a claim for lost profits and
$6,400,000 for plant installation and establishment of offices,
which were installed and established prior to execution of the
contracts.profits. The claim
was filed as an unsecured claim and, therefore, will be satisfied, to the extent
the claim is allowed by the Bankruptcy Court, in the manner other allowed
unsecured claims 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, 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.profits. 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, theNOTE 8
The Company filed suit in the United
States District Courtrecorded restructuring and other nonrecurring charges of
$77,000 and $2,811,000 for the Districtthree and nine month periods ended December 31,
1996, respectively. The Company recognized $29,000 and $946,000 of New Jersey against
Orion Sales, Inc., Otake Trading Co. Ltd., Technos Development
Limited, Shigemasa Otake, and John Richard Bond (collectively,restructuring
charges over these periods, respectively, related to 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 majorityclosure 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%local Canadian office and distribution operations in favor of an
independent distributor and downsizing of the Company's total purchases.
On December 21, 1995, Orion Sales, Inc.U.S. operations. The
charges include costs for employee severance, asset write-downs, and Orion Electric
(America), Inc. filed suit againstfacility
and equipment lease costs. Additionally, the Company in the United
States District Court, Southern Districtrecognized $48,000 and
$1,865,000 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
jurisdictionnonrecurring charges over the Company's previously-filed suitthese periods, respectively, relating to
the Otake Agreementsproposed but unsuccessful acquisition of Jensen. These costs primarily
include investment banking, commitment and consolidatingprofessional fees, including
litigation costs, relating to 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.proposed acquisition.
NOTE 79
The Company has a 50% investment in E & H Partners ("E&H"), a joint venture
that purchases, refurbisheswas formed to purchase, refurbish and sells allsell certain of the Company's product
returns. Effective January 1, 1997, the partners of E&H mutually agreed to
dissolve the joint venture and wind down its operations. 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):
Dec. 31, March 31,
1995 1995
Accounts receivable from
joint venture
Nine Months Ended Three Months Ended
December 31, December 31,
1996 1995 1996 1995
Income Statement data:
Net sales (a) $24,837* $21,147 $6,371* $7,591
Net earnings (loss) 256* 240 330* (1,154)
Sales by the Company
to E&H Partners 5,742 14,095 1,049 2,407
_____________
(a) Sales to the
Company by
E&H Partners 7,058 3,731 988 1,932
Dec.31, March 31,
1996* 1996
Balance Sheet Data:
Current assets (a) $15,995 $19,326
Noncurrent assets 147 162
Total Assets $16,142 $19,488
Accounts Payable to the
Company (a) $ 6,205 $13,270
Other Current liabilities 7,151 3,688
Total Liabilities 13,356 16,958
Partnership Equity 2,786 2,530
Total Liabilities and
Partnership Equity $16,142 $19,488
Equity of the Company in net
assets of E&H Partners $ 1,460 $ 1,265
(a) $ 13,255(a) $15,283
Nine Months Ended
December 31,
1995 1994
Condensed income statement (d):
Net sales $21,147(b) $17,142
Net earnings 240(c) 2,396
____________________
(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 $3,731,000 and $2,384,000the same amount.
*Information was derived from the November 30, 1996 financial statements of E&H
Partners. The financial statements for December 31, 1996 were not available as
of the date of this report; however, based on discussions with the management of
E&H Partners, the Company believes that the results for the nine monthsmonth ended December
31, 1995 and 1994,
respectively.
(c) Net earnings for the nine months ended December 31, 1995
includes1996 will not have 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 a complaintmaterial effect on July 5, 1995 in the
Superior Court of New Jersey, Morris County, alleging Hopper
Radio of Florida, Inc. ("Hopper"), the Company's partner in E&H
Partners, Barry Smith, the Presidentresults of Hopper, and three former
employees of the Company (collectively, the "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. 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 the New Jersey suitoperations
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.financial position.
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 Emerson Radio Corp. (the "Company""Reform Act")
completed. The Company's actual results
may differ from the results 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 $19,220,000 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 elsewherethose discussed in this Form 10-Q. Management is utilizing 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 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 adjustedreport. See Other Information - Part II, Item 5.
RESULTS OF OPERATIONS
Consolidated 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 reduce its effective cost of
borrowing while permitting the Company to expand its product
lines and distribution base.
On February 22, 1995, the Company and one of the Company's suppliers
and certain of its affiliates (collectively, the "Supplier") entered into
two mutually contingent agreements (the "Agreements"). Effective
March 31, 1995, the Company granted a license of certain trademarks to
the Supplier for a three-year term. The license permits the Supplier to
manufacture and sell certain video products under the "Emerson and G-Clef"
trademark to one of the Company's 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
the Customer directly. Further, the Agreements provide that the
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 Agreements, the Company will
receive non-refundable minimum annual royalties from the 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 the Customer. In
addition, effective August 1, 1995, the Supplier assumed responsibility
for returns and after-sale and warranty services on all video
products manufactured by the Supplier and sold to the Customer, including
video products sold by the Company prior to August 1, 1995. As a
result, the impact of sales returns on the Company's net sales
and operating results have been significantly reduced, effective
with the quarter ended September 30, 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-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
salesrevenues for the three and nine month periodperiods ended
December 31, 19951996 decreased $20,686,000 (29%) and $63,436,000 (30%) as compared
to the same periodperiods 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 (for nine month period only) 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. Excluding the Company's video products, the Company's U.S. gross
sales increased by approximately 18% and 12% for the three and nine month
periods ended December 31, 1996, respectively. Revenues recorded from the
licensing of the Emerson and G-Clef trademark were $1,005,000 and $3,007,000 for
the three and nine month periods ended December 31, 1996 as compared to
$1,152,000 and $3,553,000 in retail activitythe same periods in Fiscal 1996, respectively. The
decline in royalty income is attributable to lower aggregate sales reported by
the licensees of Emerson and G-Clef brand products. However, the Company has
not received the royalty report from the Company's largest licensee for the
third quarter ended December 31, 1996, and therefore, recorded only the minimum
royalties due pursuant to the applicable license agreement. Furthermore, the
Company's Canadian net sales decreased $1,684,000 and $5,015,000 in the three
and nine month periods ended December 31, 1996 as compared to the same periods
in Fiscal 1996 relating to the continued weak Canadian economy and the extremely high levelclosure
of sales achievedthe Company's local office and Company-operated distribution operations in
the first nine monthsfavor of Fiscal 1995.an independent distributor. The Company expects its United States sales
for the fourth quarter of the fiscal year ending March 31, 1997 ("Fiscal 19961997")
to be lower than the fourth quarter of Fiscal 1995, exclusive of the
licensed video sales,1996 due to the continuing weak
consumer demand, a soft retail climatemarket, high retail stock levels and the
increased level of price competition in video product
categories. Netcompetition.
Cost of sales, of video product to the Customer in the fourth
quarter of Fiscal 1995 (quarter ended March 31, 1995) were
$54,270,000 or 43%as a percentage 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,revenues, was $71,290,000.
The Company's operating results98% 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 nine months ended
December 31, 1995 decreased $124,019,000 (or 64%) and
$314,391,000 (or 59%), respectively, as compared to the same
periods in Fiscal 1995. The effects of the Agreements described
above accounted for a substantial portion of the
decrease in sales (approximately 75%, or $93,500,000, and 85%, or
$267,273,000, net of licensing revenues received), and as a
result, sales to the Customer were reduced to 19% and 20% of
consolidated net sales for the three and the nine month periods
ended December 31, 1995, respectively, as compared to 51% and 53%
for the same periods in Fiscal 1995. Net sales to the Customer of
video products bearing the "Emerson and G-Clef" trademark were
reported by the Supplier to the Company to be $64,309,000 and
$200,536,000 for the three and the nine month periods ended
December 31, 1995, respectively, or 32% and 27% lower than recorded by
the Company in the same periods in Fiscal 1995. In addition, sales96%
for the three and nine month periods ended December 31, 1995 decreased1996, respectively, as
a result of lower unit sales of televisionscompared to 96% and television/video
cassette recorder combination units due to increased price
competition in these product categories partially offset by an
increase in unit sales of video cassette recorders and audio
products. Furthermore, a decrease in unit sales of microwave
ovens92%, respectively, 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 personal and home security
products. The Company's Canadian operations reported a decline of
$9.3 million and $15.8 millionsame periods in net sales forFiscal 1996.
Gross profit margins in the three and nine month periods ended 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 $4.9 million and
$13.1 million for the three and nine month periods ended 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
96% and 92% for the three and nine month periods ended 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 nine month periods ended December 31, 19951996 were lower on a
comparative basis due primarily to the recognition of large
purchase discounts in the prior year periods and the recognition
of a loss experiencedunfavorably impacted 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(primarily video products),
a higher proportion of close-out sales, inventory write-downs, 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,and the
recognition of licensing income relating to reduced reserve requirements for sales returns
for the same periods in the prior fiscal year. However, gross profit margins
were favorably impacted by the introduction of higher margin products -- home
theater and reduced fixedcar audio products, and by a reduction in the costs associated with
the downsizing ofproduct returns related to the Company's foreign offices.
The reductionagreements with a majority of its
suppliers to return defective products and receive in gross margins was also unfavorably impacted
by the accrual of $3.8 millionexchange an "A" quality
unit.
Other operating costs and $7.7 millionexpenses declined $495,000 and $1,418,000 in the
three and nine month periods ended December 31, 1994, respectively, of
purchase discounts received from one of the Company's
suppliers based on purchases from the supplier in calendar 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 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 $927,000 and
$3,248,000 in the three and nine month periods ended December 31,
1995 as compared to the same
periods in Fiscal 1995,1996, respectively, 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,service costs relating to the Company's downsizing programlicensing of its Emerson and
change inG-Clef trademark to one of its suppliers (the "Supplier") for the resale arrangement
for product returns (See Note 7sale of Notesvideo
products to Interim Consolidated
Financial Statements)its largest customer (the "Customer").
Selling, general and administrative expenses ("S,G & A"&A") as a percentage of
sales,revenues, was 8%10% for both the three and nine month periods ended December 31,
1995,1996, as compared to 4% and 5%8% for the same periods in Fiscal 1995, respectively.1996. In absolute terms,
S,G & A&A decreased by $2,343,000$345,000 and $7,526,000$1,634,000 in the three and nine month periods
ended December 31, 19951996 as compared to the same periods in Fiscal 1995,1996,
respectively. The decrease
for the three and nine month periods ended December 31, 1995 was primarily attributable to lower selling expenses due to the lower
sales, a reduction in fixed
costs and compensation and fixed overhead costsexpense relating to the Company's downsizingcontinuing cost
reduction program in both the U.S. and in its foreign offices and lower provisions forselling
expenses attributable to the lower sales, partially offset by the reversal of
accounts receivable reserves in the prior year periods due to a higher
realization ofthan anticipated on past-due accounts receivable. Additionally, the
decrease for the nine months ended December 31, 1995 also included lower professional fees due to
bankruptcy costs incurred1996 was mitigated by a
reduction in the prior year.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.
Additionally, thebase. The Company's exposure to foreign currency
fluctuations, primarily in Canada and Spain, resulted in the recognition of net
foreign currency exchange losses aggregating $21,000 in the three month period
ended December 31, 1996 as compared to $174,000 in the same period in Fiscal
1996. However, the Company recognized net foreign currency exchange gains
aggregating $497,000$7,000 in the nine month period ended December 31, 19951996 as compared
to $72,000 in$497,000 for the same period in Fiscal 1995. However,
the Company incurred net foreign currency exchange losses
aggregating $174,0001996.
Interest expense decreased by $162,000 in the three month period ended
December 31, 19951996 as compared to $753,000 for the same period in Fiscal 1995.
Interest1996. The decrease
was attributable to lower average borrowings at lower interest rates on the U.S.
revolving line of credit facility. The average rate in effect on the credit
facility for the three month periods ended December 31, 1996 and 1995 was
approximately 9.5% and 10.0%, respectively. However, interest expense increased
by $79,000$203,000 in the nine month period ended December 31, 1996 as compared to the
same period in Fiscal 1996 due to the interest expense incurred on the
debentures issued in August 1995.
The Company recorded restructuring and $198,000 inother nonrecurring charges of
$77,000 and $2,811,000 for the three and nine month periods ended December 31,
1995,
respectively, as compared1996. The Company recognized $29,000 and $946,000 of restructuring charges over
these periods related to the same periods in Fiscal 1995. The
increase in interest expense was attributable to interest incurred
on the Debentures issued in August 1995, partially offset by lower
average borrowings and lower average interest rates associated
withclosure of the Company's United States secured credit facility.local Canadian office and
distribution operations in favor of an independent distributor and the
downsizing of the Company's U.S. operations. The charges include costs for
employee severance, asset write-downs, and facility and equipment lease costs.
Additionally, the Company recognized $46,000 and $1,865,000 of nonrecurring
charges over these periods 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 lossesloss of
$4,398,000$5,643,000 and $5,673,000$16,409,000 for the three and nine month periods ended December
31, 1995, as1996, compared to a net earningsloss of $4,658,000$4,398,000 and $5,353,000$5,673,000 respectively, for
the same periods in Fiscal 1995, respectively.
Liquidity and Capital Resources1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash utilizedprovided by operating activities was $11,478,000$11,317,000 for the nine
months ended December 31, 1995.1996. Cash was used to
fund the loss from operationsprovided by decreases in accounts
receivables and higher inventory levels,inventories and an increase in accounts payable and other
current liabilities partially offset by a loss from operations. The decrease in
accounts receivable was due primarily to a one-time receipt of $5.0 million from
the Company's 50% owned joint venture (E & H Partners) in the first quarter of
Fiscal 1997 as a partial paydown of the joint venture's obligation to the
Company. The decrease in inventory is primarily due to a more cautious
purchasing strategy focusing on reducing inventory levels and the receiptassociated
carrying costs, and the closure of fundsthe Company's Canadian distribution
operations. Further, accounts payable and other current liabilities increased
due to extended term financing used 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.inventory purchases.
Net cash utilizedused by investing activities was $1,875,000$14,504,000 for the nine months
ended December 31, 1995. Investing activities
consisted1996. Cash was utilized primarily of capital expenditures for the purchase of new product molds.the
Company's investment in Sport Supply Group, Inc. ("SSG"), as described below.
In the nine months ended December 31, 1995,1996, the Company's financing
activities provided $15,374,000utilized $6,825,000 of cash. Cash was
provided by the private placement of $20,750,000 aggregate
principal amount of Debentures. The proceeds of approximately
$19,220,000, net of issuance costs, was initially used to reduceCompany reduced its borrowings
under theits U.S. line of credit 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 expansionby $6,418,000 through the collection of
the Company's distribution base.accounts receivable.
The Company maintains an asset-based revolving line of credit facility, as
amended, with the Lender.a U.S. financial institution (the "Lender"). The facility, as
amended through December 31, 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
December 31, 1995,1996, there waswere approximately $24.7$14.7 million outstanding on the
Company's revolving loan facility and approximately $2.5$1.6 million of letters of
credit outstanding issued for inventory purchases. Based on the "Borrowing Base" amount
at December 31, 1995, $6.11996, approximately $1.8 million of the credit facility was not
utilized. Pursuant to the terms of the credit facility, as amended, effective
December 31, 1996, the Company is required to maintain a minimum adjusted net
worth, as defined, of $38,000,000, effective$17,000,000 excluding certain restructuring and
nonrecurring charges and working capital of $10,000,000. At December 31, 1995. This minimum
will increase to $40,000,000 effective October 1, 1996,
the Company had an adjusted net worth, excluding such charges, of $26,441,000,
and then to
$45,000,000 effective April 1, 1997.working capital of $19,529,000, and therefore, was in compliance with these
covenants.
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 December 31, 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 December 31, 1995,1996, there were approximately $4.2$11.7
million and $2.7$2.2 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 for a $10over extension of $2.6
million line of credit for documentary letters
of credit and a $10on the $9.1 million back-to-back letter of credit line
collateralized by a $5 million certificate of deposit. Atfacility at December 31, 1995,1996 was
due to timing of letter of credit payments and new issuances.
Effective, January 1, 1997, the Company and its partner in E&H Partners
("E&H") mutually agreed to dissolve this joint venture and wind down its
operations. As a result, E&H's obligation to purchase the Company's product
returns terminated as of such date. Accordingly, the Company is negotiating the
sale of product returns with other parties and anticipates finalization of such
negotiations shortly. The Company expects such negotiations will result in an
arrangement which should improve the Company's cash flows from the sale of
product returns as compared to its previous arrangement with E&H.
On December 10, 1996, the Company purchased from Sport Supply Group, Inc.
("SSG") 1,600,000 shares of newly issued common stock, $.01 par value per share
(the "Common Stock"), for aggregate consideration of $11.5 million, or
approximately $7.19 per share. In addition, the Company purchased, for an
aggregate consideration of $500,000, 5-year warrants (the "Warrants") to acquire
an additional 1,000,000 shares of Common Stock at an exercise price of $7.50
per share, subject to standard anti-dilution adjustments, pursuant to a Warrant
Agreement. Prior to such purchase, the Company beneficially owned approximately
9.9% of SSG's outstanding Common Stock which it had purchased for $4,228,000 in
open market purchases. Based upon the purchase of the Common Stock as set forth
above, the Company owns approximately 27.1% of the outstanding shares of the
Common Stock. If the Company exercises all of the Warrants, it will beneficially
own approximately 34.9% of the Common Stock. In addition, the Company has
arranged for foreign trade credit financing of $2 million for the benefit of SSG
to supplement SSG's existing credit facilities. In connection with such
purchase, SSG appointed the Company's designees to become the majority of the
members of its Board of Directors. Election of the Board of Directors is
subject to a vote of SSG's stockholders at its annual meeting of stockholders.
The $12 million purchase price paid by the Company was obtained by the
Company from the Lender, under the terms of its existing credit facility, and in
accordance with the terms of the consent obtained from such lender. Pursuant to
a Pledge and Security Agreement dated December 10, 1996, the Company has pledged
to the Lender the Common Stock and Warrants acquired on December 10, 1996.
The investment in SSG is part of management's plan to develop the Company's
business through diversification from the Company's core business of consumer
electronics. SSG sells its products at margins higher than the Company's core
business and to an institutional market which does not require the significant
after-market servicing costs typical of the Company's core business.
The Company has also recently executed a licensing/supply arrangement for
Central and Latin American markets with Cargil
International Corp. ("Cargil"), a leading distributor of consumer products in
Latin America. The transaction is for an initial five-year term, subject to
renewals, and provides for Cargil to license the Emerson trademark for certain
consumer electronics products and to source no less than 75% of the value of
such product through the Company's Hong Kong subsidiary had pledged
$5.0 million in certificatessourcing and supply operations.
Under the terms of depositthe agreements, the Company will receive minimum annual
royalties through the life of the agreement, which expires on March 31, 2002,
and will receive a separate fee for sourcing and inspection services.
The Company intends to assurepursue 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 availabilitynecessity of these credit facilities. At December 31, 1995,
there were approximately $3.3 millionutilizing working capital or accepting customer
returns.
The Company's strategic goals include growth through acquisitions and
through additions of letters of credit
outstanding on these credit facilities.
In November 1995,higher margin consumer product lines which complement 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.
Although there are 40,252,772 shares outstanding, approximately
29.2 million shares are held directly or indirectly by
affiliated 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 working 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, clocks and watches, and car audio products.business. The Company also also intends to engage in the marketing ofmarket distribution, sourcing
and other services to third parties. In addition, the Company intends to undertake efforts tofurther
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.
Based on the operating losses reported for the first nine months of Fiscal
1997, the continuing soft consumer electronics retail market and the trend in
sales of the Company's products, management believes that future cash flow
from operations and the institutional financing described above willmay not be
sufficient to fund all of the Company's cash requirements for the next yeartwelve
months. Additionally, the Company is currently in arrears on $469,000 of
dividends on the Company's Series A Preferred Stock. Management plans to take
the necessary steps to adequately finance the Company's operations which may
include one or more of the following steps:
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 certain new
business opportunities. Cash flow from operations may be
negatively impacted bypurchasing 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. Selling non-operating or underperforming assets; and
7. Selling equity and/or debt securities, either privately or through a
registered offering.
There can be no assurance that the Company will be able to successfully
implement any of these steps in a time frame or manner that 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, thereby significantly increasing the Company's working capital
needs during these periods. Additionally, the Company receives the largest
percentage of its 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 and G-Clef trademark should favorably impact
the Company's sales. However, management believes that
it has sufficient working capital to finance its sales plan forcash flow over the next year.respective terms of the agreements.
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. 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 December 31, 1995,1996, and
is incorporated herein by reference.
ITEM 2. Changes in Securities.
(a) On February 14, 1996,3. Preferred Stock Dividends.
As of the date of this report, the Company filed
a certificatewas in arrears on
$469,000 of Amendment todividends on its Certificate of
Incorporation to increase the number of authorized
shares of preferred stock from one million to ten
million.Series A Preferred Stock.
ITEM 4. Submission of Matters to a Vote of Security Holders.
(a) An Annual Meeting of Stockholders was held on November 28, 1995.December
18, 1996.
(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. 37,730,390 129,98437,359,900 171,244
Peter G. Bunger 37,730,270 130,19437,359,900 171,244
Raymond L. Steele 37,729,129 131,26537,359,900 171,244
Jerome H. Farnum 37,730,629 129,74537,359,900 171,244
Geoffrey P. Jurick 37,730,390 129,98437,358,900 172,244
Eugene I. Davis 37,730,270 130,19437,358,900 172,244
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION - CONTINUED
(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 19961997 - 37,758,85337,421,161 shares for, 43,23881,083 shares
against and 58,55328,900 shares abstained.
ITEM 5. Other Information.
(a) TheCertain 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 First Cambridge
Securities Corporation ("First Cambridge")
entered into a one-year consulting agreement
dated asExchange Commission, constitute "forward
looking statements" with the meaning of December 8, 1995. Pursuant to the consulting agreement, First Cambridge agreed to
provide financial consulting services in exchange
for $6,000 per monthReform Act. Such
forward looking statements involve known and stock purchase warrantsunknown risks,
uncertainties, and other factors which may cause the actual
results, performance or achievements of the Company to be
issuedmaterially 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 First Cambridge, and/vendor
program; effects of foreign trade; advertising and promotional
efforts; brand awareness; the existence or officersabsence 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 sharesadverse
publicity; success of the Company's common stock at
an exercise priceacquisition strategy
including results of $4.00 per share,SSG's operations; changes in business
strategy or development plans; success of management's strategy
to finance the Company's operations; quality of management;
success of licensing arrangements; availability, use and expire on
December 8, 2000.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.
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION - CONTINUED
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
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) Pledge Agreement dated as of January 1, 1996,
between Emerson and Albert G. McGrath, Jr.
relating to terminationFebruary 4, 1997 by
Fidenas International Limited, L.L.C. ("FIN") in favor of employment and agreement on
consulting services.TM
Capital.
10(b) Registration Rights Agreement dated as of
January 31,
1996, betweenFebruary 4, 1997 by and among Emerson Radio Corp., FIN, the
Creditors, FIL and Merle Eakins relating
to termination of employmentTM Capital Corp.
10(c) License and agreement on
consulting services.
10(c)Exclusive Distribution Agreement with
Cargil International Corp.
10(d) Supply and Inspection Agreement with Cargil
International Corp.
10(e) Amendment No. 25 to Financing Agreements,
dated as of February 13, 1996.
10(d) Consulting Agreement, dated as of
December 8, 1995 between18, 1997, among Emerson, Majexco Imports,
Inc. and First
Cambridge SecuritiesCongress Financial 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(27) Financial Data Schedule for the nine months ended
December 31, 1995.1996.
(b) Reports on Form 8-K:
During the three month period ended
December 31, 1995, no(1) Current Report on Form 8-K was filed by the
Company.dated November 27,
1996, reporting matters under Item 5.
(2) Current Report on Form 8-K dated December 10,
1996, reporting matters under Items 2 and 7.
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: February 14, 1996 /s/ Geoffrey P. Jurick
Geoffrey P. Jurick
Chief Executive Officer
Date: February 14, 199619, 1997 /s/ Eugene I. Davis
Eugene I. Davis
President
INDEX TO EXHIBITS
PAGE NUMBER
IN SEQUENTIAL NUMBERING
EXHIBIT DESCRIPTION SYSTEM
3(a) Amendment datedDate: 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.
2719, 1997 /s/ John P. Walker
John P. Walker
Executive Vice President,
Chief Financial Data Schedule for the
nine months ended December 31, 1995.Officer