UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 December 31,
1996: 40,295,196.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Nine Months Ended Three Months Ended
December 31, December 31,
1996 1995 1996 1995
Net revenues . . . . . . . . . $151,284 $214,720 $49,628 $70,314
Costs and expenses:
Cost of sales . . . . . . . 145,354 198,184 48,818 67,491
Other operating costs and
expenses. 2,111 3,529 488 983
Selling, general &
administrative expenses . 14,698 16,332 4,993 5,338
Restructuring and other
nonrecurring charges. . . 2,811 - 77 -
164,974 218,045 54,376 73,812
Operating loss . . . . . . . . (13,690) (3,325) (4,748) (3,498)
Interest expense . . . . . . . 2,525 2,322 867 1,029
Loss before income taxes . . . (16,215) (5,647) (5,615) (4,527)
Provision (benefit) for income
taxes . . . . . . . . . . . 194 26 28 (129)
Net loss . . . . . . . . . . . $(16,409) $(5,673) $(5,643) $(4,398)
Net loss per common share. . . $ (.42) $ (.15) $ (.14) $ (.11)
Weighted average number of
common shares outstanding. . 40,281 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)
Dec. 31, March 31,
1996 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . $ 6,121 $ 16,133
Short-term investments. . . . . . . . . 155 1,872
Accounts receivable (less allowances of
$4,531 and $6,139, respectively). . . 21,673 23,583
Inventories . . . . . . . . . . . . . . 23,917 35,292
Prepaid expenses and other current
assets . . . . . . . . . . . . . . . 6,328 8,434
Total current assets . . . . . . . . 58,194 85,314
Property and equipment - (at cost less
accumulated depreciation and
amortization of $5,546 and
$4,422, respectively) . . . . . . . . 2,455 3,501
Investment in unconsolidated affiliate . . . 15,884 -
Other assets . . . . . . . . . . . . . . . 6,927 7,761
Total Assets . . . . . . . . . . . . $83,460 $ 96,576
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . $14,733 $ 21,151
Current maturities of long-term debt. . 84 173
Accounts payable and other current
liabilities. . . . . . . . . . . . . 19,574 10,391
Accrued sales returns . . . . . . . . . 4,097 3,091
Income taxes payable. . . . . . . . . . 177 202
Total current liabilities. . . . . . 38,665 35,008
Long-term debt . . . . . . . . . . . . . . 20,878 20,886
Other non-current liabilities. . . . . . . 258 300
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 . . . . . . 109,238 108,991
Accumulated deficit. . . . . . . . . . . . (95,109) (78,175)
Cumulative translation adjustment. . . . . 127 163
Total shareholders' equity. . . . . . . 23,659 40,382
Total Liabilities and Shareholders' Equity. $83,460 $ 96,576
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
Nine Months Ended
December 31,
1996 1995
Cash Flows from Operating Activities:
Net cash provided (used) by operating
activities . . . . . . . . . . . . $ 11,317 $(11,478)
Cash Flows from Investing Activities:
Investment in unconsolidated company (14,398) -
Additions to property and equipment. (218) (1,490)
Other. . . . . . . . . . . . . . . . 112 (385)
Net cash used by investing
activities . . . . . . . . . . . . (14,504) (1,875)
Cash Flows from Financing Activities:
Net repayments under line of credit
facility . . . . . . . . . . . . . (6,418) (2,561)
Net proceeds from private placement
of Senior Subordinated Convertible
Debentures . . . . . . . . . . . . - 19,220
Other . . . . . . . . . . . . . . . 407 (1,285)
Net cash provided (used) by financing
activities . . . . . . . . . . . . (6,825) 15,374
Net increase (decrease) in cash and
cash equivalents. . . . . . . . . . . (10,012) 2,021
Cash and cash equivalents at beginning
of year. . . . . . . . . . . . . . . 16,133 17,020
Cash and cash equivalents at end of
period . . . . . . . . . . . . . . . $6,121(a) $19,041(a)
Supplemental disclosure of cash flow
information:
Interest paid . . . . . . . . . . . $ 2,532 $ 2,751
Income taxes paid . . . . . . . . . $ 15 $ 153
(a) The balances at December 31, 1996 and 1995 include $4.0 million and $9.0
million, respectively, of cash and cash equivalents pledged to assure the
availability of certain foreign 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 nine month periods ended December
31, 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 and nine month periods ended
December 31, 1996 and 1995 are based on the net loss and deduction of preferred
stock dividend requirements and the weighted average number of shares of common
stock outstanding during the periods. These per share amounts do not include
common stock equivalents assumed outstanding since they are anti-dilutive.
NOTE 3
The provision for income taxes for the three and nine month periods ended
December 31, 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
On December 10, 1996, the Company purchased from Sport Supply Group, Inc.
("SSG") 1,600,000 shares of newly issued common stock, $.01 par value per share
(the "Common Stock"), for aggregate consideration of $11.5 million, or
approximately $7.19 per share. In addition, the Company purchased, for an
aggregate consideration of $500,000, 5-year warrants (the "Warrants") to acquire
an additional 1,000,000 shares of Common Stock at an exercise price of $7.50 per
share, subject to standard anti-dilution adjustments, pursuant to a Warrant
Agreement. Prior to such purchase, the Company beneficially owned approximately
9.9% of SSG's outstanding Common Stock which it had purchased for $4,228,000 in
open market transactions. Based upon the purchase of the Common Stock as set
forth above, the Company owns approximately 27.1% of the outstanding shares of
the Common Stock. If the Company exercises all of the Warrants, it will
beneficially own approximately 34.9% of the Common Stock. In addition, the
Company has arranged for foreign trade credit financing of $2 million for the
benefit of SSG to supplement SSG's existing credit facilities. In connection
with such purchase, SSG appointed the Company's designees to become the majority
of the members of its Board of Directors. Election of the Board of Directors is
subject to a vote of SSG's stockholders at its next annual meeting of
stockholders.
The investment in, and results of operations, of SSG will be accounted for
by the equity method. SSG's fiscal year end is October 31; therefore, the
Company's equity in earnings (losses) of SSG will be recorded on a two-month
delay basis. The Company's investment in SSG includes goodwill of $4,617,000 and
is being amortized on a straight line basis over 40 years.
Prior to the acquisition of the newly issued common stock, the Company
accounted for its investment in SSG and currently accounts for other marketable
securities as short-term investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Investment securities consist of equity securities which
are classified as trading securities. Investments in trading securities are
reported at fair value, with unrealized gains and losses included in earnings.
Unrealized holding losses on trading securities for the nine months ended
December 31, 1996 were approximately $51,000 and are included in the statement
of operations. The cost of investments sold and related realized gains and
losses are determined using the specific identification method.
NOTE 5
Spare parts inventories, net of reserves, aggregating $1,668,000 and
$2,042,000 at December 31, 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 December 31, 1996, the Company is
required to maintain a minimum adjusted net worth, as defined, of $17,000,000
excluding certain restructuring and nonrecurring charges and working capital of
$10,000,000. At December 31, 1996, the Company had an adjusted net worth,
excluding such charges, of $26,441,000, and working capital of $19,529,000, and,
therefore was in compliance with this covenant.
LONG-TERM DEBT:
Long-term debt consists of the following:
(In thousands of dollars)
Dec. 31, March 31,
1996 1996
8 1/2% Senior Subordinated
Convertible Debentures
Due 2002. . . . . . . . . . . . $20,750 $20,750
Other . . . . . . . . . . . . . . 212 309
20,962 21,059
Less current obligations. . . . . 84 173
$20,878 $20,886
NOTE 7
SETTLEMENT OF LITIGATION REGARDING CERTAIN OUTSTANDING COMMON STOCK:
The 30 million shares of Common Stock issued to affiliates of Geoffrey
Jurick, the Chairman and Chief Executive Officer of the Company, 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, was approved by
order of the Court on November 19, 1996, and became effective on February 4,
1997. The Settlement Agreement reflects the settlement of various legal
proceedings in Switzerland, the Bahamas and the United States among Mr. Jurick,
certain of his affiliated entities and certain of their creditors (the
"Creditors") (together with the Company, the "Lead Parties"). The Settlement
Agreement provides, among other things, for the payment by Mr. Jurick and
such affiliated entities of $49.5 million to the Creditors, to be paid from the
proceeds of the sale of certain of the 29,152,542 shares of Emerson common stock
(the "Settlement Shares") owned by such affiliated entities of Mr. Jurick, all
of which are being registered in the name of Fidenas International Limited
("FIN"). In addition, Mr. Jurick will be paid the sum of $3.5 million from the
sale of Settlement Shares. The Settlement Shares will be sold over an
indeterminate period of time by a financial advisor (the "Advisor"), initially
TM Capital Corp. The Advisor is formulating a marketing plan taking into
consideration (i) the interests of Emerson's minority stockholders, and (ii) the
goal of generating sufficient proceeds to pay the Creditors and Mr. Jurick as
quickly as possible. Sales may be made of the Settlement Shares pursuant to a
registered offering if the sales price is not less than 90% of the average of
the three most recent closing prices (the "Average Closing Price"), or, other
than in a registered offering, of up to 1% of the Emerson common stock
outstanding per quarter, if the sales price is not less than 90% of the Average
Closing Price. Any other attempted sales are subject to the consent of the
Company, Mr. Jurick, and the Creditors, or, if necessary, the Court. No
assurance can be given that a sufficient number of Settlement Shares will be
sold at prices which would or could result in the payment in full of the
settlement amount. Further, sales of Settlement Shares, or the perception that
such sales may occur, may adversely effect the prevailing market prices, if
any, of the Common Stock and also create a potential large block of Settlement
Shares coming into the market at substantially the same time.
INTERNATIONAL JENSEN INCORPORATED LITIGATION:
On May 10, 1996, International Jensen Incorporated ("Jensen") filed an
action in the United States 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, which has subsequently been amended to allege that
Jensen and its Chairman, Chief Executive Officer and President, Robert G. Shaw,
fraudulently induced the Company to enter into a confidentiality agreement and
failed to negotiate with the Company in good faith and that Recoton Corporation
("Recoton"), the competing bidder for Jensen, aided in such actions. On October
22, 1996, Recoton filed a separate action alleging that Emerson tortiously
interfered with the Jensen/Recoton transaction, which seeks damages of not less
than $5 million. Such action is subject to a motion to dismiss filed by
Emerson. The Company 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, William Blair
Leverage Capital Fund, L.P., 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. The Court held a hearing on motions for
preliminary injunction on August 15, 1996. The Court denied the motions for
preliminary injunction, and the Recoton/Shaw transactions with Jensen were
consummated on or about August 28, 1996.
OTAKE LITIGATION:
On December 20, 1995, the Company filed suit in 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. The New Jersey Court has found that it has jurisdiction over all the
defendants in this litigation.
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 currently claimed is for
approximately $86,785,000 which represents a claim for lost profits. The claim
was filed as an unsecured claim and, therefore, will be satisfied, to the extent
the claim is allowed by the Bankruptcy Court, in the manner other allowed
unsecured claims 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. 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, 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
$77,000 and $2,811,000 for the three and nine month periods ended December 31,
1996, respectively. The Company recognized $29,000 and $946,000 of restructuring
charges over these periods, respectively, related to the closure of the
Company's local Canadian office and distribution operations in favor of an
independent distributor and downsizing of the Company's U.S. operations. The
charges include costs for employee severance, asset write-downs, and facility
and equipment lease costs. Additionally, the Company recognized $48,000 and
$1,865,000 of nonrecurring charges over these periods, respectively, relating to
the proposed but unsuccessful acquisition of Jensen. 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 ("E&H"), a joint venture
that was formed to purchase, refurbish and sell certain of the Company's product
returns. Effective January 1, 1997, the partners of E&H mutually agreed to
dissolve the joint venture and wind down its operations. The results of this
joint venture are accounted for by the equity method. The Company's equity in
the earnings of the joint venture is reflected as a reduction of cost of sales
in the Company's unaudited interim Consolidated Statements of Operations.
Summarized financial information relating to the joint venture is as follows (in
thousands):
Nine Months Ended Three Months Ended
December 31, December 31,
1996 1995 1996 1995
Income Statement data:
Net sales (a) $24,837* $21,147 $6,371* $7,591
Net earnings (loss) 256* 240 330* (1,154)
Sales by the Company
to E&H Partners 5,742 14,095 1,049 2,407
_____________
(a) Sales to the
Company by
E&H Partners 7,058 3,731 988 1,932
Dec.31, March 31,
1996* 1996
Balance Sheet Data:
Current assets (a) $15,995 $19,326
Noncurrent assets 147 162
Total Assets $16,142 $19,488
Accounts Payable to the
Company (a) $ 6,205 $13,270
Other Current liabilities 7,151 3,688
Total Liabilities 13,356 16,958
Partnership Equity 2,786 2,530
Total Liabilities and
Partnership Equity $16,142 $19,488
Equity of the Company in net
assets of E&H Partners $ 1,460 $ 1,265
(a) 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.
*Information was derived from the November 30, 1996 financial statements of E&H
Partners. The financial statements for December 31, 1996 were not available as
of the date of this report; however, based on discussions with the management of
E&H Partners, the Company believes that the results for the month ended December
31, 1996 will not have a material effect on the Company's results of operations
or financial position.
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 nine month periods ended
December 31, 1996 decreased $20,686,000 (29%) and $63,436,000 (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 (for nine month period only) 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. Excluding the Company's video products, the Company's U.S. gross
sales increased by approximately 18% and 12% for the three and nine month
periods ended December 31, 1996, respectively. Revenues recorded from the
licensing of the Emerson and G-Clef trademark were $1,005,000 and $3,007,000 for
the three and nine month periods ended December 31, 1996 as compared to
$1,152,000 and $3,553,000 in the same periods in Fiscal 1996, respectively. The
decline in royalty income is attributable to lower aggregate sales reported by
the licensees of Emerson and G-Clef brand products. However, the Company has
not received the royalty report from the Company's largest licensee for the
third quarter ended December 31, 1996, and therefore, recorded only the minimum
royalties due pursuant to the applicable license agreement. Furthermore, the
Company's Canadian net sales decreased $1,684,000 and $5,015,000 in the three
and nine month periods ended December 31, 1996 as compared to the same periods
in Fiscal 1996 relating to the continued weak Canadian economy and the closure
of the Company's local office and Company-operated distribution operations in
favor of an independent distributor. The Company expects its United States sales
for the fourth quarter of the fiscal year ending March 31, 1997 ("Fiscal 1997")
to be lower than the fourth quarter of Fiscal 1996 due to continuing weak
consumer demand, a soft retail market, high retail stock levels and the
increased level of price competition.
Cost of sales, as a percentage of consolidated revenues, was 98% and 96%
for the three and nine month periods ended December 31, 1996, respectively, as
compared to 96% and 92%, respectively, for the same periods in Fiscal 1996.
Gross profit margins in the three and nine month periods ended December 31,
1996 were unfavorably impacted by lower sales prices (primarily video products),
a higher proportion of close-out sales, inventory write-downs, the allocation of
reduced fixed costs over a lower sales base in the current fiscal year, and the
recognition of income relating to reduced reserve requirements for sales returns
for the same periods in the prior fiscal year. However, gross profit margins
were favorably impacted by the introduction of higher margin products -- home
theater and 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 $495,000 and $1,418,000 in the
three and nine month periods ended December 31, 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 and
G-Clef trademark to one of its suppliers (the "Supplier") for the sale of video
products to its largest customer (the "Customer").
Selling, general and administrative expenses ("S,G&A") as a percentage of
revenues, was 10% for both the three and nine month periods ended December 31,
1996, as compared to 8% for the same periods in Fiscal 1996. In absolute terms,
S,G&A decreased by $345,000 and $1,634,000 in the three and nine month periods
ended December 31, 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 and lower selling
expenses attributable to the lower sales, partially offset by the reversal of
accounts receivable reserves in the prior year periods due to a higher
realization than anticipated on past-due accounts receivable. Additionally, the
decrease for the nine months ended December 31, 1996 was mitigated 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. The Company's exposure to foreign currency
fluctuations, primarily in Canada and Spain, resulted in the recognition of net
foreign currency exchange losses aggregating $21,000 in the three month period
ended December 31, 1996 as compared to $174,000 in the same period in Fiscal
1996. However, the Company recognized net foreign currency exchange gains
aggregating $7,000 in the nine month period ended December 31, 1996 as compared
to $497,000 for the same period in Fiscal 1996.
Interest expense decreased by $162,000 in the three month period ended
December 31, 1996 as compared to the same period in Fiscal 1996. The decrease
was attributable to lower average borrowings at lower interest rates on the U.S.
revolving line of credit facility. The average rate in effect on the credit
facility for the three month periods ended December 31, 1996 and 1995 was
approximately 9.5% and 10.0%, respectively. However, interest expense increased
by $203,000 in the nine month period ended December 31, 1996 as compared to the
same period in Fiscal 1996 due to the interest expense incurred on the
debentures issued in August 1995.
The Company recorded restructuring and other nonrecurring charges of
$77,000 and $2,811,000 for the three and nine month periods ended December 31,
1996. The Company recognized $29,000 and $946,000 of restructuring charges over
these periods related to the closure of the Company's local Canadian office and
distribution operations in favor of an independent distributor and the
downsizing of the Company's U.S. operations. The charges include costs for
employee severance, asset write-downs, and facility and equipment lease costs.
Additionally, the Company recognized $46,000 and $1,865,000 of nonrecurring
charges over these periods relating to the proposed but unsuccessful acquisition
of International Jensen Incorporated. These costs primarily include investment
banking, commitment and professional fees, including litigation costs, relating
to the proposed acquisition.
As a result of the foregoing factors, the Company incurred a net loss of
$5,643,000 and $16,409,000 for the three and nine month periods ended December
31, 1996, compared to a net loss of $4,398,000 and $5,673,000 respectively, for
the same periods in Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $11,317,000 for the nine
months ended December 31, 1996. Cash was provided by decreases in accounts
receivables and inventories and an increase in accounts payable and other
current liabilities partially offset by a loss from operations. The decrease in
accounts receivable was due primarily to a one-time receipt of $5.0 million from
the Company's 50% owned joint venture (E & H Partners) in the first quarter of
Fiscal 1997 as a partial paydown of the joint venture's obligation to the
Company. The decrease in inventory is primarily due to a more cautious
purchasing strategy focusing on reducing inventory levels and the associated
carrying costs, and the closure of the Company's Canadian distribution
operations. Further, accounts payable and other current liabilities increased
due to extended term financing used for inventory purchases.
Net cash used by investing activities was $14,504,000 for the nine months
ended December 31, 1996. Cash was utilized primarily for the purchase of the
Company's investment in Sport Supply Group, Inc. ("SSG"), as described below.
In the nine months ended December 31, 1996, the Company's financing
activities utilized $6,825,000 of cash. The Company reduced its borrowings
under its U.S. line of credit facility by $6,418,000 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 December 31, 1996, provides for revolving loans and letters of
credit, subject to individual maximums and, in the aggregate, not to exceed the
lesser of $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
December 31, 1996, there were approximately $14.7 million outstanding on the
Company's revolving loan facility and approximately $1.6 million of letters of
credit outstanding for inventory purchases. Based on the "Borrowing Base" amount
at December 31, 1996, approximately $1.8 million of the credit facility was not
utilized. Pursuant to the terms of the credit facility, as amended, effective
December 31, 1996, the Company is required to maintain a minimum adjusted net
worth, as defined, of $17,000,000 excluding certain restructuring and
nonrecurring charges and working capital of $10,000,000. At December 31, 1996,
the Company had an adjusted net worth, excluding such charges, of $26,441,000,
and working capital of $19,529,000, and therefore, was in compliance with these
covenants.
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 December 31, 1996, the Company's Hong Kong subsidiary had pledged
$4 million in certificates of deposit to this bank to assure the availability of
these credit facilities. At December 31, 1996, there were approximately $11.7
million and $2.2 million of letters of credit outstanding on the $9.1 million
and $50 million credit facilities, respectively. The over extension of $2.6
million on the $9.1 million letter of credit facility at December 31, 1996 was
due to timing of letter of credit payments and new issuances.
Effective, January 1, 1997, the Company and its partner in E&H Partners
("E&H") mutually agreed to dissolve this joint venture and wind down its
operations. As a result, E&H's obligation to purchase the Company's product
returns terminated as of such date. Accordingly, the Company is negotiating the
sale of product returns with other parties and anticipates finalization of such
negotiations shortly. The Company expects such negotiations will result in an
arrangement which should improve the Company's cash flows from the sale of
product returns as compared to its previous arrangement with E&H.
On December 10, 1996, the Company purchased from Sport Supply Group, Inc.
("SSG") 1,600,000 shares of newly issued common stock, $.01 par value per share
(the "Common Stock"), for aggregate consideration of $11.5 million, or
approximately $7.19 per share. In addition, the Company purchased, for an
aggregate consideration of $500,000, 5-year warrants (the "Warrants") to acquire
an additional 1,000,000 shares of Common Stock at an exercise price of $7.50
per share, subject to standard anti-dilution adjustments, pursuant to a Warrant
Agreement. Prior to such purchase, the Company beneficially owned approximately
9.9% of SSG's outstanding Common Stock which it had purchased for $4,228,000 in
open market purchases. Based upon the purchase of the Common Stock as set forth
above, the Company owns approximately 27.1% of the outstanding shares of the
Common Stock. If the Company exercises all of the Warrants, it will beneficially
own approximately 34.9% of the Common Stock. In addition, the Company has
arranged for foreign trade credit financing of $2 million for the benefit of SSG
to supplement SSG's existing credit facilities. In connection with such
purchase, SSG appointed the Company's designees to become the majority of the
members of its Board of Directors. Election of the Board of Directors is
subject to a vote of SSG's stockholders at its annual meeting of stockholders.
The $12 million purchase price paid by the Company was obtained by the
Company from the Lender, under the terms of its existing credit facility, and in
accordance with the terms of the consent obtained from such lender. Pursuant to
a Pledge and Security Agreement dated December 10, 1996, the Company has pledged
to the Lender the Common Stock and Warrants acquired on December 10, 1996.
The investment in SSG is part of management's plan to develop the Company's
business through diversification from the Company's core business of consumer
electronics. SSG sells its products at margins higher than the Company's core
business and to an institutional market which does not require the significant
after-market servicing costs typical of the Company's core business.
The Company has also recently executed a licensing/supply arrangement for
Central and Latin American markets with Cargil
International Corp. ("Cargil"), a leading distributor of consumer products in
Latin America. The transaction is for an initial five-year term, subject to
renewals, and provides for Cargil to license the Emerson trademark for certain
consumer electronics products and to source no less than 75% of the value of
such product through the Company's Hong Kong sourcing and supply operations.
Under the terms of the agreements, the Company will receive minimum annual
royalties through the life of the agreement, which expires on March 31, 2002,
and will receive a separate fee for sourcing and inspection services.
The Company intends to 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'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 further
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.
Based on the operating losses reported for the first nine months of Fiscal
1997, the continuing soft consumer electronics retail market and the trend in
sales of the Company's products, management believes that future cash flow
from operations and the institutional financing described above may not be
sufficient to fund all of the Company's cash requirements for the next twelve
months. Additionally, the Company is currently in arrears on $469,000 of
dividends on the Company's Series A Preferred Stock. Management plans to take
the necessary steps to adequately finance the Company's operations which may
include one or more of the following steps:
1. Reviewing strategic alternatives for its North American video business not
covered under the license agreement with the Supplier;
2. Reducing inventory levels and purchasing 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. Selling non-operating or underperforming assets; and
7. Selling equity and/or debt securities, either privately or through a
registered offering.
There can be no assurance that the Company will be able to successfully
implement any of these steps in a time frame or manner that will permit the
Company to fund current operations and other planned expenditures at current and
expected sales volumes, if at all.
The Company's liquidity is impacted by the seasonality of its business.
The Company records the majority of its annual sales in the quarters ending
September 30 and December 31. This requires the Company to open significantly
higher amounts of letters of credit during the quarters ending June 30 and
September 30, thereby significantly increasing the Company's working capital
needs during these periods. Additionally, the Company receives the largest
percentage of its customer returns in the quarter ending March 31. The higher
level of returns during this period adversely impacts the Company's collection
activity during this period, and therefore its liquidity. The Company believes
that the licensing of the Emerson and G-Clef trademark should favorably impact
the Company's cash flow over the respective terms of the agreements.
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings.
The information required by this item is included in Note 7
of Notes to Interim Consolidated Financial Statements filed in
Part I of Form 10-Q for the quarter ended December 31, 1996, and
is incorporated herein by reference.
ITEM 3. Preferred Stock Dividends.
As of the date of this report, the Company was in arrears on
$469,000 of dividends on its Series A Preferred Stock.
ITEM 4. Submission of Matters to a Vote of Security Holders.
(a) An Annual Meeting of Stockholders was held on December
18, 1996.
(b) The following directors were elected at the Annual
Meeting of Stockholders and constituted the entire Board of
Directors following the Meeting:
Robert H. Brown, Jr.
Peter G. Bunger
Raymond L. Steele
Jerome H. Farnum
Geoffrey P. Jurick
Eugene I. Davis
(c) Other matters voted at Annual Meeting:
(i) Election of Directors:
For Against
Robert H. Brown, Jr. 37,359,900 171,244
Peter G. Bunger 37,359,900 171,244
Raymond L. Steele 37,359,900 171,244
Jerome H. Farnum 37,359,900 171,244
Geoffrey P. Jurick 37,358,900 172,244
Eugene I. Davis 37,358,900 172,244
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION - CONTINUED
(ii) Appointment of Ernst & Young LLP to audit
financial statements of the Company for the fiscal year
ending in 1997 - 37,421,161 shares for, 81,083 shares
against and 28,900 shares abstained.
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; effects of foreign trade; advertising and promotional
efforts; brand awareness; the existence or absence of adverse
publicity; success of the Company's acquisition strategy
including results of SSG's operations; changes in business
strategy or development plans; success of management's strategy
to finance the Company's operations; quality of management;
success of licensing arrangements; availability, use and terms of
capital and compliance with debt covenants; business abilities
and judgment of personnel; availability of qualified personnel;
labor and employee benefit costs; changes in, or the failure to
comply with, government regulations and other factors referenced
in this quarterly report.
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION - CONTINUED
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10(a) Pledge Agreement dated as of February 4, 1997 by
Fidenas International Limited, L.L.C. ("FIN") in favor of TM
Capital.
10(b) Registration Rights Agreement dated as of
February 4, 1997 by and among Emerson Radio Corp., FIN, the
Creditors, FIL and TM Capital Corp.
10(c) License and Exclusive Distribution Agreement with
Cargil International Corp.
10(d) Supply and Inspection Agreement with Cargil
International Corp.
10(e) Amendment No. 5 to Financing Agreements,
dated as of February 18, 1997, among Emerson, Majexco Imports,
Inc. and Congress Financial Corporation.
(27) Financial Data Schedule for nine months ended
December 31, 1996.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K dated November 27,
1996, reporting matters under Item 5.
(2) Current Report on Form 8-K dated December 10,
1996, reporting matters under Items 2 and 7.
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION - CONTINUED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMERSON RADIO CORP.
(Registrant)
Date: February 19, 1997 /s/ Eugene I. Davis
Eugene I. Davis
President
Date: February 19, 1997 /s/ John P. Walker
John P. Walker
Executive Vice President,
Chief Financial Officer