THIS DOCUMENT IS A COPY OF THE FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30,
1996 FILED ON AUGUST 20, 1996 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP
EXEMPTION.
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 June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-25226
EMERSON RADIO CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3285224
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Entin Road Parsippany, New Jersey 07054
(Address of principal executive offices) (Zip code)
(201)884-5800
(Registrant's telephone number, including area code)
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of common stock as of June 30, 1996:
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)
Three Months Ended
June 30
1996 1995
Net revenues . . . . . . . . . . . . . $41,147 $ 57,058
Costs and expenses:
Cost of sales . . . . . . . . . . . 38,784 50,886
Other operating costs and expenses . 934 1,617
Selling, general & administrative
expenses . . . . . . . . . . . . . 5,364 5,242
45,082 57,745
Operating loss . . . . . . . . . . . . (3,935) (687)
Interest expense . . . . . . . . . . . 812 622
Loss before income taxes . . . . . . . (4,747) (1,309)
Provision (benefit) for income taxes . (24) 92
Net loss . . . . . . . . . . . . . . . $ (4,723) $ (1,401)
Net loss per common share. . . . . . . $ (.12) $ (.04)
Weighted average number of
common shares outstanding . . . . . . 40,253 40,253
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
June 30, March 31,
1996 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . $ 17,508 $ 16,133
Accounts receivable (less allowances of
$4,426 and $6,139, respectively) . . . . . 17,908 23,583
Inventories . . . . . . . . . . . . . . . . 31,682 35,292
Prepaid expenses and other current assets . 9,979 10,306
Total current assets . . . . . . . . . . . 77,077 85,314
Property and equipment - (at cost less
accumulated depreciation and amortization
of $4,838 and $4,422, respectively) . . . . . 3,137 3,501
Other assets . . . . . . . . . . . . . . . . . 8,336 7,761
Total Assets . . . . . . . . . . . . . . . $ 88,550 $ 96,576
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . . . $ 17,436 $ 21,151
Current maturities of long-term debt . . . . 138 173
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . 11,533 10,391
Accrued sales returns . . . . . . . . . . . 2,672 3,091
Income taxes payable . . . . . . . . . . . . 187 202
Total current liabilities . . . . . . . . 31,966 35,008
Long-term debt . . . . . . . . . . . . . . . . 20,872 20,886
Other non-current liabilities . . . . . . . . 278 300
Shareholders' Equity:
Preferred stock - $.01 par value, 10,000,000
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 . . . . . . . . 108,986 108,991
Accumulated deficit . . . . . . . . . . . . . (83,073) (78,175)
Cumulative translation adjustment . . . . . . 118 163
Total shareholders' equity . . . . . . . 35,434 40,382
Total Liabilities and Shareholders' Equity $ 88,550 $ 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)
Three Months Ended
June 30,
1996 1995
Cash Flows from Operating Activities:
Net cash provided by operating
activities . . . . . . . . . . . . . . . . $ 5,308 $ 1,428
Cash Flows from Investing Activities:
Net cash provided (used) by investing
activities . . . . . . . . . . . . . . . 45 (1,177)
Cash Flows from Financing Activities:
Net repayments under line of
credit facility. . . . . . . . . . . . . . (3,715) (2,077)
Other . . . . . . . . . . . . . . . . . . . (263) (720)
Net cash used by financing
activities . . . . . . . . . . . . . . . . (3,978) (2,797)
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . 1,375 (2,546)
Cash and cash equivalents at beginning
of year. . . . . . . . . . . . . . . . . . . 16,133 17,020
Cash and cash equivalents at end of period . . $ 17,508(a) $14,474 (a)
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . $ 815 $ 884
Income taxes paid . . . . . . . . . . . . . $ 15 $ 114
(a) The balances at June 30, 1996 and 1995, include $9.0 million and $9.1
million of cash and cash equivalents, respectively, pledged to assure the
availability of certain letter of credit facilities.
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
The unaudited interim consolidated financial statements reflect all
adjustments that management believes 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, 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 months ended June 30, 1996 are not
necessarily indicative of the results of operations for the full year ending
March 31, 1997.
NOTE 2
Net loss per common share for the three month periods ended June 30, 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 each period. The net loss per share for both periods does
not include common stock equivalents assumed outstanding since they are anti-
dilutive.
NOTE 3
The provision for income taxes for the three months ended June 30, 1995
consists primarily of taxes related to international operations. The benefit for
income taxes for the three months ended June 30, 1996 consists primarily of
domestic tax refunds received. The Company did not recognize tax benefits for
losses incurred by its domestic operations during the three months ended June
30, 1996 and 1995.
NOTE 4
Spare parts inventories, net of reserves, aggregating $1,920,000 and
$2,042,000 at June 30, 1996 and March 31, 1996, respectively, are included in
"Prepaid expenses and other current assets."
NOTE 5
Long-term debt consists of the following:
(In thousands of dollars)
June 30, March 31,
1996 1996
8 1/2% Senior Subordinated Convertible
Debentures Due 2002 . . . . . . $20,750 $20,750
Other . . . . . . . . . . . . . . 260 309
21,010 21,059
Less current obligations. . . . . 138 173
$20,872 $20,886
NOTE 6
The 30 million shares of Common Stock issued to GSE Multimedia Technologies
Corporation ("GSE"), Fidenas International Limited, L.L.C. ("FIN") and Elision
International, Inc. ("Elision") on March 31, 1994, pursuant to the bankruptcy
restructuring plan, were the subject of certain legal proceedings. On June 11,
1996, a Stipulation of Settlement and Order (the "Settlement Agreement") was
executed, which settles various legal proceedings in Switzerland, the Bahamas
and the United States among Mr. Jurick, Emerson's Chairman and Chief Executive
Officer, and his affiliated entities and certain of their creditors (the
"Creditors"). The Settlement Agreement provides, among other things, for the
payment by Mr. Jurick and his 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 affiliated
entities of Mr. Jurick. In addition, Mr. Jurick will be paid the sum of $3.5
million from the sale of such stock. The Settlement Shares will be sold over an
extended, but indeterminate, period of time by a financial advisor (the
"Advisor") to be proposed by Emerson and selected in consultation with Mr.
Jurick and the Creditors. Such Advisor will formulate a marketing plan taking
into consideration (i) the interests of Emerson's minority stockholders, and
(ii) the goal of generating sufficient proceeds to pay the Creditors and Mr.
Jurick as quickly as possible. The Settlement Shares will be divided into two
pools. The Pool A Shares initially will consist of 15,286,172 Emerson shares.
The Pool B Shares will consist of the number of Settlement Shares with respect
to which Mr. Jurick must retain beneficial ownership of voting power to avoid an
event of default arising out of a change of control pursuant to the terms of the
Company's Loan and Security Agreement with a U.S. financial institution (the
"Lender") and/or the indenture governing the Company's 8 1/2% Senior
Subordinated Convertible Debentures Due 2002 (the "Debentures"). Sales may
be made of the Settlement Shares pursuant to a registered offering if the
sales price is not less than 90% of the average of the three most recent
closing prices (the "Average Closing Price"), or, other than in a
registered offering, of up to 1% of the Emerson common stock
outstanding per quarter, if the sales price is not less than 90% of the Average
Closing Price. Any other attempted sales are subject to the consent of the
Company, Mr. Jurick and the Creditors, or, if necessary, the Court. The
Settlement Agreement will only become effective after, among other things,
receipt by the Court of certain share certificates currently held in foreign
jurisdictions and all documents required in the Settlement Agreement.
On May 10, 1996, International Jensen Incorporated ("Jensen") filed an
action in the United States District Court for the Northern District of
Illinois, Eastern Division, against the Company and its President, Eugene I.
Davis, for violations of proxy solicitation rules and for breach of a
confidentiality agreement with Jensen. On May 14, 1996, the Court entered a
temporary restraining order against the Company and its President, which
subsequently lapsed, enjoining them from (i) further solicitation of Jensen's
stockholders or their representatives until the Company has filed a Proxy
Statement with the Securities and Exchange Commission which complies with the
provisions of Regulation 14A of the Securities Exchange Act of 1934; (ii) making
further solicitation containing false and misleading or misleading statements of
material fact or material omissions; and (iii) disclosing confidential
information in violation of the confidentiality agreement. On May 20, 1996, the
Company filed a counterclaim and third party complaint in this action alleging
that Jensen and its Chairman, Chief Executive Officer and President, Robert G.
Shaw, fraudulently induced the Company to enter into a confidentiality agreement
and failed to negotiate with the Company in good faith. In its counterclaim and
third party complaint, the Company requests such other equitable or other relief
as the Court finds proper and an award of attorneys' fees and expenses. On
July 2, 1996, the Company amended its third party complaint to include Recoton
Corporation ("Recoton"), the competing bidder for Jensen, and William Blair
Leveraged Capital Fund, L.P. ("Blair") for conspiring in the actions of Jensen
and Mr. Shaw. The Company voluntarily dismissed Blair, without prejudice, on
August 2, 1996. On August 8, 1996, the Company filed a Second Amended
Counterclaim and Third Party Complaint with the Chicago Federal Court
alleging that disclosures and omissions in Jensen's proxy materials
consitituted violations of the antifraud provisions of the federal proxy rules
and seeking a temporary restraining order to enjoin Jensen from holding its
August 28, 1996 Special Meeting of Stockholders to approve the Recoton/Shaw
transactions and from utilizing any proxies solicited pursuant to such allegedly
materially misleading proxy materials. Jensen has sought to have the Court
abstain from deciding this matter. The Court has not yet ruled on whether it
will abstain. The Company and its President intend to vigorously defend
Jensen's claims against the Company and its President and to vigorously
pursue its counterclaim against Jensen and its third party complaint against
Mr. Shaw and Recoton. The Company believes that Jensen's claims are without
basis, that it has meritorious defenses against Jensen's claim and that the
litigation or results thereof will not have a material adverse effect on the
Company's consolidated financial position.
On July 30, 1996, the Company filed a complaint in the Court of Chancery of
the State of Delaware against Jensen, all of its directors, Blair, Recoton, and
certain affiliates of the foregoing alleging violations of Delaware law
involving Jensen's auction process, interference with prospective economic
advantage, and aiding and abetting breaches of fiduciary duties. In particular,
the complaint seeks an order enjoining the consummation of the Jensen/Recoton
merger and the sale of Jensen's Original Equipment Manufacturing business to Mr.
Shaw. The complaint also seeks to require Jensen and its Board of Directors to
provide relevant due diligence materials to the Company and to engage in good
faith negotiations with the Company by asking the Court to order Jensen and its
Board of Directors to conduct a fair auction on a level playing field. The
Company is also requesting the Court to award damages and further relief as
would be just and equitable. The Court ordered expedited discovery and held a
hearing on the matter and on a motion for preliminary injunction filed on behalf
of Jensen's stockholders on August 15, 1996. The Court has not yet rendered its
decision.
On December 20, 1995, the Company filed suit in the United States District
Court for the District of New Jersey against Orion Sales, Inc., Otake Trading
Co. Ltd., Technos Development Limited, Shigemasa Otake, and John Richard Bond,
Jr., (collectively, the "Otake Defendants") alleging breach of contract, breach
of covenant of good faith and fair dealing, unfair competition, interference
with prospective economic gain, and conspiracy in connection with certain
activities of the Otake Defendants under certain agreements between the Company
and the Otake Defendants. Mr. Bond is a former officer and sales representative
of the Company, having served in the latter capacity until he 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 ended March 31, 1996.
On December 21, 1995, Orion Sales, Inc. and Orion Electric (America), Inc.
filed suit against the Company in the United States District Court,
Southern District of Indiana, Evansville Division, alleging
various breaches of certain agreements by the Company, including
breaches of the confidentiality provisions, certain payment breaches, breaches
of provisions relating to product returns, and other alleged breaches of those
agreements, and seeking damages in the amount of $2,452,656, together with
interest thereon, attorneys' fees, and certain other costs. While the outcome
of the New Jersey and Indiana actions are not certain at this time, the Company
believes it has meritorious defenses against the claims made by the plaintiffs
in the Indiana action. In any event, the Company believes the results of that
litigation should not have a material adverse effect on the financial condition
of the Company or on its operations.
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
were satisfied. The Company has objected to and has vigorously contested the
claim and believes it has meritorious defenses to the highly speculative portion
of the claim for lost profits and the portion of the claim for actual damages
for expenses incurred prior to the execution of the contracts. Additionally, on
or about September 30, 1994, the Company instituted an adversary proceeding in
the Bankruptcy Court asserting damages caused by Cineral and seeking declaratory
relief and replevin. A motion filed by Cineral to dismiss the adversary
proceeding has been denied. The adversary proceeding and claim objection have
been consolidated into one proceeding an discovery commenced. This action has
been stayed since June 1995 by order of the Bankruptcy Court pending settlement
negotiations. An adverse final ruling on the Cineral claim could have a
material adverse effect on the Company, even though it would be limited to 18.3%
of the final claim determined by a court of competent jurisdiction; however,
with respect to the claim for lost profits, in light of the foregoing, the
Company believes the chances for recovery for lost profits are remote.
NOTE 7
The Company has a 50% investment in E & H Partners, a joint venture that
purchases, refurbishes and sells certain of the Company's product returns. The
results of this joint venture are accounted for by the
equity method. The Company's equity in the earnings of the joint venture is
reflected as a reduction of cost of sales in the Company's unaudited interim
Consolidated Statements of Operations. Summarized financial information relating
to the joint venture is as follows (in thousands):
Three Months Ended June 30,
1996 1995
Income Statement data:
Net Sales (a) $10,405 $ 7,274
Net Earnings 580 919
Sales by the Company 2,819 7,989
to E&H Partners
June 30, March 31,
1996 1996
Balance Sheet Data:
Current assets (b) $17,121 $19,326
Noncurrent assets 181 162
Total Assets $17,302 $19,488
Accounts Payable to the
Company (b) $ 6,471 $13,270
Other Current liabilities 7,721 3,688
Total Liabilities 14,192 16,958
Partnership Equity 3,110 2,530
Total Liabilities and
Partnership Equity $17,302 $19,488
Equity of the Company in net
assets of E&H Partners $ 1,555 $ 1,265
(a) Includes sales to the Company of $3,971,000 and $1,425,000, respectively.
(b) Inventories of the Partnership had been assigned to the Lender as
collateral for the U.S. line of credit facility. In April 1996, the Company
agreed to equally share the lien on the partnership's inventory with the other
party in the joint venture, in exchange for, among other things, a $5.0 million
loan by such partner to the joint venture and a subsequent partial paydown of
E&H Partners' obligation to the Company of the same amount.
Item 2. Management'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 1995 (the "Reform Act"). The Company's actual results
may differ from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in this report. See Other Information - Part II, Item 5.
GENERAL
Effective March 31, 1995, the Company and one of its suppliers and certain
of its affiliates (collectively, the "Supplier"), entered into two mutually
contingent agreements (the "Agreements"). 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 trademark to the Company's largest customer (the "Customer"), in
the U.S. and Canada. As a result, the Company is receiving 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 continues 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 operating results have been
significantly reduced, effective with the quarter ended September 30, 1995. The
Company has reported lower direct revenues in the quarters ended June 30, 1996
and 1995 as a result of the Agreements, but its net operating results for such
periods have not been impacted negatively. The Company has realized and expects
to continue to realize a more stable cash flow over the three-year term of the
Agreements, as well as reduced short-term borrowings necessary to finance
accounts receivable and inventory, thereby reducing interest costs.
Additionally, the Company's gross margins are expected to improve as the change
in mix to higher margin products and a reduction in costs for product returns
(which have historically been higher for certain video products) take hold. The
Company and the Supplier are currently involved in litigation over certain
matters concerning the terms of the Agreements.
The Company's operating results and liquidity are impacted by the
seasonality of its business. The Company records the majority of its annual
sales in the quarters ending September 30 and December 31 and receives the
largest percentage of customer returns in the quarters ending March 31 and
June 30. Therefore, the results of operations discussed below are not
necessarily indicative of the Company's prospective annual results of
operations.
RESULTS OF OPERATIONS
Consolidated net revenues for the three month period ended June 30, 1996
decreased $15,911,000 (28%) as compared to the same period in the fiscal year
ended March 31, 1996 ("Fiscal 1996"). The decrease resulted from decreases in
unit sales of video cassette recorders, televisions and television/video
cassette recorder combination units, audio products and microwave ovens due to
higher retail stock levels, increased price competition in these product
categories, weak consumer demand and a soft retail market. This was partially
offset by sales of home theater and car audio products which were not introduced
until the second half of Fiscal 1996. Revenues earned from the licensing of the
Emerson Radio trademark were $1,002,000 and $1,044,000 in the three month
periods ended June 30, 1996 and 1995, respectively. Furthermore, the Company's
Canadian sales decreased $2.5 million relating to the continued weak Canadian
economy, partially offset by an increase in European sales to the Company's new
distributor in Spain. Although the Company expects its United States sales for
the quarter ending September 30, 1996 to be lower than the second quarter of
Fiscal 1996 due to continuing weak consumer demand and the increased level of
price competition, the Company is focusing on improving its margins on such
sales by emphasizing higher margin products.
Cost of sales, as a percentage of consolidated revenues, was 94% for the
three month period ended June 30, 1996 as compared to 89% for the same period in
Fiscal 1996. Gross profit margins in the three month period ended June 30,
1996 were unfavorably impacted by a change in product mix, lower sales prices
(primarily video products), the allocation of reduced fixed costs over a lower
sales base in the current fiscal year, and the recognition of income relating to
reduced reserve requirements for sales returns in the first quarter of Fiscal
1996. However, gross profit margins were favorably impacted by a reduction in
the costs associated with product returns related to the Company's agreements
with a majority of its suppliers to return defective products and receive in
exchange an "A" quality unit.
Other operating costs and expenses declined $683,000 in the three month
period ended June 30, 1996 as compared to the same period in Fiscal 1996,
primarily as a result of a decrease in expenses formerly incurred to process
product returns which are now subject to the Agreements with the Supplier.
Selling, general and administrative expenses ("S,G&A") as a percentage of
revenues, was 13% for the three month period ended June 30, 1996, as compared to
9% for the same period in Fiscal 1996. In absolute terms, S,G&A increased by
$122,000 in the three month period ended June 30, 1996 as compared to the same
period in Fiscal 1996. The increase was primarily attributable to a decrease in
foreign currency exchange gains, unrealized losses incurred on investment
securities and an increase in advertising incentives to stimulate sales,
partially offset by a reduction in fixed costs and compensation expense relating
to the Company's downsizing program in both the U.S. and in its foreign offices,
and lower selling expenses attributable to the lower sales. The increase in the
S,G&A as a percentage of revenues is due primarily to the allocation of fixed
S,G&A costs over a lower sales base. Additionally, the Company's exposure to
foreign currency fluctuations, primarily in Canada and Spain, resulted in the
recognition of net foreign currency exchange gains aggregating $14,000 and
$432,000 in the three month periods ended June 30, 1996 and 1995, respectively.
Interest expense increased by $190,000 in the three month period ended June
30, 1996 as compared to the same period in Fiscal 1996. The increase was
attributable to the interest expense associated with the Debentures issued in
August 1995, partially offset by the 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 June 30, 1996 and 1995
was approximately 9.5% and 11.25%, respectively.
As a result of the foregoing factors, the Company incurred a net loss of
$4,723,000 for the three month period ended June 30, 1996, compared to a net
loss of $1,401,000 for the same period in Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $5,308,000 for the three
months ended June 30, 1996. Cash was provided by decreases in accounts
receivables and inventories partially offset by a loss from operations. The
decrease in accounts receivable was due primarily to a one-time receipt of $5.0
million from the Company's 50% owned joint venture (E & H Partners) in the
current quarter as a partial paydown of joint venture's obligation to the
Company. The decrease in inventory is primarily due to a more cautious
purchasing strategy focusing on reducing inventory levels and the associated
carrying costs.
Net cash provided by investing activities was $45,000 for the three months
ended June 30, 1996.
In the three months ended June 30, 1996, the Company's financing activities
utilized $3,978,000 of cash. The Company reduced its borrowings under its U.S.
line of credit facility by $3,715,000 through the collection of accounts
receivable.
The Company maintains an asset-based revolving line of credit facility, as
amended, with a U.S. financial institution (the "Lender"). The facility 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 the U.S.
and Canadian assets of the Company except for trademarks, which are subject to a
negative pledge covenant. The interest rate on these borrowings is 1.25% above
the stated prime rate. At June 30, 1996, there were approximately $17.4 million
outstanding on the Company's revolving loan facility. At June 30, 1996, the
Company's letter of credit facility was not utilized. Based on the "Borrowing
Base" amount at June 30, 1996, $7,085,000 of the credit facility was not
utilized. Pursuant to the terms of the credit facility, as amended, effective
June 30, 1996, the Company is required to maintain a minimum adjusted net worth,
as defined, of $30,000,000. At June 30, 1996, the Company had an adjusted net
worth of $35,434,000.
The Company's Hong Kong subsidiary maintains various credit facilities
aggregating $62.1 million with a bank in Hong Kong consisting of the following:
(i) a $12.1 million credit facility generally used for letters of credit for a
foreign subsidiary's direct import business and affiliates' inventory
purchases, and (ii) a $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 Customer. At June 30, 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 June 30, 1996,
there were approximately $7.7 million and $9.0 million of letters of credit
outstanding on the $12.1 million and $50 million credit facilities,
respectively.
The Company's Hong Kong subsidiary maintained an additional credit facility
with another bank in Hong Kong. The facility provided 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 June
30, 1996, the Company's Hong Kong subsidiary had pledged $5.0 million in
certificates of deposit to assure the availability of this credit facility. At
June 30, 1996, this credit facility was not utilized. The Company recently
terminated such facility.
Since the emergence of the Company from bankruptcy, management believes it
has been able to compete more effectively in the highly competitive
consumer electronics and microwave oven industries in the United States and
Canada by combining innovative approaches to the Company's current
product line, such as value-added promotions, and augmenting its product
line with higher margin complementary products. The Company also
intends to engage in the marketing of distribution, sourcing and other services
to third parties. In addition, the Company intends to undertake efforts to
expand the international distribution of its products into areas where
management believes low to moderately priced, dependable consumer electronics
and microwave oven products will have a broad appeal. The Company has in the
past and intends in the future to pursue such plans either on its own or by
forging new relationships, including license arrangements, partnerships, joint
ventures or strategic mergers and acquisitions of companies in similar or
complementary businesses.
In prior years, the Company successfully concluded licensing agreements for
certain business products and intends to pursue additional licensing
opportunities and believes that such licensing activities will have a positive
impact on net operating results by generating royalty income with minimal costs,
if any, and without the necessity of utilizing working capital or accepting
customer returns. The Company is also considering strategic alternatives for
its North American video business not covered under the license agreement with
the Supplier.
Management believes that future cash flow from operations and the
institutional financing described above will be sufficient to fund all of the
Company's cash requirements for the next year.
The Company's liquidity is impacted by the seasonality of its business.
The Company records the majority of its annual sales in the quarters ending
September 30 and December 31. This requires the Company to open significantly
higher amounts of letters of credit during the quarters ending June 30 and
September 30, therefore significantly increasing the Company's working capital
needs during these periods. Additionally, the Company received the largest
percentage of customer returns in the quarter ending March 31. The higher level
of returns during this period adversely impacts the Company's collection
activity during this period, and therefore its liquidity. The Company believes
that the Agreements with the Supplier (as noted above) and the "return-to-
vendor" agreements should favorably impact the Company's cash flow over their
respective terms.
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 June 30, 1996,
and is incorporated herein by reference.
ITEM 5. Other Information.
(a) Certain statements in this quarterly report on Form 10-
Q under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in
this quarterly report and in future filings by the Company with
the Securities and Exchange Commission, constitute "forward
looking statements" with the meaning of the Reform Act. Such
forward looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual
results, performance or achievements of the Company to be
materially different from any future results, performance or
achievements expressed or implied by such forward looking
statements. Such factors include, among others, the following:
general economic and business conditions; competition; success of
operating initiatives; operating costs; advertising and
promotional efforts; brand awareness; the existence or absence of
adverse publicity; changes in business strategy or development
plans; quality of management; availability, terms and deployment
of capital; 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.
(b) The Company and Starr Securities, Inc. ("Starr")
entered into a one-year consulting agreement dated as of August
1, 1996. Pursuant to the consulting agreement, Starr agreed to
provide financial consulting services in exchange for $5,000 per
month and stock purchase warrants to be issued to Starr, and/or
representatives of Starr it so designates (see Exhibits 10b, 10c
and 10d below). The stock purchase warrants were issued to Starr
and two of its representatives and entitles 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 August 1, 2001.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10(a) Consulting Agreement, dated as
of August 1, 1996 between Emerson Radio Corp.
("Emerson") and Starr Securities, Inc.
10(b) Common Stock Purchase Warrant
Agreement to purchase 125,000 shares of Common
Stock, dated as of August 1, 1996 between
Emerson and Starr Securities, Inc.
10(c) Common Stock Purchase Warrant
Agreement to purchase 110,000 shares of Common
Stock, dated as of August 1, 1996 between
Emerson and Arthur Stern, III.
10(d) Common Stock Purchase Warrant
Agreement to purchase 15,000 shares of Common
Stock, dated as of August 1, 1996 between
Emerson and Arthur Stern, IV.
(b) Reports on Form 8-K:
(1) During the three month period
ended June 30, 1996, no Form 8-K was filed.
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION - CONTINUED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMERSON RADIO CORP.
(Registrant)
Date: August 20, 1996 /s/ Eugene I. Davis
Eugene I. Davis
President
Date: August 20, 1996 /s/ Eddie Rishty
Eddie Rishty
Senior Vice President - Controller
and Logistics (Chief Accounting Officer)