UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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)
(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 August 12,
1997: 41,916,567.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
June 30,
1997 1996
Net revenues . . . . . . . . . . . . . $30,443 $ 41,147
Costs and expenses:
Cost of sales . . . . . . . . . . . 28,399 38,784
Other operating costs and expenses. 866 934
Selling, general & administrative
expenses . . . . . . . . . . . . 3,602 5,364
Restructuring and other nonrecurring
charges. . . . . . . . . . . . . 52 -
32,919 45,082
Operating loss . . . . . . . . . . . . (2,476) (3,935)
Equity in earnings of affiliate. . . . 536 -
Interest expense . . . . . . . . . . . 741 812
Loss before income taxes . . . . . . . (2,681) (4,747)
Provision (benefit) for income taxes . 41 (24)
Net loss . . . . . . . . . . . . . . . $ (2,722) $(4,723)
Net loss per common share. . . . . . . $ (.07) $ (.12)
Weighted average number of
common shares outstanding . . . . . 40,592 40,253
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
June 30, March 31,
1997 1997
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . $ 1,756 $ 2,640
Accounts receivable (less allowances of
$4,429 and $6,001, respectively) . . . . . 6,900 12,452
Inventories . . . . . . . . . . . . . . . . 13,201 13,329
Prepaid expenses and other current assets . 7,016 6,497
Total current assets . . . . . . . . . . . 28,873 34,918
Property and equipment - (at cost less
accumulated depreciation and amortization
of $3,685 and $3,521, respectively). . . . . 1,912 2,130
Investment in unconsolidated affiliate . . . . 16,537 16,033
Other assets . . . . . . . . . . . . . . . . . 5,488 5,687
Total Assets . . . . . . . . . . . . . . . $ 52,810 $ 58,768
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . . . $ 4,576 $ 5,689
Current maturities of long-term debt . . . . 81 85
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . 11,310 13,053
Accrued sales returns . . . . . . . . . . . 2,518 2,730
Income taxes payable . . . . . . . . . . . . 89 103
Total current liabilities . . . . . . . . 18,574 21,660
Long-term debt . . . . . . . . . . . . . . . . 20,834 20,856
Other non-current liabilities . . . . . . . . 224 223
Shareholders' Equity:
Preferred stock - $.01 par value, 10,000,000
shares authorized, 9,700 and 10,000 shares
issued and outstanding, respectively . . . . 8,730 9,000
Common stock - $.01 par value, 75,000,000
shares authorized, 40,631,672 and 40,335,642
shares issued and outstanding, respectively. 406 403
Capital in excess of par value . . . . . . . . 109,545 109,278
Accumulated deficit . . . . . . . . . . . . . (105,701) (102,843)
Cumulative translation adjustment . . . . . . 198 191
Total shareholders' equity . . . . . . . 13,178 16,029
Total Liabilities and Shareholders' Equity $ 52,810 $ 58,768
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
Three Months Ended
June 30,
1997 1996
Cash Flows from Operating Activities:
Net cash provided by operating
activities . . . . . . . . . . . . . . . . $ 373 $ 5,308
Cash Flows from Investing Activities:
Net cash provided by investing
activities . . . . . . . . . . . . . . . 13 45
Cash Flows from Financing Activities:
Net repayments under line of
credit facility. . . . . . . . . . . . . . (1,113) (3,715)
Other . . . . . . . . . . . . . . . . . . . (157) (263)
Net cash used by financing
activities . . . . . . . . . . . . . . . . (1,270) (3,978)
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . (884) 1,375
Cash and cash equivalents at beginning
of year. . . . . . . . . . . . . . . . . . . 2,640 16,133
Cash and cash equivalents at end of period . . $ 1,756(a) $17,508(a)
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . $ 741 $ 815
Income taxes paid . . . . . . . . . . . . . $ 31 $ 15
(a) The balances at June 30, 1997 and 1996, include $1.0 million and $9.0
million of cash and cash equivalents, respectively, pledged to assure the
availability of certain letter of credit facilities.
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
These 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 June 30, 1997 and
the results of operations for the three month periods June 30, 1997 and 1996.
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 year ended March
31, 1997, 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 three months ended
June 30, 1997 are not necessarily indicative of the results of operations that
may be expected for the full year ending March 31, 1998.
NOTE 2
Net loss per common share for the three month periods ended
June 30, 1997 and 1996 are based on the net loss and deduction of preferred
stock dividend requirements and the weighted average number of shares of common
stock outstanding during each period. The net loss per share for both periods
does not include common stock equivalents assumed outstanding since they are
anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("FAS 128"), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of FAS 128 on
the calculation of primary earnings per share is not expected to be material.
NOTE 3
The provision for income taxes for the three months ended
June 30, 1997 consists primarily of taxes related to international operations.
The benefit for income taxes for the three months ended June 30, 1996
consists primarily of domestic tax refunds received. The Company did not
recognize tax benefits for losses incurred by its domestic operations during the
three months ended June 30, 1997 and 1996.
NOTE 4
Spare parts inventories, net of reserves, aggregating
$1,337,000 and $1,469,000 at June 30, 1997 and March 31, 1997, respectively, are
included in "Prepaid expenses and other current assets."
NOTE 5
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 "SSG 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, five-year warrants (the "SSG Warrants") to
acquire an additional 1,000,000 shares of SSG 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 the outstanding shares of SSG Stock which it had purchased
for $4,228,000 in open market transactions. Based upon the purchase of the SSG
Stock as set forth above, the Company owns approximately 27% of the outstanding
shares of the SSG Stock. If the Company exercises all of the SSG Warrants, it
will beneficially own approximately 35% of the SSG 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 and the Company's management is
directly involved in SSG's day-to-day operations. In March 1997, SSG's
stockholders elected Emerson's nominees as a majority of the members of its
Board of Directors.
The investment in, and results of operations of, SSG are
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 $3,967,000 which is being amortized on a straight line
basis over 40 years. Equity in earnings of SSG was $536,000 for the three months
ended June 30, 1997. At June 30, 1997, the aggregate market value quoted on the
New York Stock Exchange of Emerson's shares of SSG Common Stock was
approximately $15,177,000. Summarized financial information derived from SSG's
financial reports to the Securities and Exchange Commission was as follows (in
thousands):
(Unaudited)
As of May 2, 1997
Current assets $35,364
Property, plant and equipment
and other assets 19,804
Current liabilities 8,410
Long-term debt 7,524
(Unaudited)
For the six months
ended May 2, 1997
Net sales $42,892
Gross Profit 16,622
Earnings from continuing operatins 618
Loss from discontinued operations (2,574)
Net loss (1,956)
NOTE 6
Long-term debt consists of the following:
(In thousands of dollars)
June 30, March 31,
1997 1997
8-1/2% Senior Subordinated Convertible
Debentures Due 2002 . . . . . . $20,750 $20,750
Other . . . . . . . . . . . . . . 165 191
20,915 20,941
Less current obligations. . . . . 81 85
$20,834 $20,856
NOTE 7
Pursuant to the Company's bankruptcy restructuring plans on March 31, 1994,
30 million shares of Common Stock were issued to GSE Multimedia Technologies
Corporation ("GSE"), Fidenas International Limited, L.L.C. ("FIN") and Elision
International, Inc. ("Elision"). GSE, FIN and Elision (the "Affiliated
Entities") are all affiliates of Geoffrey P. Jurick, the Company's Chairman of
the Board, Chief Executive Officer and President. 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. The Settlement Agreement provides for, among other things, the
payment by Mr. Jurick and his Affiliated Entities of $49.5 million to various
claimants of Mr. Jurick and Affiliated Entities (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 the Affiliated Entities. In
addition, Mr. Jurick is to be paid the sum of $3.5 million from the sale of the
Settlement Shares. The Settlement Shares are to be sold over an
indeterminate period of time by a financial advisor, initially TM
Capital (the "Advisor"). 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. The Settlement Shares will be divided into two
pools. The Pool A Shares initially will consist of 15,286,172 shares of
Emerson's common stock. The Pool B Shares will consist of the number of Emerson
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, the Creditors, and, if necessary, the United States
District Court in Newark, New Jersey.
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. On
December 21, 1995, Orion Sales, Inc. and Orion Electric (America), Inc.
filed suit against the Company in the United States District Court,
Southern District of Indiana, Evansville Division,
alleging various breaches of certain agreements by the Company, including
breaches of the confidentiality provisions, certain payment breaches,
breaches of provisions relating to product returns, and other alleged breaches
of those agreements, and seeking damages in the amount of $2,452,656, together
with interest thereon, attorneys' fees, and certain other costs. While the
outcome of the New Jersey and Indiana actions are not certain at this time, the
Company believes it has meritorious defenses against the claims made by the
plaintiffs in the Indiana action. In any event, the Company believes the
results of that litigation should not have a material adverse effect on the
financial condition of the Company or on its operations.
The Company is presently engaged in litigation regarding
several bankruptcy claims which have not been resolved since the restructuring
of the Company's debt. The largest claim was filed on or about 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 amount currently claimed is for $93,563,457, of
which $86,785,000 represents a claim for lost profits. The claim 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 the claim and intends to vigorously contest such 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. 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.
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 materially differ from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in this report. See Other Information - Part II,
Item 5.
GENERAL
In December 1996, the Company purchased from SSG 1,600,000 newly-issued
shares of common stock (the "SSG Stock") for aggregate consideration of $11.5
million, or approximately $7.19 per share. In addition, the Company purchased,
for aggregate consideration of $500,000, five year warrants (the "SSG Warrants")
to acquire an additional 1,000,000 shares of SSG Stock at an exercise price of
$7.50 per share, subject to standard anti-dilution adjustments. Prior to such
purchase, the Company beneficially owned 669,500 shares, or approximately 9.9%,
of SSG's outstanding common stock which it had purchased for $4,228,000 in open
market purchases. The Company owns 2,269,500 shares, or approximately 27%, of
SSG's outstanding common stock. Assuming the exercise of all the SSG Warrants,
the Company would beneficially own approximately 35% of the outstanding shares
of SSG Stock. As part of the securities acquisition, SSG appointed the
Company's designees to become the majority of the members of its Board of
Directors and certain members of the Company's management are directly involved
in SSG's day-to-day operations. In March 1997, SSG's stockholders elected
Emerson's nominees as a majority of the members of its Board of Directors. In
addition, the Company arranged for foreign trade credit financing of $2 million
for the benefit of SSG.
The $12 million purchase price paid by the Company for the SSG Stock and
SSG Warrants was obtained from the Lender (as hereinafter defined), 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 1,600,000
shares of SSG Stock and the SSG Warrants acquired on December 10, 1996.
SSG is the largest direct mail distributor of sporting goods equipment and
supplies in the United States. SSG sells its products at margins significantly
higher than the average of 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 investment allows Emerson to diversify
from its core business of consumer electronics distribution to another
distribution business that offers what management believes
to be significant growth potential. SSG benefited from the
investment by gaining the liquidity needed to cure its then-existing
loan default with its senior lenders and amended its
secured credit facility on more favorable terms. Also, SSG now possesses the
capital necessary to take advantage of opportunities to increase its business in
the institutional sporting goods market both in the U.S. and internationally and
to continue marketing its products showcased at the 1996 Olympic games. Emerson
has negotiated a management services agreement which provides for certain
administrative services to be performed by SSG. These services should allow
both the Company and SSG to benefit from this additional cost sharing
arrangement.
In February 1997, the Company executed five-year license/supply
agreements, subject to renewals, with Cargil covering the Caribbean and Central
and South American markets. The agreements provide for the license of the
Emerson and G-Clef trademark for certain consumer electronics and other products
and the provision of sourcing and inspection services. Under the terms of the
agreements, the Company will receive minimum annual royalties through the life
of the agreements and will receive a separate fee for sourcing and inspection
services. Cargil assumes all costs and expenses associated with the purchasing,
marketing and after sales support of such products. The Company believes that
this transaction will have a positive impact on operating results by generating
royalty and servicing revenues with minimal costs while limiting the Company's
working capital risks.
In April 1997, Emerson executed a four-year agreement with Daewoo
Electronics Co. Ltd. and its U.S. affiliate (collectively, "Daewoo"). This
agreement provides that, subject to existing agreements relating
to sales to Wal-Mart Stores, Inc. (the "Customer"), Daewoo
will manufacture and sell television and video products bearing
the Emerson and G-Clef trademark to all customers in the U.S. market.
Daewoo will also be responsible for and assume all risks
associated with order processing, shipping, credit and collections, inventory,
returns and after-sale services. The Company will arrange sales and provide
marketing services and receive a commission for such services. Sales to the
Customer are currently subject to a license/supply agreement with the Supplier
(hereinafter defined), as more fully described below.
Additionally, in June 1997, the Company entered into a non-exclusive
license agreement with World Wide One, a Hong Kong corporation, for use of the
Emerson and G-Clef trademark in connection with the sale of certain consumer
electronics products and other products for sale exclusively to Makro
International Far East Ltd. in China, Indonesia, Malaysia, Philippines, South
Korea, Taiwan and Thailand. The term is initially for a six month trial
period, at which time the agreement will either be terminated or continue for an
additional twelve months. Emerson will provide sourcing and inspection services
for at least 50% of World Wide One's purchase requirements. World Wide One is
required to meet certain minimum sales requirements as well as ensuring the
establishment of adequate service centers or agents for after sales warranty
services for the goods.
Effective March 31, 1995, the Company and one of the Company's former
suppliers and certain of its affiliates (collectively, the "Supplier") entered
into a license/supply agreement (the "Agreements"). The Company granted a
license of certain trademarks to the Supplier for a three-year term which is
currently scheduled to expire on March 31, 1998. The license permits the
Supplier to manufacture and sell certain video products under the Emerson and G-
Clef trademark to the Customer, in the United States and Canada. As a result,
the Company receives royalties attributable to such sales over the three-year
term of the Agreements in lieu of reporting the full dollar value of such sales
and associated costs. Net sales of these products to the Customer accounted for
approximately 47% of consolidated net revenues for Fiscal 1995. The Company
continues to supply other products to the Customer directly. Further, these
agreements provided that the Supplier would supply the Company with certain
video products for sale to other customers at preferred prices for a three-year
term. Under the terms of these agreements, the Company receives non-refundable
minimum annual royalties from the Supplier to be credited against royalties
earned from sales of VCRs, VCPs, TV/VCR combination units, and color televisions
to the Customer. In addition, effective August 1, 1995, the Supplier assumed
responsibility for returns and after-sale and warranty services on all video
products manufactured by the Supplier and sold to the Customer, including video
products sold by the Company prior to August 1, 1995. As a result, the impact of
sales returns on the Company's operating results have been significantly
reduced, effective with the quarter ended September 30, 1995. The Company has
reported lower net direct revenues in Fiscal 1997 and Fiscal 1996 as a result of
these agreements, but its net operating results for such years have not been
impacted negatively. Over the term of the Agreements, the Company has realized
a more stable cash flow, as well as reduced short-term borrowings necessary to
finance accounts receivable and inventory and has thereby reduced interest
costs. However, royalties earned for the three month periods ended March 31,
1997 and June 30, 1997 have not been remitted subject to certain litigation in
Indiana.
The Company's operating results and liquidity are impacted by
the seasonality of its business. The Company records the majority of its
annual sales in the quarters ending September 30 and December 31 and receives
the largest percentage of customer returns in the quarters ending March 31
and June 30. Therefore, the results of operations discussed
below are not necessarily indicative of the Company's prospective
annual results of operations.
RESULTS OF OPERATIONS
Consolidated net revenues for the three month period ended
June 30, 1997 decreased $10,704,000 (or 26%) as compared to the same period in
the fiscal year ended March 31, 1997 ("Fiscal 1997"). The decrease resulted
primarily from decreases in unit sales of video cassette recorders, televisions
and television/video cassette recorder combination units due to the Daewoo
agreement described above. Excluding video products, the Company's U.S. gross
sales increased by approximately 18% for the three month period ended June 30,
1997 as compared to the same period in Fiscal 1997. This increase in sales was
due primarily to an increase in unit sales of audio products and microwave ovens
due to lower retail stock levels, and strengthening of the retail market.
Revenues earned from the licensing of the Emerson and G-Clef trademark were
$1,000,000 and $1,002,000 in the three month periods ended June 30, 1997 and
1996, respectively. Furthermore, the Company's Canadian and European sales
decreased $2.7 million relating to the closure of these operations in favor of
independent distributors. Although the Company expects its United States sales
for the quarter ending September 30, 1997 to be lower than the second quarter of
Fiscal 1997 due to the Daewoo agreement, the Company expects its U.S. gross
sales, excluding video products, to continue to improve and its margins on such
sales to improve due to the change in product mix to higher margin products.
Cost of sales, as a percentage of consolidated revenues, was
93% for the three month period ended June 30, 1997 as compared to 94% for the
same period in Fiscal 1997. Gross profit margins in the three month period
ended June 30, 1997 were favorably impacted by a change in product mix to higher
margin products partially offset by the allocation of reduced fixed costs over a
lower sales base in the current fiscal year.
The Company's margins continue to be impacted by the pricing category of
the consumer electronics market in which the Company competes. The Company's
products are generally placed in the low-to-medium priced category of the
market. These categories tend to be the most competitive and generate the
lowest profits. The Company believes that the combination of (i) the new
television and video arrangement with Daewoo, (ii) the license agreement with
Cargil, and (iii) the introduction of its new home theater product,
CinemaSurround (TM), will all have a favorable impact on the Company's gross
profit margins. The Company intends 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 is focusing on its higher margin products and is
reviewing new product categories which can generate higher margins
than its current business, either through license arrangements,
acquisitions, joint ventures or on its own. The Company also
plans on expanding its sales and distribution channels into the
Central and Southeast Asia markets.
Other operating costs and expenses declined $68,000 in the
three month period ended June 30, 1997 as compared to the same period in Fiscal
1997, primarily as a result of a decrease in compensation and other expenses
incurred to perform after-sale services as a result of the Company's downsizing
program.
Selling, general and administrative expenses ("S,G&A") as a
percentage of revenues, was 12% for the three month period ended June 30, 1997,
as compared to 13% for the same period in Fiscal 1997. In absolute terms, S,G&A
decreased by $1,762,000 in the three month period ended June 30, 1997 as
compared to the same period in Fiscal 1997. The decrease was primarily
attributable to (i) a reduction in compensation expense relating to the
Company's downsizing program in the U.S., (ii) a reduction in professional fees
and (iii) the unrealized losses incurred in the prior year's quarter
on investment securities.
The Company recorded restructuring and other nonrecurring
charges of $52,000 in the three month period ended June 30, 1997. The charges
include costs for employee severances relating to further downsizing of the
Company's U.S. operations.
Equity in earnings of SSG amounted to $536,000 in the three
months ended June 30, 1997. SSG reported record earnings and double digit sales
growth in its first full quarter under Emerson's management team as compared to
the same period a year ago.
Interest expense decreased by $71,000 in the three month
period ended June 30, 1997 as compared to the same period in Fiscal 1997.
The decrease was attributable to lower average borrowings on the U.S. revolving
line of credit facility. The average rate in effect on the credit facility for
both the three month periods ended June 30, 1997 and 1996 was approximately
9.5%.
As a result of the foregoing factors, the Company incurred a
net loss of $2,722,000 for the three month period ended June 30, 1997, compared
to a net loss of $4,723,000 for the same period in Fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $373,000 for the
three months ended June 30, 1997. Cash was provided by the decrease in accounts
receivables partially offset by a loss from operations.
Net cash provided by investing activities was $13,000 for the
three months ended June 30, 1997.
In the three months ended June 30, 1997, the Company's
financing activities utilized $1,270,000 of cash. The Company reduced
its borrowings under its U.S. line of credit facility by
$1,113,000 through the collection of accounts receivable.
The Company maintains an asset-based revolving line of credit
facility, as amended, with a U.S. financial institution (the "Lender"). The
facility provides for revolving loans and letters of credit, subject to
individual maximums which, in the aggregate, cannot 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 June 30, 1997,
there were approximately $4.6 million outstanding on the Company's revolving
loan facility. At June 30, 1997, the Company's letter of credit facility was
not utilized. Based on the "Borrowing Base" amount at June 30, 1997, $1.6
million of the credit facility was not utilized. Pursuant to the terms of the
credit facility, as amended, effective June 30, 1997, the Company is required to
maintain a minimum adjusted net worth, as defined, of $15,000,000 and a minimum
working capital of $10,000,000. At June 30, 1997, the Company had an adjusted
net worth of $16,002,000.
The Company's Hong Kong subsidiary maintains various credit
facilities, as amended, aggregating $28.5 million with a bank in Hong Kong
consisting of the following: (i) a $3.5 million credit facility generally used
for letters of credit for a foreign subsidiary's direct import business and
affiliates' inventory purchases, and (ii) a $25 million credit facility, for
the benefit of a foreign subsidiary, which is for the establishment of back-to-
back letters of credit with the Customer. At June 30, 1997, the Company's Hong
Kong subsidiary had pledged $1 million in certificates of deposit to this bank
to assure the availability of these credit facilities. At June 30, 1997, there
were approximately $3.0 million and $14.1 million of letters of credit
outstanding on the $3.5 million and $25 million credit facilities, respectively.
Since the emergence of the Company from bankruptcy, management
believes that it has been able to compete more effectively in the highly
competitive consumer electronics and microwave oven industries in the United
States by combining innovative approaches to the Company's current product line
such as value-added promotions, and augmenting its product line with higher
margin complimentary products. The Company also intends to engage in the
marketing of distribution, sourcing and other services to third parties similar
to the sales and marketing arrangements to be provided to Daewoo and the
sourcing and inspection services to be provided to Cargil.
In addition, the Company intends to undertake efforts to expand the
international distribution of its products into areas
where management believes low to moderately priced, dependable
consumer electronics and microwave oven products will have a broad appeal. The
Company has in the past and intends in the future to pursue such plans either
on its own or by forging new relationships, including license arrangements,
partnerships, joint ventures or strategic mergers and acquisitions of, or
controlling interests in, companies in similar or complimentary businesses. No
assurance can be made that the Company will be successful in implementing such
plans.
The Company successfully concluded several licensing agreements for
existing core business products and new products, and intends to pursue
additional licensing opportunities. The Company 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.
At present, management believes that future cash flow from operations and
the 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
business plan. The Company's results of operations were substantially in line
with its business plan for the three months ended June 30, 1997. Current
trends show that the Company's results of operations for the three months
ended September 30, 1997, will be significantly improved as compared with
the second quarter of Fiscal 1997. During Fiscal 1997, the Company reduced
inventory levels approximately 62% and executed cost-reduction
programs in both its U.S. and foreign offices. The Company
intends to further reduce inventory levels and shift a higher
proportion of its sales to direct import thereby reducing its
inventory and its needs for working capital. In Fiscal 1997, products
representing approximately 49% of net revenues were directly imported from
manufacturers to the Company's customers. The Company's business plan includes
an increase in this percentage to approximately 80% in Fiscal 1998 and was 91%
for the three months ended June 30, 1997. This increase in the direct import
portion of sales is critical in providing sufficient working capital to meet its
sales objectives. If the Company does not obtain this objective, it may not
have sufficient working capital to finance its sales plan. It may be necessary
for the Company to margin or sell some of the SSG Stock to adequately finance
the Company's operations.
There can be no assurance that the Company will be able to successfully
achieve its business plan 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. Additionally, at June 30,
1997 the Company was in arrears on $618,000 of dividends
on the Company's Series A Preferred Stock. The preferred stock is
convertible into common stock at any time during the period beginning on March
31, 1997 and ending on March 31, 2002 and at a price per share of common stock
equal to 80% of the market value of a share
of common stock on the date of conversion. The preferred stock dividend rate for
Fiscal 1998 is 5.6%.
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 receives the largest
percentage of customer returns in the quarter ending March 31. The higher level
of returns during this period adversely impacts the Company's collection
activity during this period, and therefore its liquidity. The Company believes
that the agreements with Daewoo and Cargil, as discussed above, and the
arrangements it has implemented over the past twelve months concerning returned
merchandise, should favorably impact the Company's cash flow over their
respective terms.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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 June 30, 1997,
and is incorporated herein by reference. Additionally, the Company,
Mr. Davis, International Jensen Incorporated, Recoton Corporation
and certain other related parties entered into a settlement agreement
settling all disputes among them and releasing each other from all
liability in connection with the subject matter of these actions
on terms Emerson believes to be beneficial to it. Please refer to
Part 1 Item-3-Legal Proceedings in the Company's most recent annual
report on Form 10-K.
ITEM 3. Preferred Stock Dividends.
As of the date of this report, the Company was in arrears
on $618,000 of dividends on its Series A Preferred Stock.
ITEM 5. Other Information.
(a) Certain statements in this quarterly report on Form
10-Q under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in
this quarterly report and in future filings by the Company with
the Securities and Exchange Commission, constitute "forward
looking statements" with the meaning of the Reform Act. Such
forward looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual
results, performance or achievements of the Company to be
materially different from any future results, performance or
achievements expressed or implied by such forward looking
statements. Such factors include, among others, the following:
product supply and demand; general economic and business
conditions of the retail consumer electronics market; price
competition and competition from companies with greater
resources; success of operating initiatives and new product
introductions, including CinemaSurround(TM); operating costs
including continuing the Company's cost reduction program and
Company's return to vendor program; effects of foreign trade;
effects of the reversion of Hong Kong to the sovereignty of the
Peoples' Republic of China; 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 or refinance
the Company's operations; quality of management; success of
licensing arrangements; 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:
(27) Financial Data Schedule for the
three months ended June 30, 1997.
(b) Reports on Form 8-K:
(1) During the three month period
ended June 30, 1997, no Form 8-K was filed.
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION - CONTINUED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
EMERSON RADIO CORP.
(Registrant)
Date: August 14, 1997 /s/ Geoffrey P. Jurick
Geoffrey P. Jurick
Chairman, Chief Executive Officer and
President
Date: August 14, 1997 /s/ John P. Walker
John P. Walker
Executive Vice President and
Chief Financial Officer