UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30,
1996: 40,295,196.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Six Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
Net revenues .. . . . . . . . . . $101,656 $144,406 $60,509 $87,348
Costs and expenses:
Cost of sales . . . . . . . . . 96,536 130,692 57,752 79,807
Other operating costs and expenses 1,624 2,545 689 929
Selling, general & administrative
expenses. . . . . . . . . . . . 9,705 10,995 4,342 5,752
Restructuring and other nonrecurring
charges . . . . . . . . . . . . 2,734 2,734
110,599 144,232 65,517 86,488
Operating profit (loss). . . . . . (8,943) 174 (5,008) 860
Interest expense . . . . .. . . . . 1,657 1,294 845 671
Earnings (loss) before income taxes. . (10,600) (1,120) (5,853) 189
Provision for income taxes . . .. . 166 154 190 63
Net earnings (loss). . . . . . . . . $(10,766) $ (1,274) (6,043) $ 126
Net earnings (loss) per common share $ (.28) $ (.04) $ (.15) $ -
Weighted average number of common
shares outstanding. . . . . . . 40,274 40,253 40,295 40,253
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
Sept. 30, March 31,
1996 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . $ 15,002 $ 16,133
Short-term investments . . . . . . . . . . . 4,050 1,872
Accounts receivable (less allowances of
$4,813 and $6,139, respectively) . . . . . 18,232 23,583
Inventories . . . . . . . . . . . . . . . . 27,517 35,292
Prepaid expenses and other current assets . 7,898 8,434
Total current assets . . . . . . . . . . . 72,699 85,314
Property and equipment - (at cost less
accumulated depreciation and amortization
of $5,166 and $4,422, respectively) . . . . . 2,823 3,501
Other assets . . . . . . . . . . . . . . . . . 7,111 7,761
Total Assets . . . . . . . . . . . . . . . $ 82,633 $ 96,576
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . . . $ 19,186 $ 21,151
Current maturities of long-term debt . . . . 120 173
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . 9,806 10,391
Accrued sales returns . . . . . . . . . . . 3,016 3,091
Income taxes payable . . . . . . . . . . . . 148 202
Total current liabilities . . . . . . . . 32,276 35,008
Long-term debt . . . . . . . . . . . . . . . . 20,895 20,886
Other non-current liabilities . . . . . . . . 256 300
Shareholders' Equity:
Preferred stock - $.01 par value, 1,000,000
shares authorized, 10,000 shares issued
and outstanding . . . . .. . . . . . . . . 9,000 9,000
Common stock - $.01 par value, 75,000,000
shares authorized, 40,295,196 and 40,252,772
shares issued and outstanding, respectively. 403 403
Capital in excess of par value . . . . . . . . 109,243 108,991
Accumulated deficit . . . . . . . . . . . . . (89,291) (78,175)
Unrealized loss on short-term investments. . . (256)
Cumulative translation adjustment . . . . . . 107 163
Total shareholders' equity . . . . . . . 29,206 40,382
Total Liabilities and Shareholders' Equity $ 82,633 $ 96,576
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
Six Months Ended
September 30,
1996 1995
Cash Flows from Operating Activities:
Net cash provided (used) by operating
activities . . . . . . . . . . . . . . . . $ 3,322 $ (4,295)
Cash Flows from Investing Activities:
Purchases of investment securities. . . . . . (2,256)
Additions to property and equipment. . . . . (169) (1,145)
Other. . . . . . . . . . . . . . . . . . . . 113 (476)
Net cash used by investing
activities . . . . . . . . . . . . . . . . (2,312) (1,621)
Cash Flows from Financing Activities:
Net repayments under line of credit
facility . . . . . . . . . . . . . . . . . (1,965) (15,305)
Net proceeds from private placement of
Senior Subordinated Convertible
Debentures . . . . . . . . . . . . . . . . 19,233
Other . . . . . . . . . . . . . . . . . . . (176) (731)
Net cash provided (used) by financing
activities . . . . . . . . . . . . . . . . (2,141) 3,197
Net decrease in cash and cash
equivalents . . . . . . . . . . . . . . . . (1,131) (2,719)
Cash and cash equivalents at beginning
of year. . . . . . . . . . . . . . . . . . . 16,133 17,020
Cash and cash equivalents at end of period . . $ 15,002(a) $14,301(a)
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . $ 1,661 $ 1,564
Income taxes paid . . . . . . . . . . . . . $ 15 $ 133
(a) The balances at September 30, 1996 and 1995 include $4.0 million and $9.1
million, respectively, of cash and cash equivalents pledged to assure the
availability of certain letter of credit facilities.
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
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. 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, 1996, included in the Company's annual Form 10-K filing.
The preparation of the unaudited interim consolidated financial statements
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Due to the seasonal nature of the Company's consumer electronics business,
the results of operations for the three and six month periods ended September
30, 1996 are not necessarily indicative of the results of operations for the
full year ending March 31, 1997.
NOTE 2
Net earnings (loss) per common share for the three and six month periods
ended September 30, 1996 and 1995 are based on the net earnings (loss) and
deduction of preferred stock dividend requirements (resulting in a loss
attributable to common shareholders) and the weighted average number of shares
of common stock outstanding during the periods. These per share amounts do not
include common stock equivalents assumed outstanding since they are anti-
dilutive.
NOTE 3
The provision for income taxes for the three and six month periods ended
September 30, 1996 and 1995 consists primarily of taxes related to international
operations. The Company did not recognize tax benefits for losses incurred by
its domestic operations during the same periods.
NOTE 4
The Company records short-term investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Investment securities consist of equity securities
which are classified as both trading securities and as available for sale
securities. Investments in trading securities are reported at fair value, with
unrealized gains and losses included in earnings. Unrealized holding losses on
trading securities as of September 30, 1996 were approximately $283,000 and are
included in the statement of operations. In the quarter ended September 30,
1996, the Company reclassified one of its short-term investments to available
for sale and accordingly, unrealized gains and losses are reported as a separate
component of shareholders' equity. The cost of investments sold and related
realized gains and losses are determined using the specific identification
method.
The amortized cost and estimated market value of investment securities
classified as available for sale at September 30, 1996 are as follows:
Amortized cost $3,938,659
Gross unrealized losses (256,409)
Estimated market value $3,682,250
NOTE 5
Spare parts inventories, net of reserves, aggregating $1,823,000 and
$2,042,000 at September 30, 1996 and March 31, 1996, respectively, are included
in "Prepaid expenses and other current assets".
NOTE 6
NOTES PAYABLE:
The Company maintains a $30 million asset-based revolving line of credit
facility with a U.S. financial institution (the "Lender"). Pursuant to the terms
of the credit facility, as amended, effective September 30, 1996, the Company is
required to maintain a minimum adjusted net worth, as defined, of $30,000,000
excluding certain restructuring and nonrecurring charges. At September 30,
1996, the Company had an adjusted net worth, excluding such charges, of
$31,940,000 and, therefore was in compliance with this covenant.
LONG-TERM DEBT:
Long-term debt consists of the following:
(In thousands of dollars)
Sept. 30, March 31,
1996 1996
8 1/2% Senior Subordinated
Convertible Debentures
Due 2002. . . . . . . . . . . . $20,750 $20,750
Other . . . . . . . . . . . . . . 265 309
21,015 21,059
Less current obligations. . . . . 120 173
$20,895 $20,886
NOTE 7
SETTLEMENT OF LITIGATION REGARDING CERTAIN OUTSTANDING COMMON STOCK:
The 30 million shares of Common Stock issued to GSE Multimedia Technologies
Corporation ("GSE"), Fidenas International Limited, L.L.C. ("FIN") and Elision
International, Inc. ("Elision") on March 31, 1994, pursuant to the 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. Geoffrey P. Jurick, Emerson's Chairman and Chief
Executive Officer, certain of his affiliated entities (GSE, FIN and Elision) and
certain of their creditors (the "Creditors"). The Settlement Agreement
provides, among other things, for the 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 affiliated entities of Mr. Jurick. In addition,
Mr. Jurick will be paid the sum of $3.5 million from the sale of Settlement
Shares. The Settlement Shares will be sold over an indeterminate period of time
by a financial advisor (the "Advisor") to be proposed by Emerson and selected in
consultation with Mr. Jurick and the Creditors. TM Capital has initially been
selected as the Advisor. Such Advisor will formulate a marketing plan taking
into consideration (i) the interests of Emerson's minority stockholders, and
(ii) the goal of generating sufficient proceeds to pay the Creditors and Mr.
Jurick as quickly as possible. The Settlement Shares will be divided into two
pools. The Pool A Shares initially will consist of 15,286,172 Emerson shares.
The Pool B Shares will consist of the 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. A hearing to approve the Settlement Agreement has been
scheduled for November 19, 1996 in the United States District Court in Newark,
New Jersey.
INTERNATIONAL JENSEN INCORPORATED LITIGATION:
On May 10, 1996, International Jensen Incorporated ("Jensen") filed an
action in the United States District Court for the Northern District of
Illinois, Eastern Division, against the Company and its President, Eugene I.
Davis, for violations of proxy solicitation rules and for breach of a
confidentiality agreement with Jensen. On May 14, 1996, the Court entered a
temporary restraining order against the Company and its President, which
subsequently lapsed, enjoining them from (i) further solicitation of Jensen's
stockholders or their representatives until the Company has filed a Proxy
Statement with the Securities and Exchange Commission which complies with the
provisions of Regulation 14A of the Securities Exchange Act of 1934; (ii) making
further solicitation containing false and misleading or misleading statements of
material fact or material omissions; and (iii) disclosing confidential
information in violation of the confidentiality agreement. On May 20, 1996, the
Company filed a counterclaim and third party complaint in this action alleging
that Jensen and its Chairman, Chief Executive Officer and President, Robert G.
Shaw, fraudulently induced the Company to enter into a confidentiality agreement
and failed to negotiate with the Company in good faith. On July 2, 1996, the
Company amended its third party complaint to include Recoton Corporation
("Recoton"), the competing bidder for Jensen, and William Blair
Leveraged Capital Fund, L.P. ("Blair") for conspiring in the
actions of Jensen and Mr. Shaw. The Company voluntarily dismissed Blair, without
prejudice, on August 2, 1996.
On August 8, 1996, the Company filed a Second Amended Counterclaim and
Third Party Complaint with the Chicago Federal Court alleging that disclosures
and omissions in Jensen's proxy materials constituted violations of the
antifraud provisions of the federal proxy rules and seeking a temporary
restraining order to enjoin Jensen from holding its August 28, 1996 Special
Meeting of Stockholders to approve the Recoton/Shaw transactions and from
utilizing any proxies solicited pursuant to such allegedly misleading proxy
materials. The Court determined to abstain from deciding on this matter on
August 26, 1996. On October 22, 1996, Emerson and Jensen further amended their
claims and Recoton filed a separate action alleging that Emerson tortuously
interfered with the Jensen/Recoton transaction which seeks damages of not less
than $5 million. The Company and its President intend to vigorously defend
Jensen's and Recoton's claims against the Company and its President and to
vigorously pursue its counterclaim against Jensen and its third party complaint
against Mr. Shaw and Recoton. The Company believes that Jensen's and
Recoton's claims are without basis, that it has meritorious defenses against
Jensen's and Recoton's claims and that the litigation or results thereof
will not have a material adverse effect on the Company's consolidated
financial position.
On July 30, 1996, the Company filed a complaint in the Court of Chancery of
the State of Delaware against Jensen, all of its directors, Blair, Recoton, and
certain affiliates of the foregoing alleging violations of Delaware law
involving Jensen's auction process, interference with prospective economic
advantage, and aiding and abetting breaches of fiduciary duties. In particular,
the complaint seeks an order enjoining the consummation of the Jensen/Recoton
merger and the sale of Jensen's Original Equipment Manufacturing business to Mr.
Shaw. The complaint also seeks to require Jensen and its Board of Directors to
provide relevant due diligence materials to the Company and to engage in good
faith negotiations with the Company by asking the Court to order Jensen and its
Board of Directors to conduct a fair auction on a level playing field. The
Company is also requesting the Court to award damages and further relief as
would be just and equitable. The Court ordered expedited discovery and held a
hearing on the matter and on a motion for preliminary injunction filed on behalf
of Jensen's stockholders on August 15, 1996. The Court denied the motions for
preliminary injunction, and the Recoton/Shaw transactions with Jensen were
consummated on or about August 28, 1996.
OTAKE LITIGATION:
On December 20, 1995, the Company filed suit in the United States District
Court for the District of New Jersey against Orion Sales, Inc., Otake Trading
Co. Ltd., Technos Development Limited, Shigemasa Otake, and John Richard Bond,
Jr., (collectively, the "Otake Defendants") alleging breach of contract, breach
of covenant of good faith and fair dealing, unfair competition, interference
with prospective economic gain, and conspiracy in connection with certain
activities of the Otake Defendants under certain agreements between the Company
and the Otake Defendants. Mr. Bond is a former officer and sales representative
of the Company, having served in the latter capacity until he began working for
the other Otake Defendants. Certain of the other Otake Defendants have supplied
the majority of the Company's purchases until the Company's most recent fiscal
year ended March 31, 1996.
On December 21, 1995, Orion Sales, Inc. and Orion Electric (America), Inc.
filed suit against the Company in the United States District Court, Southern
District of Indiana, Evansville Division, alleging various breaches of certain
agreements by the Company, including breaches of the confidentiality provisions,
certain payment breaches, breaches of provisions relating to product returns,
and other alleged breaches of those agreements, and seeking damages in the
amount of $2,452,656, together with interest thereon, attorneys' fees, and
certain other costs. While the outcome of the New Jersey and Indiana actions are
not certain at this time, the Company believes it has meritorious defenses
against the claims made by the plaintiffs in the Indiana action. In any event,
the Company believes the results of that litigation should not have a material
adverse effect on the financial condition of the Company or on its operations.
BANKRUPTCY CLAIMS:
The Company is presently engaged in litigation regarding several bankruptcy
claims which have not been resolved since the restructuring of the Company's
debt. The largest claim was filed July 25, 1994 in connection with the
rejection of certain executory contracts with two Brazilian entities, Cineral
Electronica de Amazonia Ltda. and Cineral Magazine Ltda. (collectively,
"Cineral"). The contracts were executed in August 1993, shortly before the
Company's filing for bankruptcy protection. The amount claimed was
$93,563,457, of which $86,785,000 represents a claim for lost
profits and $6,400,000 for plant installation and establishment of offices,
which were installed and established prior to execution of the contracts. The
claim was filed as an unsecured claim and, therefore, will be satisfied, to the
extent the claim is allowed by the Bankruptcy Court, in the manner other allowed
unsecured claims 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 in early 1995 and seeking declaratory relief and replevin. A motion
filed by Cineral to dismiss the adversary proceeding has been denied. The
adversary proceeding and claim objection have been consolidated into one
proceeding and discovery commenced. This action has been stayed since June 1995
by order of the Bankruptcy Court pending settlement negotiations. An adverse
final ruling on the Cineral claim could have a material adverse effect on the
Company, even though it would be limited to 18.3% of the final claim determined
by a court of competent jurisdiction; however, with respect to the claim for
lost profits, in light of the foregoing, the Company believes the chances for
recovery for lost profits are remote.
NOTE 8
The Company recorded restructuring and other nonrecurring charges of
$2,734,000 for the three and six month periods ended September 30, 1996. The
Company recognized $917,000 of restructuring charges related to the closure of
the Company's local Canadian office and distribution operations in favor of an
independent distributor. The charges include costs for employee severance,
asset write-downs, and facility and equipment lease costs. Additionally, the
Company recognized $1,817,000 of nonrecurring charges relating to the proposed
but unsuccessful acquisition of International Jensen Incorporated. These costs
primarily include investment banking, commitment and professional fees,
including litigation costs, relating to the proposed acquisition.
NOTE 9
The Company has a 50% investment in E & H Partners, a joint venture that
purchases, refurbishes and sells 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):
Six Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
Income Statement data:
Net sales (a) $18,466 $13,556 $8,061 $6,282
Net earnings (loss) (74) 1,394 (654) 475
Sales by the Company
to E&H Partners 4,693 11,688 1,874 3,709
___________________________
(a) Sales to the
Company by
E&H Partners 6,070 1,799 2,099 374
Sept. 30, March 31,
1996 1996
Balance Sheet Data:
Current assets (a) $16,478 $19,326
Noncurrent assets 151 162
Total Assets $16,629 $19,488
Accounts Payable to the
Company (a) $ 6,226 $13,270
Other Current liabilities 7,947 3,688
Total Liabilities 14,173 16,958
Partnership Equity 2,456 2,530
Total Liabilities and
Partnership Equity $16,629 $19,488
Equity of the Company in net
assets of E&H Partners $ 1,295 $ 1,265
_______________
(a) Inventories of the Partnership had been assigned to the Lender as collateral
for the U.S. line of credit facility. In April 1996, the Company agreed to
equally share the lien on the partnership's inventory with the other party in
the joint venture, in exchange for, among other things, a $5.0 million loan by
such partner to the joint venture and a subsequent partial paydown of E&H
Partners' obligation to the Company of the same amount.
EMERSON RADIO CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL 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.
RESULTS OF OPERATIONS
Consolidated net revenues for the three and six month periods ended
September 30, 1996 decreased $26,839,000 (31%) and $42,750,000 (30%) as compared
to the same periods in the fiscal year ended March 31, 1996 ("Fiscal 1996"),
respectively. The decrease resulted from decreases in unit sales of video
cassette recorders, televisions, television/video cassette recorder combination
units and audio products due to higher retail stock levels, increased price
competition in these product categories, weak consumer demand and a soft
retail market. This was partially offset by increased sales of microwave ovens
attributable to a broader product line, larger size units and increased SKU
selections by customers, and by sales of home theater and car audio products
which were not introduced until the second and third quarters of Fiscal 1996.
Revenues recorded from the licensing of the Emerson & G-Clef registered
trademark were $1,001,000 and $2,002,000 in the three and six month periods
ended September 30, 1996 as compared to $1,356,000 and $2,401,000 in the same
periods in Fiscal 1996, respectively. The decline in royalty income is
attributable to lower aggregate sales reported by the licensees of the Emerson &
G-Clef registered trademark brand products. However, the Company has not
received the royalty report from the Company's largest licensee for the second
quarter ended September 30, 1996, and therefore, recorded only the minimum
royalties due pursuant to the license agreement. Such royalties may be higher
upon receipt of the report of the actual results from the licensee. Furthermore,
the Company's Canadian sales decreased $3.3 million in the first half of the
fiscal year ending March 31, 1997 ("Fiscal 1997") relating to the continued weak
Canadian economy and the closure of the Company's local office and Company
operated distribution operations in favor of an independent distributor. This
was partially offset by an increase in European sales to the Company's new
distributor in Spain. The Company expects its United States sales for the third
quarter of Fiscal 1997 to be lower than the third quarter of Fiscal 1996 due to
continuing weak consumer demand, a soft retail market and the increased level of
price competition.
Cost of sales, as a percentage of consolidated revenues, was 95% for both
the three and six month periods ended September 30, 1996 as compared to 91% for
the same periods in Fiscal 1996. Gross profit margins in the three and six
month periods ended September 30, 1996 were unfavorably impacted by a change in
product mix, lower sales prices (primarily video products), a higher proportion
of close-out sales, the allocation of reduced fixed costs over a lower sales
base in the current fiscal year, and the recognition of income relating to
reduced reserve requirements for sales returns in the first half of the prior
fiscal year. However, gross profit margins were favorably impacted by the
introduction of higher margin products -- home theater and car audio products,
and by a reduction in the costs associated with product returns related to the
Company's agreements with a majority of its suppliers to return defective
products and receive in exchange an "A" quality unit.
Other operating costs and expenses declined $240,000 and $921,000 in the
three and six month periods ended September 30, 1996 as compared to the same
periods in Fiscal 1996, respectively, primarily as a result of a decrease in
after-sale service costs relating to the Company's licensing of its Emerson & G-
Clef registered trademark for sale of video products to its largest customer .
Selling, general and administrative expenses ("S,G&A") as a percentage of
revenues, was 7% and 10% for the three and six month periods ended September 30,
1996, as compared to 7% and 8% for the same periods in Fiscal 1996,
respectively. In absolute terms, S,G&A decreased by $1,410,000 and $1,290,000 in
the three and six month periods ended September 30, 1996 as compared to the same
periods in Fiscal 1996, respectively. The decrease was primarily attributable to
a reduction in fixed costs and compensation expense relating to the Company's
continuing cost reduction program in both the U.S. and in its foreign offices,
lower selling expenses attributable to the lower sales and a lower provision on
trade receivables. This was partially offset by a reduction in foreign currency
exchange gains. The increase in 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 $12,000 and $26,000 in the three and six month
periods ended September 30, 1996 as compared to $239,000 and $671,000 in the
same periods in Fiscal 1996, respectively.
Interest expense increased by $174,000 and $363,000 in the three and six
month periods ended September 30, 1996 as compared to the same periods in
Fiscal 1996, respectively. The increase was attributable to the interest
expense associated with the debentures issued in August 1995,
partially offset by lower average borrowings at lower interest rates on the U.S.
revolving line of credit facility. The average rate in effect on the credit
facility for the three month periods ended September 30, 1996 and 1995 was
approximately 9.5% and 10.75%, respectively.
The Company recorded restructuring and other nonrecurring charges of
$2,734,000 for the three and six month periods ended September 30, 1996. The
Company recognized $917,000 of restructuring charges related to the closure of
the Company's local Canadian office and distribution operations in favor of an
independent distributor. The charges include costs for employee severance,
asset write-downs, and facility and equipment lease costs. Additionally, the
Company recognized $1,817,000 of nonrecurring charges relating to the proposed
but unsuccessful acquisition of International Jensen Incorporated. These costs
primarily include investment banking, commitment and professional fees,
including litigation costs, relating to the proposed acquisition.
As a result of the foregoing factors, the Company incurred a net loss of
$6,043,000 and $10,766,000 for the three and six month periods ended September
30, 1996, compared to net earnings of $126,000 for the quarter ended September
30, 1996 and a net loss of $1,274,000 for the first half of Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3,322,000 for the six months
ended September 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 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 associated
carrying costs.
Net cash used by investing activities was $2,312,000 for the six months
ended September 30, 1996. Cash was utilized primarily for the purchase of
investment securities.
In the six months ended September 30, 1996, the Company's financing
activities utilized $2,141,000 of cash. The Company reduced its
borrowings under its U.S. line of credit facility by $1,965,000
through the collection of accounts receivable.
The Company maintains an asset-based revolving line of credit facility, as
amended, with a U.S. financial institution (the "Lender"). The facility, as
amended through September 30, 1996, provides for revolving loans and letters of
credit, subject to individual maximums and, in the aggregate, not to exceed the
lesser of $30 million or a "Borrowing Base" amount based on specified
percentages of eligible accounts receivable and inventories. All credit extended
under the line of credit is secured by the U.S. and Canadian assets of the
Company except for trademarks, which are subject to a negative pledge covenant.
The interest rate on these borrowings is 1.25% above the stated prime rate. At
September 30, 1996, there were approximately $19.2 million outstanding on the
Company's revolving loan facility and approximately $3.3 million of letters of
credit outstanding for inventory purchases. Based on the "Borrowing Base" amount
at September 30, 1996, approximately $2.2 million of the credit facility was not
utilized. Pursuant to the terms of the credit facility, as amended, effective
September 30, 1996, the Company is required to maintain a minimum adjusted net
worth, as defined, of $30,000,000 excluding certain restructuring and
nonrecurring charges. At September 30, 1996, the Company had an adjusted net
worth, excluding such charges, of $31,940,000, and therefore, was in compliance
with this covenant.
The Company's Hong Kong subsidiary maintains various credit facilities
aggregating $59.1 million with a bank in Hong Kong consisting of the following:
(i) a $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 $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 September 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 September 30, 1996, there were approximately $7.7
million and $8.9 million of letters of credit outstanding on the $9.1 million
and $50 million credit facilities, respectively.
In the third quarter of Fiscal 1997, the Company made proposals to Sport
Supply Group, Inc. ("SSG"), a New York Stock Exchange listed company and the
largest direct mail distributor of sporting goods equipment and supplies in the
United States, in which the Company seeks to acquire a significant interest in
SSG, though not a majority interest of SSG common stock, and control of SSG's
Board of Directors. Under the terms of its most recent proposal, the Company
would increase its investment in SSG (the Company currently owns 9.9%
of outstanding SSG common stock) through the purchase of 1,714,286 shares
of newly issued common stock (the "Stock") of SSG at a purchase price
of $7.00 per share, for aggregate consideration of approximately
$12 million. The Company would also purchase, for $600, warrants
to purchase 1,000,000 shares of Stock at an exercise price of $7.50 per share
(the "Warrants"), subject to adjustment and exercisable for a five year term.
In addition, the Company would arrange for foreign trade credit financing of $2
million for the benefit of SSG. As part of the proposal, SSG would cause a
majority of the members of its Board of Directors to consist of Emerson
designees. If the proposal is accepted, upon acquisition of the Stock, the
Company would beneficially own approximately 28% of the outstanding shares of
SSG common stock, and assuming exercise of all the Warrants, the Company would
beneficially own approximately 35% of SSG common stock. The Company is currently
negotiating with SSG on the price and terms of such a transaction. There can be
no assurance that such negotiations will be successful or that the transaction
will be completed on terms set forth in the Company's most recent proposal.
The proposed acquisition of a significant interest in SSG is part of
management's plan to grow the Company through diversification from the Company's
core business of consumer electronics. SSG sells its product at margins
significantly higher than Emerson's core business and to an institutional market
that does not require the significant after-market servicing costs typical of
Emerson's core business.
The Company's strategic goals include growth through acquisitions and through
additions of higher margin consumer product lines which complement the Company's
business. The Company also intends to market distribution, sourcing and other
services to third parties. In addition, the Company intends to expand the
international distribution of its products into areas where management believes
low to moderately priced, dependable consumer electronics and microwave oven
products will have a broad appeal. The Company has in the past and intends in
the future to pursue such plans either on its own or by forging new
relationships, including license arrangements, partnerships, joint ventures or
strategic mergers and acquisitions of companies in similar or complementary
businesses.
In prior years, the Company successfully concluded licensing agreements for
certain business products and intends to pursue additional licensing
opportunities and believes that such licensing activities will have a positive
impact on net operating results by generating royalty income with minimal
costs, if any, and without the necessity of utilizing working capital or
accepting customer returns.
Based on the operating losses reported for the first half of Fiscal 1997,
the continuing soft retail market and the trend in sales, management believes
that future cash flow from operations and the institutional financing described
above may not be sufficient to fund all of the Company's cash requirements for
the next twelve months. Management plans to take the necessary steps to
adequately finance the Company's operations which may include the following:
1. Reviewing strategic alternatives for its North American video business not
covered under the license agreement with the Supplier.
2. Reducing inventory levels and purchase higher margin products for inventory.
3. Shifting a higher proportion of sales to direct import.
4. Negotiating with the Lender to amend the U.S. revolving credit facility to
ensure continued compliance with all covenants.
5. Continuing cost reduction programs in both the U.S. and foreign offices.
6. Sale of non-operating or underperforming assets.
7. Private sale of equity and/or debt securities.
There can be no assurance that the Company will be able to successfully
implement any of these steps in a time frame or manner which will permit the
Company to fund current operations and other planned expenditures at current and
expected sales volumes, if at all.
The Company's liquidity is impacted by the seasonality of its business.
The Company records the majority of its annual sales in the quarters ending
September 30 and December 31. This requires the Company to open significantly
higher amounts of letters of credit during the quarters ending June 30 and
September 30, therefore significantly increasing the Company's working capital
needs during these periods. Additionally, the Company received the largest
percentage of customer returns in the quarter ending March 31. The higher level
of returns during this period adversely impacts the Company's collection
activity during this period, and therefore its liquidity. The Company believes
that the licensing of the Emerson & G-Clef registered trademark and the "return-
to-vendor" agreements should favorably impact the Company's 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 Note
7 of Notes to Interim Consolidated Financial Statements
filed in Part I of Form 10-Q for the quarter ended September 30,
1996, and is incorporated herein by reference.
ITEM 5. OTHER INFORMATION.
Certain statements in this quarterly report on Form 10-Q
under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in
this quarterly report and in future filings by the Company with
the Securities and Exchange Commission, constitute "forward
looking statements" with the meaning of the Reform Act. Such
forward looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual
results, performance or achievements of the Company to be
materially different from any future results, performance or
achievements expressed or implied by such forward looking
statements. Such factors include, among others, the following:
product supply and demand; general economic and business
conditions and condition of the retail consumer electronics
market; price competition and competition from companies with
greater resources; success of operating initiatives and new
product introductions; operating costs including continuing the
Company's cost reduction program and Company's return to vendor
program; advertising and promotional efforts; brand awareness;
the existence or absence of adverse publicity; success of the
Company's acquisition strategy; changes in business strategy or
development plans; quality of management; availability, use and
terms of capital and compliance with debt covenants; business
abilities and judgment of personnel; availability of qualified
personnel; labor and employee benefit costs; changes in, or the
failure to comply with, government regulations and other factors
referenced in this quarterly report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
(10)(a) Employment Agreement, dated as of January 29, 1996
between Emerson Radio Corp. ("Emerson") and Marino Andriani.
(10)(b) Amendment No. 3 to Financing Agreements, dated
as of August 20, 1996, amending the adjusted net worth covenant
of the Loan Agreement between Emerson and Congress Financial
Corp.
(10(c) Amendment No. 4 to Financing Agreements, dated
as of November 14, 1996, amending the adjusted net worth covenant
of the Loan Agreement between Emerson and Congress Financial
Corp.
(10)(d) License Agreement, dated as of August 23, 1996
between Emerson and REP Investment Limited Liability Company for
the exclusive license for proprietary technology for home
theater and stereo surround sound systems.
(10)(e) Distribution Agreement, dated as of September
11, 1996 between Emerson, Emerson Radio Canada Ltd. and AVS
Technologies Inc., appointing exclusive distributor for Canada.
(27) Financial Data Schedule for six months ended
September 30, 1996.
(b) Reports on Form 8-K:
(1) During the three month period ended September
30, 1996, no Form 8-K was filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMERSON RADIO CORP.
(Registrant)
Date: November 19,1996 /s/ Eugene I. Davis
Eugene I. Davis
President
Date: November 19, 1996 /s/ John P. Walker
John P. Walker
Executive Vice President,
Chief Financial Officer