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 July 3,October 2, 1998
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)code)
(973)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 July 27,November 9,
1998: 50,772,615.48,621,815.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.Statements
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)(Unaudited)
(In thousands, except earnings per share data)amounts)
Three Months Ended July 3, JuneSix Months Ended
October 2, September 30, October 2, September 30,
1998 1997 1998 1997
Net revenues $59,126 $30,443$ 46,762 $ 45,100 $105,888 $ 75,543
Costs and expenses:
Cost of sales 51,888 28,39942,273 38,787 94,161 67,186
Other operating costs and expenses 1,266 866897 637 2,163 1,503
Selling, general & administrative
expenses 5,083 3,627
58,237 32,8922,599 3,527 7,497 7,154
------ ------ ------- ------
45,769 42,951 103,821 75,843
------ ------ ------- ------
Operating income (loss) 889 (2,449)993 2,149 2,067 (300)
Equity in earnings of Affiliate 443 509348 528 791 1,037
Write-down of investment in Joint
Venture (185) -- (370) --
Interest expense, net (569) (741)(551) (658) (1,120) (1,399)
----- ------ --------- ------
Income (loss) before income taxes 763 (2,681)605 2,019 1,368 (662)
Provision (benefit) for income taxes (1)22 -- 21 41
------ ------ --------- ---------
Net income (loss) $ 764 $(2,722)583 $ 2,019 $ 1,347 $ (703)
======= ========= ========= =========
Net income (loss) per common share
Basic $ .02.01 $ (.07).06 $ .03 $ (.02)
======= ========= ========= =========
Diluted $ .02.01 $ (.07).04 $ .03 $ (.02)
======= ========= ========= =========
Weighted average number of
common shares outstanding
Basic 51,220 40,59250,037 42,372 50,625 41,486
====== ====== ====== ======
Diluted 69,394 40,592
64,326 64,888 64,914 41,486
====== ====== ====== ======
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)
July 3,October 2, April 3,
1998 1998
ASSETS (Unaudited)
Current Assets:
Current Assets:
Cash and cash equivalents $ 5,6196,624 $ 2,608
Available for sale securities (net fair
value adjustment of ($770) and $0,
respectively) 1,040 --
Accounts receivable (net allowances of
$5,822$5,862 and $4,884, respectively) 3,000 5,2477,381 6,287
Other receivables 6,4526,554 6,474
Inventories 11,14811,472 11,375
Prepaid expenses and other current assets 1,8522,541 2,503
------ ------
Total current assets 28,071 28,20735,612 29,247
Property and equipment - (net of
accumulated depreciation and amortization
of $3,310$3,069 and $3,152, respectively) 1,2401,200 1,381
Investment in Affiliate and Joint Venture 18,00918,357 17,522
Other assets 4,6444,155 4,810
------ ------
Total Assets 59,324 $ 51,964 $ 51,92052,960
====== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 6835,134 $ --
Current maturities of long-term debt 6258 85
Accounts payable and other current
liabilities 10,527 12,25616,220 13,296
Accrued sales returns 5,0865,552 4,511
Income taxes payable 168109 191
------ ------
Total current liabilities 16,526 17,04327,073 18,083
Long-term debt, net of current maturities 20,750 20,750
Other non-current liabilities 175166 179
Shareholders' Equity:
Preferred shares - 10,000,000
shares authorized, 5,1373,714 and 5,237
shares issued and outstanding, respectively 4,6233,343 4,713
Common shares - $.01 par value, 75,000,000
shares authorized, 51,331,615 and 51,044,730
shares issued; 51,065,11548,701,015 and 51,044,730
shares outstanding, respectively 513 510
Treasury stock, at cost, 266,5002,630,600 shares and 0
shares respectively. (145)(1,409) --
Capital in excess of par value 113,293113,287 113,201
Unrealized losses on securities (770) --
Accumulated deficit (103,963)(103,826) (104,673)
Cumulative translation adjustment 192 197 197
------- --------
Total shareholders' equity 14,51311,335 13,948
------- --------
Total Liabilities and Shareholders' Equity $ 51,96459,324 $ 51,920
52,960
======= ========
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)
ThreeSix Months Ended
July 3, JuneOctober 2, September 30,
1998 1997
Cash Flows from Operating Activities:
Net cash provided by operating
activities $ 2,5213,965 $ 3732,005
-------- -------
Cash Flows from Investing Activities:
Net cash provided (used) by investing
activities. (44)(1,854) 13
-------- -------
Cash Flows from Financing Activities:
Net repaymentsborrowings (repayments) under line of
credit facility 683 (1,113)5,134 (1,859)
Other (149) (157)(3,229) (73)
-------- -------
Net cash used by financing
activities 534 (1,270)1,905 (1,932)
-------- -------
Net increase (decrease) in cash and cash equivalents 3,011 (884)4,016 86
Cash and cash equivalents at beginning
of year 2,608 2,640
------- -------
Cash and cash equivalents at end of period(a) $ 5,6196,624 $ 1,7562,726
======= =======
Supplemental disclosure of cash flow information:
Interest paid $ 569551 $ 7411,399
======= =======
Income taxes paid $ 3212 $ 31
======= =======
(a) Includes $1.0$1.4 million and $1.7 million as of October 2, 1998 and September
30, 1997, 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)
(In thousands, except earnings per share data)
NOTE 1 - BUSINESS
The unaudited interim consolidated financial statements reflect all
normal and recurring adjustments that are, in the opinion of management,
necessary to present a fair statement of Emerson Radio Corp.'s (the "Company" or
"Emerson") consolidated financial position as of July 3,October 2, 1998 and the results
of operations for the quartersthree and six month periods ended July 3,October 2, 1998 and
JuneSeptember 30, 1997 and1997. 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 Company's 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 fiscal year ended April 3, 1998 ("Fiscal 1998"), included in the Company's
annual report on Form 10-K.
The consolidated financial statements include the accounts of the
Company and all of its majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. 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 materially
differ from those estimates.
Due to the seasonal nature of the Company's consumer electronics
business, the results of operations for the quarterthree and six month periods ended
July 3,October 2 1998 are not necessarily indicative of the results of operations that
may be expected for the full year ending April 2, 1999 ("Fiscal 1999").
Beginning in Fiscal 1998, the Company changed its financial reporting
year to a 52/53 week year ending on the Friday closest to March 31. Accordingly,
the current fiscal year will end on April 2, 1999. Such change in the Company's
financial reporting year will not have a material effect on the Company's
results of operations.
Certain amounts in the prior period's consolidated financial
statements have been reclassified to conform to current periods presentation.
NOTE 2 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
For the Three For the Six
Months Ended July 3, JuneMonths Ended
October 2, September 30, October 2, September 30,
1998 1997 1998 1997
Numerator:
Numerator:
Net income (loss) $ 764583 $ (2,722)2,019 $ 1,347 $ (703)
Less: preferred
stock dividends 54 132538 109 592 245
----- ----- ----- --------
Numerator for basic earnings per
share - income available to
common stockholders 710 (2,854)45 1,910 755 (948)
Added effect of assumed conversions:
Interest on convertible debentures 441 441 882 --
Preferred stock dividends 5439 109 93 --
----- ----- ----- -------
Numerator for diluted earnings
(loss) per share $ 1,205525 $ (2,854)2,460 $ 1,730 $ (948)
====== ======= ======= ========
Denominator:
Denominator for basic earnings
per share - weighted average
shares 51,220 40,59250,037 42,372 50,625 41,486
Effect of dilutive securities:
Convertible debentures 5,204 5,204 5,204 --
Preferred shares 12,9709,085 17,312 9,085 --
------ ------ ----- -------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 69,394 40,59264,326 64,888 64,914 41,486
======= ====== ====== ========
Basic earnings (loss) per share $ .02.01 $ (.07).06 $ .03 $ (.02)
======= ======= ======== =========
Diluted earnings (loss) per share $ .02.01 $ (.07).04 $ .03 $ (.02)
======= ======= ========= ========
NOTE 3- CAPITAL STRUCTURE
The outstanding capital stock of the Company at July 3,October 2, 1998
consisted of common stock and Series A convertible preferred stock. The
preferred shares are convertible to common shares until March 31, 2002.
During the quartersquarter ended July 3, 1998 and JuneSeptember 30, 1997, 100 and 5501,434 shares of Series A
Preferred Stock were converted into 286,885 and 766,0542,990,011 shares of common stock, respectively.stock. There were
no conversions of Series A Preferred Stock for the quarter ended October 2,
1998. During August 1998, the Company repurchased directly 1,423 preferred
shares. If all existing outstanding preferred shares were converted at July 3,October
2, 1998, an estimated 139.1 million additional common shares would be issuable.
Dividends for the preferred stock accrued and were payable quarterly at a 7%
annual rate until March 31, 1997; dividend rates decline by 1.4% each succeeding
year until March 31, 2001 when no further dividends are payable. The dividend
rates at July 3,October 2, 1998 and JuneSeptember 30, 1997 were 4.2% and 5.6%, with
$801,000$762,000 and $618,000$615,000 of dividends in arrears respectively.
At July 3,October 2, 1998, the Company had outstanding approximately 1.2
million options with exercise prices ranging from $1.00 to $1.10. OutstandingApproximately
737,000 outstanding warrants with a common stock equivalent totalare convertible into approximately 670,000 shares
and haveof common stock at conversion prices ranging frombetween $1.20 toand $4.00.
The Company also has outstanding $20.8 million of Senior Subordinated
Convertible Debentures due in 2002. See "Note 78 - Long Term Debt.".
NOTE 4 - INCOME TAXES
Income tax provisions and benefits for the quarterly periods ended
July 3,October 2, 1998 and JuneSeptember 30, 1997 consist of taxes related to international
operations. The Company diddoes not recognize tax benefits for losses incurred by
its domestic operations during the quarters ended June 3, 1998 and June 30, 1997.operations.
NOTE 5 - INVENTORY
Inventories are comprised primarily of finished goods. Spare parts
inventories, net of reserves, aggregating $247,000$281,000 and $384,000 at July 3,October 2,
1998 and April 3, 1998, respectively, are included in "Prepaid expenses and
other current assets."
NOTE 6 - AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities are stated at fair value, with the
unrealized gains and losses, reported in a separate component of shareholders'
equity. Realized gains and losses, and declines in value judged to be
other-than-temporary are included in earnings.
The following is a summary of available-for-sale equity securities at
October 2, 1998 (in thousands):
Cost Gross Gross Estimated
Unrealized Unrealized Fair
Gains Losses Value
Equity Securities $1,810 $-- $770~ $1,040
NOTE 7 - INVESTMENT IN SPORT SUPPLY GROUP, INC.
The Company owns 2,200,000 (28%2,274,500 (29% of the outstanding) shares of common
stock of Sport Supply Group, Inc. ("SSG") which it purchased in 1996 at an
aggregate cost of $15,728,000 or $ 6.92 per share. In addition, the Company owns
warrants also purchased by it in 1996 for $500,000 to purchase an additional 1 million shares of SSG atSSG's common stock for
$7.50 per share ("SSG Warrants"). which the Company purchased in 1996 at an
aggregate cost of $500,000 or $.50 per SSG warrant. If the Company exercises all
of the SSG Warrants, it will beneficially own approximately 36%42% of the SSG
common shares.
The investment in and results of operations of SSG are accounted for
by the equity method. In January 1997, SSG changed its financial reporting year
end from October 31 to September 30. This change in accounting period resulted
in the Company now recording its share of SSG earnings on a concurrent basis.
Previously, the Company recorded its share of SSG's earnings on a two month
delay. The Company's investment in SSG includes goodwill of $3,973,000 which is
being amortized on a straight line basis over 40 years. At July 3,October 2, 1998, the
aggregate market value quoted on the New York Stock Exchange of Emerson's shares
of SSG common shares was approximately $18$16.2 million. Summarized financial
information derived from SSG's financial reports to the Securities and Exchange
Commission was as follows (in thousands):
(Unaudited)
July 3, 1998 April 3, 1998
Current assets $ 30,966 $ 37,282
Property, plant and
equipment and other assets 20,974 19,878
Current liabilities 6,741 8,395
Long-term debt 2,446October 2, 1998 April 3, 1998
(Audited) (Unaudited)
Current assets $ 33,710 $ 37,282
Property, plant and equipment
and other assets 21,094 19,878
Current liabilities 8,465 8,395
Long-term debt 5,161 7,498
(Unaudited)
For the 3 Months For the 3 Months
Ended Ended
July 3, 1998 May 2, 1997
Net sales $ 25,340 $ 28,312
Gross profit 9,840 10,717
Net income 1,739 1,974
(Unaudited)
For the 6 Months Ended For the 6 Months Ended
October 2, 1998 August 1, 1997
Net sales $ 50,607 $ 51,536
Gross profit 19,950 20,239
Net income 2,994 3,950
In July 1997, the Company entered into a Management Services Agreement
with SSG, under which SSG provides various managerial and administrative
services to the Company.
NOTE 78 -LONG TERM DEBT
As of July 3,October 2, 1998 and April 3, 1998 long-term debt consisted of
the following in (thousands(in thousands of dollars):
July 3, April 3,
1998 1998
8 1/October 2, April 3,
1998 1998
8-1/2% Senior Subordinated Convertible
Debentures Due 2002 $20,750 $20,750
Equipment notes and other 62 85
20,812 20,835
Less current obligations
Long term debt 62 85 $20,750 $20,750
Equipment notes and other 58 85
20,808 20,835
------- ------
Less current obligations 58 85
------- -------
Long term debt $20,750 $20,750
======= =======
The Senior Subordinated Convertible Debentures Due 2002 ("Debentures")
were issued in August 1995, bear interest at the rate of 8 1/8-1/2% per annum,
payable quarterly, and 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 a conversion price of $3.9875 per share, subject to adjustment under
certain circumstances. Beginning August 15, 1998 at the option of the Company,
the Debentures are redeemable in whole or in part at an initial redemption price
of 104% of principal, decreasing by 1% per year until maturity. The Debentures
are subordinated to all existing and future senior indebtedness (as defined in
the Indenture governing the Debentures). The Debentures restrict, among other
things, the amount of senior indebtedness and other indebtedness that the
Company and, in certain instances, its subsidiaries, may incur. Each Debenture
holder has the right to cause the Company to redeem the Debentures if certain
designated events (as defined) should occur.
NOTE 8Note 9 --LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings and claims of
various types, the most significant of which are described in "Part I - Item 3.
Legal Proceedings" of the Company's Form 10-K for the fiscal year ended April 3,
1998 and "Part II -- Other Information Item 1. Legal Proceedings" of this
Quarterly Report on Form 10-Q. While any such litigation contains an element of
uncertainty, management presently believes that the outcome of such proceedings
and claims will not have a material adverse effect on the Company's consolidated
financial position.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
GENERALGeneral
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 fiscal quarters ending in September and December and receives the
largest amount of customer returns in the fiscal quarters ending in March and
June. Therefore, the results of operations discussed below are not necessarily
indicative of the Company's prospective annual results. The Company expects its
United States sales for the fiscal quarter ended SeptemberDecember 1998 to be lower than
the secondthird fiscal quarter of Fiscal 1998 due to reduced product sales.
RESULTS OF OPERATIONS
NET REVENUESResults of Operations
Net Revenues - Consolidated net revenues for the three and six month
periodperiods ended July 3,October 2, 1998 increased $28.6$1.7 million (94%(3.7%) and $30.3 million
(40.2%) as compared to the same periodperiods in the fiscal year ended June 30, 1997.March 31, 1998
("Fiscal 1998"), respectively. The increase in net revenues resulted primarily from
increasedincreases in unit sales of audio products, and microwave ovens, partially offset by reductions in
other product categories.microwave ovens. Additionally, a significant reduction in returned product was
recorded in the current period as compared to the same period in the prior year. The significant reduction in returned product is
attributable to higher returns in the June, 1997 quarter due to the opening of a
return processing center in early 1997 that resulted in delays in processing
returns that flowed into the June 1997 quarter; andyear
resulting from an overall more restrictive return policy by the Company's
customers. While the Company expects the latter
to continue, the effect of the processing center was a one time event. Revenues earned from the licensing of the Emerson and G-Clef"EMERSON" trademark were $613,000$1
million and $1,000,000$1.6 million in the three and six month periodperiods ended July 3,1998October 2,
1998 as compared to $1.5 million and June 30,1997,$2.5 million in the same periods in Fiscal
1998, respectively.
The Company reports royalty and commission revenues earned from its
licensing arrangements, covering various products and territories, in lieuCost of reporting the full dollar value of such sales and associated costs.
COST OF SALESSales - Cost of Sales, as a percentage of consolidated
net
revenues, was 88%90% and 89% for the three and six month periods ended October 2,
1998 as compared to 86% and 89% for the same periods in Fiscal 1998,
respectively. The increase in cost of sales as a percent of sales for the three
month period ended July 3,October 2, 1998 as compared to 93% for the same period in Fiscal 1998. Marginsthe prior
fiscal year was primarily attributable to lower margins in the current quarter were
significantly improved as a percent of sales primarily as a result of: (i) a
change in the product mix to higher margin products; (ii) a reduction of
inventory overhead costs due to the Company's successful efforts to shift to a
higher portion of its sales to a direct import basis; and (iii) a significant
reduction in returnedaudio products, and resulting loss on such product. For the
three month period ended July 3, 1998, products representing approximately 87%
of neta
decrease in licensing revenues were directly imported from manufacturers to the Company's
customers as compared to 78% for the same period last year.and marketing fees.
The Company's gross profit margins continue to be subject to
competitive pressures arising from pricing strategies associated with the
category of the consumer electronics market in which the Company competes. The
Company's products competeare generally placed in the low-to-medium priced categorycategories
of the market which tend to be the most competitive and generate the lowest
profit margins. The Company believes that its marketing agreements, its
licensing agreements in the United States and various foreign countries and its
distribution agreements in Canada, Europe and parts of Asia all will have a
favorable impact on the Company's gross profit. The Company continues to promote
its direct import programs to reduce its inventory levels and working capital
risks thereby reducing its inventory overhead costs. In addition, the Company
continues to focus on its higher margin products and continually reviews new
products whichthat can generate higher margins than its current business, either
through license arrangements, acquisitions, joint ventures or on its own.
OTHER OPERATING COSTS AND EXPENSESOther Operating Costs and Expenses - Other operating costs and
expenses increased $400,000 for$260,000 and $660,000 in the three monthsand six month periods
ended July 3,1998October 2,1998 as compared to the same periodperiods in Fiscal 1998,
respectively, primarily as a result of the Company's return-to-
vendorreturn-to-vendor program.
Under the return-to-vendor program, the Company, by paying a fee, is able to
return defective product to its suppliers and, to receive in exchange, a
replacement unit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSESSelling, General and Administrative Expenses ("S,G&A") - S,G&A, as a
percentage of net revenues, were 9% of net revenueswas 5.6% and 7.1% for the three and six month periods
ended October 2, 1998, as compared to 7.8% and 9.5% for the same periods in
Fiscal 1998, respectively. In absolute terms, S,G&A decreased by $930,000 for
the three month period ended July 3,1998 as compared to 12% inOctober 2, 1998, and for the samesix month period a year ago. In absolute
terms, S,G&Aended
October 2,1998 increased by $1.5 million in the period ended July 3,1998$340,000 as compared to the same period last year.in Fiscal
1998. The decrease of $930,000 in S,G&A as a percentage of
net revenuesfor the three month period was primarily
attributable primarily to a higher revenue base.decrease in advertising costs and rent expense, offset by an
increase in professional fees. The increase of $340,000 in S,G&A for the six
month period was primarily attributable to increased professional fees, offset
by a decrease in absolute terms was caused primarily by (i) an increase in
promotional programsadvertising costs and (ii) a decrease in the charges incurred in the
prior year for relocation costs of the Company's back office operations from New
Jersey to Texas.
OPERATING INCOME (LOSS)Operating Income (Loss) - The Company reported operating income of
$889,000$1.0 million and $2.0 million for the three and six months ended October 2,
1998, as compared to operating income of $2.1 million and an operating loss of
$.3 million for the same periods in Fiscal 1998, respectively. Operating income
for the three month period ended July 3,1998,October 2,1998 as compared to an operating loss
of $2.4 million for the same period
in the prior year
is lower by $1.1 million mainly due to a year ago. The operating incomehigher cost of sales in the current
period, offset by a reduction in S,G&A expenses. Operating income for the six
month period ended October 2, 1998 as compared to the same period in the prior
year is attributablehigher by $2.3 million primarily due to a higher revenue base and improved gross profit
margins and a reduction in S,G&A expenses as a percent of
revenues.
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATEapproximately $30 million.
Equity In Earnings Of Unconsolidated Affiliate - The Company's 28% share
in the earnings of SSG amounted to $443,000 for$348,000 and $791,000 in the three and six
month periodperiods ended July
3,1998October 2,1998 as compared to $509,000$528,000 and $1.0 million for
the same period last year.
INTEREST EXPENSEperiods in the prior Fiscal year, respectively.
Interest Expense - Interest expense decreased by $172,000$107,000 and $279,000
in the three monthsand six month periods ended July 3,1998October 2, 1998 as compared to the same
period a year ago.periods in Fiscal 1998, respectively. The decrease was attributable to a
significant reduction in short term average borrowings. The decrease in short
term borrowings was due to a reduction in working capital requirements.
NET INCOMENet Earnings (Loss) - As a result of the foregoing factors, the
Company generated net incomeearnings of $764,000$583,000 and $1,347,000 for the three monthsand six
month periods ended July 3,1998,October 2, 1998, as compared to net earnings of $2,019,000
and a net loss of $2.7 million$703,000 for the three months ended June 30,1997.
LIQUIDITY AND CAPITAL RESOURCESsame periods in Fiscal 1998, respectively.
Liquidity and Capital Resources
Net cash provided by operating activities was $2,521,000$4.0 million for the threesix
months ended July 3,1998.October 2, 1998. Cash was provided primarily by a reductionan increase in
accounts receivables alongpayable, increased borrowings, partially offset by an increase in
accounts receivable, combined with theincreased profitability of the CompanyCompany.
Net cash utilized by investing activities was $1.9 million for the period,
partially offset by a decrease in accounts payable. The decrease in accounts
receivable resulted primarily from an increase in the percentage of the
Company's sales which were on a direct shipment basis.six
months ended October 2, 1998.
In the threesix months ended July 3,1998,October 2, 1998, the Company's financing
activities provided $534,000$1.9 million of cash as thecash. The Company increased its borrowings
under its U.S. line of credit facility by $5.1 million and utilized $3.2 million
for the purchase of the Company's preferred and common stock to be held in
treasury.
The Company maintains an asset-based $10 million U.S. line of credit
facility from $0 at April 3, 1998 to $683,000 at
July 3, 1998. Thefacility. In addition, the Company maintains 2 credit facilities with a Hong
Kong based bank: a $3.5$4.2 million letter of credit facility and a $25 million
back-to-back letter of credit facility. At July 3,October 2, 1998, there was $1,565,000$315,000
and $9,647,000, respectively,$18.0 million of letters of credit outstanding.outstanding under the $4.2 million letter
of credit facility and the $25 million letter of credit facility, respectively.
At present, management believes that future cash flow from operations
and its existing institutional financing noted above will be sufficient to fund
all of the Company's cash requirements for the next twelve months. However, the
adequacy of future cash flow from operations is dependent upon the Company
achieving its operating plan.
During the three month period ended July 3,1998,
the Company reduced accounts receivable by 48%. The Company intends to maintain
the reduced accounts receivable levels and to continue the sale of its products
on a direct import basis. For the three month period ended July 3, 1998,
products representing approximately 87% of net revenues were directly imported
from manufacturers to the Company's customers as compared to 78% for the same
period last year. The direct import program implemented by the Company is
critical in providing sufficient working capital to meet its liquidity
objectives.
As of July 3,October 2, 1998 the Company had no material commitments for
capital expenditures.
INFLATION AND FOREIGN CURRENCY
Inflation and Foreign Currency
Neither inflation nor currency fluctuations had a significant effect
on the Company's results of operations during the first quartersix months of Fiscal
1999. The Company's exposure to currency fluctuations has been minimized by the
use of U.S. dollar denominated purchase orders, and by sourcing production in
more than one country. The Company purchases virtually all of its products from
manufacturers located in various Asian countries. The economic crises in these
countries and its related impact on their financial markets has not impacted the
Company's ability to purchase product. Should these crises continue, they could
have a material adverse effect on the Company by inhibiting the Company's
relationship with its suppliers and its ability to acquire products for resale.
YEARYear 2000
The Company has developedin place detailed programs to address Year 2000
readiness in its internal computer systems and its key customers and suppliers.
The Company's Year 2000 readiness team includes both internal personnel and
external consultants. The team's activities are designed to ensure that there
will be no material adverse effects on the Company's business operations and
that transactions with customers, suppliers, and financial institutions will be
fully supported. The specific costs of achieving Year 2000 compliance are
expected to be $300,000, of which approximately $100,000 has been expended to
date.
The Company has converted a significant portion of its operational
software, with testing scheduled to take place in the last quarter of calendar
year 1998. The balance of the Company's software is to be updated from an
outside vendor, which the Company expects to take place in the first quarter of
Calendar 1999. The Company expects that all critical systems will be compliant
by June 1999 and fully tested by September 1999. The Company is also in the
process of implementing a planensuring that its significant suppliers, customers and financial
institutions have appropriate plans to modify its management information systemensure that they are Year 2000 compliant.
Risk assessment, readiness evaluation, action plans and contingency plans
related to third parties are expected to be yearcompleted during the first half of
Calendar 1999.
While the Company believes its planning efforts are adequate to
address its Year 2000 compliant. The Company
currently expects toconcerns, there can be substantially complete with this conversion by mid-1999.
The incremental costno guarantee that all internal
systems, as well as those of conversion is estimated tothird parties on which the company relies, will be
less than $300,000. The
Company doesconverted on a timely basis and will not expect the conversion to have a significant effectmaterial affect on
operations or the Company's
financial results. In addition, the year 2000
problem may impact other entities with which the Company transacts business, and
the Company cannot predict the effectoperations.
Recent Pronouncements of the year 2000 problem on such entities.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARDFinancial Accounting Standards Board
Recent pronouncements ofto the Financial Accounting Standards Board
("FASB") whichthat are not required to be adopted and(and that the Company has not
adopted them as of July 3, 1998,October 2, 1998), include the following Statements of Financial
Accounting Standards ("SFAS"):
SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for reporting and display of comprehensive income (all changes in equity during
a period except those resulting from investments by and distributions to owners)
and its components in the financial statements. This new standard, which will be
effective for Fiscalthe Company's April 2, 1999 financial statements, is not currently
anticipated to have a significant impact on the Company's financial statements
based on the current financial structure and operations of the Company.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which will be effective for the Company for Fiscal 1999,
establishes standards for reporting information about operating segments in the
annual financial statements, selected information about operating segments in
interim financial reports and disclosures about products and services,
geographic areas and major customers. This new standard requires the Company to
report financial information on the basis that is used internally for evaluating
segment performance and deciding how to allocate resources to segments, which
may result in more detailed information in the notes to the Company's financial
statements than is currently required and provided. The Company has not yet
determined the effects, if any, of implementing SFAS No. 131 on its reporting of
financial information.
FORWARD-LOOKING INFORMATIONSFAS No. 132, "Employers Disclosures about Pension and other
Postretirement Benefits," revises disclosures about pension and other
postretirement benefit plans. This new standard, standardizes the disclosure
requirements for pension and other postretirement benefits to the extent
practicable and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis. This new standard, which will be effective for Fiscal 1999, will not
have a significant impact on the Company's financial statements based on the
current financial structure and operations of the Company.
SFAS No. 133, "Accounting for Derivative Instructments and Hedging
Activities," which will be effective for the Company for Fiscal 2000,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. The Company has not yet determined the effects, if any, of
implementing SFAS No. 133 on its reporting of financial information.
Forward-looking Information
This report contains various forward looking statements under the
Private Securities Litigation Reform Act of 1995 (the "Reform Act'Act") and
information that is based on Management's beliefs as well as assumptions made by
and information currently available to Management. When used in this report, the
words "anticipate", "estimate", "expect", "predict", "project", and similar
expressions are intended to identify forward looking statements. Such statements
are subject to certain risks, uncertainties and assumptions. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
expected or projected. Among the key factors that could cause actual results to
differ materially are as follows: (i) the ability of the Company to continue
selling products to its largest customers whose net revenues represented 58% and
16% of Fiscal 1998 net revenues; (ii) competitive factors such as competitive
pricing strategies utilized by retailers in the domestic marketplace whichthat
negatively impacts product gross margins; (iii) the ability of the Company to
maintain its suppliers, primarily all of whom are located in the Far East; (iv)
the Company's ability to replace the licensing income from the Supplier with
commission revenues from Daewoo; (v) the
outcome of litigation; (vi) the availability of sufficient capital to finance
the Company's operating plans; (vii) the ability of the Company to comply with
the restrictions imposed upon it by its outstanding indebtedness; (viii) the
effect of the worldwide volatility in the financial markets and (viii)the Company's
securities that are being held as available-for-sale; and (ix) general economic
conditions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.Legal Proceedings.
During July 1998, further hearings were heldtestimony concluded on the Creditors' motion to
terminate the Settlement Agreement in the Stelling litigation. It is expected that all testimony in that
matter will be concluded inNo
decision has been rendered by the next month.Court.
In August 1998, the Company voluntarily dismissed with prejudice its
lawsuit against Grace Brothers, Ltd.
On September 22,1998, Connecticut General Life Insurance Company
(CGLIC) filed suit against the Company in the United States District
Court, for the District of New Jersey, alleging that the Company
entered into an insurance agreement and failed to honor its obligation
as stated in the agreement. CGLIC is seeking damages in the amount of
$785,890. While the outcome of this action is not certain at this
time, the Company believes it has meritorious defenses.
For further information on the Stelling litigation and other
litigation to which the Company is a party, reference is made to Part
1 Item-3-Legal Proceedings in the Company's most recent annual report
on Form 10-K.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three months ended July 3, 1998, the Company
issued a totalChanges in Securities and Use of 286,885 shares of the common stock, upon
conversion of 100 shares of Series A Preferred Stock. No
consideration was received by the Company for the issuance of the
shares of common stock. The shares of common stock were issued
by the Company to certain of its existing holders of Series A
Preferred Stock where no commission or other remuneration was
paid or given directly or indirectly for soliciting such
exchange. The shares of common stock were issued pursuant to
Section 3(a)(9) of the Securities Act of 1933, as amended.Proceeds.
In August 1998, the Company repurchased and retired 1,423 shares of
its outstanding Series A Preferred Stock.
During the quarter ended October 2, 1998 the Company purchased
2,364,100 shares of its common stock that is being held as treasury
stock.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.Default Upon Senior Securities.
(a) None
(b) None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.Submission of Matters to a Vote of Security Holders.
Not Applicable.
ITEM 5. OTHER INFORMATION.Other Information.
(a) None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(10)(a) Amendment No. 8 to Financing Agreements, dated as of November
13, 1998.*
(10)(b) Third Lease Modification made the 26 day of October, 1998
between Hartz Mountain Parsippany and Emerson.*
(10)(c) Purchasing Agreement, dated June 30, 1998, between
AFG-Elektronik GmbH and Emerson Radio International Ltd.*
(27) Financial Data Schedule for quarter ended July 3,October 2, 1998.*
(b) Reports on Form 8-K - During the three month period ended July 3,October
2, 1998, no Form 8-K was filed.
____________________________
*Filed herewith.
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 4,November 13, 1998 /s/ Geoffrey P. Jurick
Geoffrey P. Jurick
Chairman, Chief Executive Officer and
President
Date: August 4,November 13, 1998 /s/ John P. Walker
John P. Walker
Executive Vice President and
Chief Financial Officer