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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 Identification
incorporation or organization) Number)
Nine Entin Road, Parsippany, NJ 07054
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (973) 884-5800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.01 American Stock Exchange
per share
Securities registered pursuant to Section 12(g) of the Act: Series A Preferred
Stock and Warrants.
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
requirement for the past 90 days. [X] YES [ ] NO.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock of the registrant held by non-
affiliates of the registrant at June 24, 1998 (computed by reference to the last
reported sale price of the Common Stock on the American Stock Exchange on such
date): $10,461,520.
Indicate by check mark whether the registrant has filed all documents and
reports to be filed by Section 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.
Number of Common Shares outstanding at June 24, 1998: 51,118,915
DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for the 1998 Annual
Meeting of Stockholders: Part III
PART I
Item 1. BUSINESS
GENERAL
Emerson Radio Corp. ("Emerson" or the "Company"), a consumer electronics
distributor, directly and through subsidiaries, designs, sources, imports and
markets a variety of televisions and other video products, microwave ovens,
audio, home theater, specialty and other consumer electronic products. The
Company also licenses the Emerson and G-Clef trademark for a variety of
television, video, telephone, and other products domestically and
internationally to certain non-affiliated entities (See "Business-Licensing and
Related Activities" for further discussion). The Company distributes its
products primarily through mass merchants and discount retailers leveraging the
strength of its Emerson and G-Clef trademark, a nationally recognized trade name
in the consumer electronics industry. The trade name "Emerson Radio" dates back
to 1912 and is one of the oldest and most well respected names in the consumer
electronics industry.
The Company believes it possesses an advantage over its competitors due to
the combination of (i) the Emerson and G-Clef brand recognition, (ii) its
distribution base and established relations with customers in the mass merchant
and discount retail channels, (iii) its sourcing expertise and established
vendor relations, and (iv) an infrastructure with personnel experienced in
servicing and providing logistical support to the domestic mass merchant
distribution channel. Emerson intends to continue to leverage its core
competencies to offer a broad variety of current and new consumer products to
retail customers. In addition, the Company has in the past and intends in the
future to form joint ventures and enter into licensing and distributor
agreements which will take advantage of the Company's trademarks and utilize the
Company's logistical and sourcing advantages for products which are more
efficiently marketed with the assistance of these partners.
The Company's core business consists of the distribution and sale of
various low to moderately priced product categories, including black and white
and color televisions, video cassette recorders ("VCRs"), video cassette players
("VCPs"), TV/VCR combination units, home stereo and portable audio products,
home theater products and microwave ovens. The majority of the Company's
marketing efforts and sales of these products is concentrated in the United
States and, to a lesser extent, certain other international regions. Emerson's
major competition in these markets are foreign-based manufacturers and
distributors. See "Business - Competition."
The Company was originally formed in the State of New York in 1956 under
the name Major Electronics Corp. In 1977, the Company reincorporated in the
State of New Jersey and changed its name to Emerson Radio Corp. On March 31,
1994, the Company successfully reorganized under Chapter 11 of the Federal
Bankruptcy Code. On April 4, 1994, the Company was reincorporated in Delaware
by merger of its predecessor into its wholly-owned Delaware subsidiary formed
for such purpose. References to "Emerson" or the "Company" refer to Emerson
Radio Corp. and its predecessor and subsidiaries, unless the context otherwise
indicates. The Company's principal executive offices are located at Nine Entin
Road, Parsippany, New Jersey 07054-0430. The Company's telephone number in
Parsippany, New Jersey, is (973) 884-5800.
PRODUCTS
The Company directly and through subsidiaries designs, sources, imports and
markets a variety of television and other video products, microwave ovens,
audio, home theater, specialty and other consumer electronic products, primarily
on the strength of its Emerson and G-Clef trademark, a nationally
recognized symbol in the consumer electronics industry.
The Company's current product categories consist of the following
core products:
Video Products Audio Products Other
Color televisions Shelf systems Home theater
Black and white specialty televisions CD stereo systems Microwave ovens
Color specialty televisions Portable audio,
Color TV/VCR combination units cassette & CD
Video cassette recorders systems
Specialty video cassette players Personal audio,
cassette & CD
systems
Digital clock
radios
Specialty clock
radios
All of the Company's products offer various features. Color television
units range in screen size from 5 inches to 25 inches and specialty color
televisions are offered in 5 inch and 9 inch units. Combination units range in
screen size from 9 inches to 25 inches. Portable audio systems incorporate
AM/FM radios and/or cassette and/or CD players in a variety of models.
Microwave ovens range in size from 0.6 cubic feet to 1.2 cubic feet containing
features such as turntables, key pad touch controls, auto defrost and multi-
power levels. Industry sales of units of home theater speakers increased 60%
($126 million) in 1997 and are expected to increase another 20% ($70 million) in
1998. During the fiscal year ending April 3, 1998 ("Fiscal 1998") Emerson
introduced its CinemaSurround(R) product line, a new concept in Home
Theater Technology which uses a patented technology to deliver dynamic
3-dimensional sound from any stereo source, without the need for any decoding
electronics.
GROWTH STRATEGY
The Company's strategic focus is to: (i) develop and expand its
distribution of consumer electronics products in the domestic marketplace to
existing and new customers; (ii) develop and sell new products, such as home
theater; (iii) capitalize on opportunities to license the Emerson and G-Clef
trademark; (iv) leverage and exploit its sourcing capabilities, buying power and
logistics expertise in the Far East either internally or on behalf of third
parties; (v) expand international sales and distribution channels; and (vi)
expand through strategic mergers and acquisitions of, or controlling interests
in, other companies. See Note 3 to the consolidated financial statements
included in Item 8 "Financial Statements and Supplementary Data" regarding
Emerson's investment in Sport Supply Group ("SSG") as part of its strategic plan
to expand.
The Company believes that the Emerson and G-Clef trademark is recognized in
many countries. A principal component of the Company's growth strategy is to
utilize this global brand name recognition together with the Company's
reputation for quality and cost competitive products to aggressively promote its
product lines within the United States and targeted geographic areas on an
international basis. The Company's management believes the Company will be able
to compete more effectively in the highly competitive consumer electronics and
microwave oven industries, domestically and internationally, by combining
innovative approaches to the Company's current product line and augmenting its
product line with complimentary products. The Company intends to pursue such
plans either on its own, or by forging new relationships, including through
license arrangements, distributorship agreements and joint ventures. See
"Business-Licensing and Related Activities."
SALES AND DISTRIBUTION
The Company makes available to its customers a direct import program,
pursuant to which products bearing the Emerson trademark are imported directly
by the Company's customers. In Fiscal 1998 and Fiscal 1997, products
representing approximately 77% and 46% of net revenues, respectively, were
imported directly from manufacturers to the Company's customers. If the Company
experiences a decline in sales effected through direct imports and a
corresponding increase in domestic sales, the Company will require increased
working capital in order to purchase inventory to make such sales. This
increase in working capital may affect the liquidity of the Company. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Forward-looking Information".
The Company has an integrated system to coordinate the purchasing, sales
and distribution aspects of its operations. The Company receives orders from
its major accounts electronically or by the conventional modes of facsimile,
telephone or mail. The Company does not have long-term contracts with any of
its customers, but rather receives orders on an ongoing basis. Products
imported by the Company (generally from the Far East and Mexico) are shipped by
ocean and/or inland freight and then stored in contracted public warehouse
facilities for shipment to customers. This also includes the use of an
Affiliate's warehouse pursuant to a Management Services Agreement between the
Company and the Affiliate. (See Note 3 to the Consolidated Financial Statements
included in Item 8). All merchandise received by Emerson is automatically input
into the Company's on-line inventory system. As a purchase order is received
and filled, warehoused product is labeled and prepared for outbound shipment to
Company customers by common, contract or small package carriers for sales made
from the Company's inventory.
DOMESTIC MARKETING
In the United States, the Company markets its products primarily through
mass merchandisers and discount retailers. Wal-Mart Stores accounted for
approximately 58% and 36%, and Target Stores accounted for approximately 16% and
13% of the Company's net revenues in Fiscal 1998 and Fiscal 1997, respectively.
No other customer accounted for more than 10% of the Company's net revenues in
either period. Management believes that any loss or reduction in sales from
these customers may have a material impact on the Company's operating income.
Approximately 34% and 43% of the Company's sales in Fiscal 1998 and Fiscal
1997, respectively, were made through sales representative organizations that
receive sales commissions and work closely with the Company's sales personnel.
The sales representative organizations sell, in addition to the Company's
products, similar, but generally non-competitive, products. In most instances,
either party may terminate a sales representative relationship on 30 days' prior
notice in accordance with customary industry practice. The Company utilizes
approximately 30 sales representative organizations, including one through which
approximately 13% of the Company's net revenues were made in 1997. No other
sales representative organization accounted for more than 10% of the Company's
net revenues in either year. The remainder of the Company's sales are made to
retail customers serviced by the Company's sales personnel.
FOREIGN MARKETING
While the major portion of the Company's marketing efforts are made in the
United States, approximately 2% and 8% of the Company's net revenues in Fiscal
1998 and Fiscal 1997, respectively, were derived from customers based in foreign
countries. See Note 14 of notes to consolidated financial statements included in
Item 8 "Financial Statements and Supplementary Data" and "Management's
Discussion and Analysis of Results of Operations and Financial Condition."
LICENSING AND RELATED ACTIVITIES
The Company has several license agreements in place, which allow licensees
the use of the Emerson and G-Clef trademark for the manufacture and/or the sale
of consumer electronics and other products. The license agreements cover
various countries throughout the world and are subject to renewal at the
expiration of the agreements. Additionally, the Company has entered into
several sourcing and inspection agreements that require the Company to provide
these services in exchange for a fee. License revenues recognized in Fiscal
years 1998, 1997 and 1996 were $5,597,000, $5,040,000 and $4,493,000,
respectively. The Company records a majority of licensing revenues as they
are earned over the term of the related agreements.
In February 1995, the Company and one of its largest Suppliers and certain
of the Supplier's affiliates (collectively, the "Supplier") entered into two
mutually contingent agreements (the "Agreements"). Effective March 31, 1995,
the Company granted a license of certain trademarks to the Supplier for a three-
year term. The license permitted the Supplier to manufacture and sell certain
video products under the Emerson and G-Clef trademark to one of the Company's
largest customer (the "Customer") in the U.S. and Canada, and precluded the
Supplier from supplying product to the Customer other than under the Emerson and
G-Clef trademark or the Supplier's other trademarks. Further, the 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 the Agreements, the Company received non-refundable minimum annual
royalties from the Supplier to be credited against royalties earned from sales
of video cassette recorders and players, television/video cassette recorder and
player combinations, 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 similar video products sold by the
Company prior to April 1, 1995. Royalty income recognized by the Company
pursuant to the Agreements were $4,000,000, $4,000,000 and $4,442,000 in
Fiscal 1998, 1997 and 1996, respectively, and are included in the balances
provided above. The agreement expired on March 31, 1998.
In anticipation of the expiration of the Agreements, Emerson executed a
four-year agreement ("Daewoo Agreement") with Daewoo Electronics Co. Ltd.,
("Daewoo") in April 1997. This agreement provides that Daewoo will manufacture
and sell television and video products bearing the Emerson and G-Clef trademark
to customers in the U.S. market. Daewoo is responsible for and assumes all
risks associated with, order processing, shipping, credit and collections,
inventory, returns and after-sale service. The Company will arrange sales and
provide marketing services and in return receive a commission for such services.
This agreement can be terminated without cause by either party upon 90 days
notice.
The Daewoo Agreement may result in commission revenues that will be less
than, equal to or exceed those earned from the Supplier Agreement. The
agreement with Daewoo does not contain minimum annual commissions and is
entirely dependent on the volume of sales made by the Company that are subject
to the Daewoo Agreement. Should the Company not generate commission revenues
that are at levels substantially equal to the revenues generated from the
Supplier Agreement, the Company's results of operations will be effected
adversely.
In February 1997, the Company executed five-year license/supply agreements
with Cargil International Corp. ("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 require Emerson to source and inspect product for Cargil. Under the terms
of the agreements, the Company will receive minimum annual royalties and a
separate fee for the provision of sourcing and inspection services. Cargil
assumes all costs and expenses associated with the purchasing, marketing and
after-sales support of such products.
In October 1994, the Company entered into a license agreement with Jasco
Products Co., Inc., ("Jasco"), as amended, whereby the Company granted a license
of certain trademarks to Jasco for use on consumer electronics accessories.
Under the terms of the agreement as amended in April 1997, the Company will
receive minimum annual royalties through the life of the agreement, which
expires on December 31, 1998.
In June 1997, the Company entered into an eighteen month non-exclusive
license agreement with World Wide One, Ltd., 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 to Makro International Far East Ltd. for
sales of these products in China, Indonesia, Malaysia, Philippines, South Korea,
Taiwan and Thailand. The Company will provide sourcing and inspection services
for at least 50% of the licensee's purchase requirement. The licensee is
required to meet certain minimum sales requirements as well as to ensure the
establishment of adequate service centers or agents for after-sales warranty
services.
In March 1998, the Company executed three-year license and supply
agreements with WW Mexicana, S. A. de C. V. ("WW Mexicana"), a distributor
located in Mexico covering the Mexico market. The agreements provide for the
license of the Emerson and G-Clef trademark for use on certain consumer products
to be sold in Mexico and sourcing and inspection services. Under the terms of
these agreements, the Company will receive minimum annual royalties through the
life of the agreement and will receive a separate fee for sourcing and
inspection services.
In March 1998 the Company executed a three-year license agreement with Tel-
Sound Electronics, Inc. ("Tel-Sound"), covering the United States and Canada
markets. The agreement provides for the license of the Emerson and G-Clef
trademark for use with telephones, answering machines and caller ID products.
Under the terms of this agreement, the Company will receive minimum annual
royalties through the life of the agreement.
The Company intends to pursue additional licensing opportunities and
believes that such licensing activities have had and will continue to have a
positive impact on operating results by generating royalty and sourcing income
with minimal incremental costs, if any, and without the necessity of utilizing
working capital. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and "Forward-Looking Information."
DESIGN AND MANUFACTURING
The majority of the Company's products are manufactured by original
equipment manufacturers in accordance with the Company's specifications. These
manufacturers are primarily located in Hong Kong, South Korea, China, Malaysia,
Thailand and Mexico.
The Company's design team is responsible for product development and works
closely with its suppliers. Company engineers determine the detailed cosmetic,
electronic and other features for new products, which typically incorporate
commercially available electronic parts to be assembled according to its design.
Accordingly, the exterior designs and operating features of the Company's
products reflect the Company's judgment of current styles and consumer
preferences. The Company's designs are tailored to meet the consumer
preferences of the local market, particularly in the case of the Company's
international markets.
During Fiscal 1998 and Fiscal 1997, 100% of the Company's purchases
consisted of imported finished goods.
The following summarizes the Company's purchases from its major suppliers.
FISCAL YEAR
SUPPLIER 1998 1997
Daewoo 42% 22%
Tonic Electronics 20% *
Orient Power * 21%
Imarflex * 16%
* Less than 10%.
No other supplier accounted for more than 10% of the Company's total
purchases in Fiscal 1998 or Fiscal 1997. The Company considers its
relationships with its suppliers to be satisfactory and believes that, barring
any unusual shortages or economic conditions (See "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and "Forward-Looking
Information" regarding the economic crisis in Asia) the Company could develop,
as it already has developed, alternative sources for the products it currently
purchases. Except for the agreement with Daewoo described above (See "Licensing
and Related Activities"), the Company does not have a contractual agreement with
any of its suppliers for product purchases. No assurance can be given that
certain shortages of product would not result if the Company was required to
seek alternative sources of supply without adequate notice by a supplier or a
reasonable opportunity to seek alternate production facilities and component
parts.
WARRANTIES
On sales the Company makes to customers within the United States, the
Company offers limited warranties comparable to those offered to consumers by
its competitors.
RETURNED PRODUCTS
Customers return product to the Company for a variety of reasons, including
liberal retailer return policies with their customers, damage to goods in
transit and occasional cosmetic imperfections and mechanical failures.
The Company has executed an agreement with Hi Quality International
(U.S.A.) Inc. ("Hi Quality") as an outlet for the Company's returned products
pursuant to which Hi Quality has agreed to purchase from the Company all
returned consumer electronics products in the United States that are not subject
to the return-to-vendor agreements discussed below. Hi Quality will refurbish
them, if feasible, and sell them as either refurbished or "As-Is" product.
To further reduce the costs associated with product returns, the Company
has entered into return-to-vendor agreements with the majority of its
suppliers. For a fee, the Company returns defective returned product to the
supplier and in exchange receives a replacement unit. The agreements cover
certain microwave oven, home theater, audio and video products. The Company has
realized and expects to continue to realize significant cost savings from such
agreements.
BACKLOG
From time-to-time, the Company has substantial orders from customers on
hand. Management believes, however, that backlog is not a significant factor in
its operations. The ability of management to correctly anticipate and provide
for inventory requirements is essential to the successful operation of the
Company's business.
TRADEMARKS
The Company owns the Emerson and G-Clef , "H.H. Scott" and "Scott"
trademarks for certain of its home entertainment and consumer electronic
products in the United States, Canada, Mexico and various other countries. Of
the trademarks owned by the Company, those registered in the United States must
be renewed at various times through 2008 and those registered in Canada must be
renewed at various times through 2011. The Company's trademarks are also
registered on a worldwide basis in various countries, which registrations must
be renewed at various times. The Company intends to renew all such trademarks.
The Company considers the Emerson and G-Clef trademark to be of material
importance to its business. The Company owns several other trademarks, none of
which is currently considered by the Company to be of material importance to its
business. The Company has licensed certain applications of the Emerson and G-
Clef trademark to Tel-Sound, WW Mexicana, Cargil, Daewoo, World Wide One, Jasco
and the Franklin Mint on a limited basis and for a definitive period of time.
See " Licensing and Related Activities."
COMPETITION
The market segment of the consumer electronics industry in which the
Company competes generates approximately $18 billion of factory sales annually
and is highly fragmented, cyclical and very competitive, supporting major
American, Japanese and Korean companies, as well as numerous small importers.
The industry is characterized by the short life cycle of products which requires
continuous design and development efforts. Market entry is comparatively easy
because of low initial capital requirements.
The Company primarily competes in the low to medium-priced sector of the
consumer electronics market. Management estimates that the Company has several
dozen competitors that are manufacturers and/or distributors, many of which are
much larger and have greater financial resources than the Company. The Company
competes primarily on the basis of its products' reliability, quality, price,
design, consumer acceptance of the Emerson and G-Clef trademark and quality
service to retailers and their customers. The Company's products also compete
at the retail level for shelf space and promotional displays, all of which have
an impact on the Company's established and proposed distribution channels. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
SEASONALITY
The Company generally experiences stronger demand from its customers for
its products in the fiscal quarters ending September 30 and December 31.
Accordingly, to accommodate such increased demand, the Company generally is
required to place higher orders with its vendors during the quarters ending June
30 and September 30, thereby increasing the Company's need for working capital
during such periods. On a corresponding basis, the Company also is subject to
increased returns during the quarters ending March 31 and June 30, which
adversely affects the Company's collection activities and liquidity during such
periods. Operating results may fluctuate due to other factors such as the
timing of the introduction of new products, price changes by the Company and its
competitors, demand for the Company's products, product mix, delay, available
inventory levels, fluctuation in foreign currency exchange rates relative to the
United States dollar, seasonal cost increases, and general economic conditions.
GOVERNMENT REGULATION
Pursuant to the Tariff Act of 1930, as amended, the Trade Act of 1974 and
regulations promulgated thereunder, the United States government charges tariff
duties, excess charges, assessments and penalties on many imports. These
regulations are subject to constant change and revision by government agencies
and by action by the United States Trade Representative and may have the effect
of increasing the cost of goods purchased by the Company or limiting quantities
of goods available to the Company from its overseas suppliers. A number of
states have adopted statutes regulating the manner of determining the amount of
payments to independent service centers performing warranty service on products
such as those sold by the Company. Additional Federal legislation and
regulations regarding the importation of consumer electronics products,
including the products marketed by the Company, have been proposed from
time-to-time and, if enacted into law, could adversely affect the Company's
results of operations.
EMPLOYEES
As of June 24, 1998, the Company had approximately 108 employees. The
Company considers its labor relations to be generally satisfactory. The Company
has no union employees.
Item 2. PROPERTIES
The Company leases warehouse and office space in New Jersey, Texas, Canada
and Hong Kong under leases expiring at various times.
Lease agreements for 10,132 square feet of office space in Hong Kong expire
July 31, 2000. Renewal for reduced square footage for office space at its
Corporate offices in New Jersey for 19,216 square feet was entered into on May
15, 1998 for commencement as of August 1, 1998 and expires on July 31, 2003.
There is also 5,400 square feet of warehouse and office space rented from an
Affiliate pursuant to a Management Services Agreement which can be terminated by
either party upon 60 days notice.
In the past several years, the Company has closed substantially all of its
leased or owned warehouse facilities in favor of public warehouse space as part
of the Company's effort to convert fixed costs to variable costs. Such public
warehouse commitments are evidenced by contracts with terms of up to one year.
The cost for the public warehouse space is primarily based on a fixed percentage
of the Company's sales from each respective location. The Company does not
presently own any real property. In addition, a portion of its New Jersey
corporate headquarters has been subleased through July 1998.
Item 3. LEGAL PROCEEDINGS
CERTAIN OUTSTANDING COMMON STOCK
Pursuant to the Company's bankruptcy restructuring plans on March 31, 1994,
30 million shares of the Company's 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 in proceedings before the United States District Court for the District
of New Jersey, 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 the Affiliated Entities (the
"Creditors"), to be paid from the proceeds of the sale of certain of the 29.2
million 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, TM Capital
(the "Advisor") pursuant to 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 have been divided into two pools. The Pool A Shares
currently consist of 15.3 million shares of Emerson's common stock. The Pool B
Shares currently 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 of the
Settlement Shares may be made 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% per quarter of the Emerson common stock outstanding, 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.
All of the Settlement Shares secure payment of the $49.5 million owed to
the Creditors on a first priority basis. Any Creditor may apply to the Court
for an order to terminate the Settlement Agreement if certain events occur.
Such events include, without limitation, delisting of the Settlement Shares from
a national securities exchange or a determination that there is no reasonable
prospect that the goals contemplated by the Settlement Agreement can be
achieved. In November 1997, Petra Stelling and Barclays Bank filed a motion with
the Court for an order (i) terminating the Settlement Agreement on the ground
that there is no reasonable prospect that the goals contemplated by the
Settlement Agreement can be accomplished, and (ii) granting the Creditors
authorization to exercise all the rights and remedies provided by the Settlement
and Pledge Agreements in the event of termination including authorizing the
Collateral Agent to sell the Emerson Shares to fund payment of the Settlement
Amount and to vote the Emerson Shares pending such sale, directing the entry and
release of the Consent Judgments, authorizing Petra Stelling to enforce the
Swiss Judgment and for such other relief as the Court deems appropriate. The
Company and Mr. Jurick responded, the Creditors replied and a hearing on the
motion was held in April 1998 at which time it was adjourned. The hearing is
currently scheduled to resume on July 9, 1998.
If the Court enters an order terminating the Settlement Agreement, the
Creditors may take any action permitted by law to execute the Consent Judgments
given to them in connection with the Settlement Agreement to collect the unpaid
balance (including, without limitation, foreclosing on the Settlement Shares).
If the Creditors foreclose on the Settlement Shares and such foreclosure results
in a change of control (as defined in the Senior Secured Credit Facility), such
foreclosure will be deemed an event of default under the Company's Senior
Secured Credit Facility entitling the holders to accelerate payment of such
indebtedness. In addition, if a change of control (as defined in the Indenture
governing the Debentures) occurs, each of the holders of the Debentures, subject
to the right of the Senior Secured Creditors to impose a 120 day payment block,
has the right to require the Company to repurchase its Debentures at the par
value thereof plus accrued but unpaid interest. Such repurchases may have a
material adverse effect on the Company's future business activities.
In 1994, Petra and Donald Stelling ("the Stellings"), two of the Creditors
filed a complaint with the Swiss Authorities alleging that Messrs. Jurick and
Jerome H. Farnum ("Farnum"), directors of the Company, had conducted banking
operations in Switzerland without appropriate licenses and that Messrs. Jurick,
Farnum, and Peter G. Bunger ("Bunger"), also a director of the Company, engaged
in improper activities in the financing of the Plan of Reorganization.
Although, as part of the settlement discussed herein, the Stellings and other
affected parties requested the discontinuance of the criminal investigations of
these individuals, the matter is presently pending before a Swiss Court with a
trial, if any, to be held no earlier than 1999. The Federal Banking Commission
of Switzerland previously issued a decree purporting to determine that certain
entities affiliated with Messrs. Jurick and Farnum were subject to Swiss banking
laws and had engaged in banking activities without a license.
OTAKE
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") seeking damages and 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, subsequently amended, 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 declaratory and injunctive relief and damages in the amount of $3.2
million, together with interest thereon, attorneys' fees, and certain other
costs. The Company is presently owed the sum of $5 million from Orion
representing royalty payments past due and owing pursuant to a certain License
Agreement dated February 22, 1995 by and between the Company and Orion. In the
context of the action Orion Sales, Inc. v. Emerson Radio Corp., pending in the
United States District Court for the Southern District of Indiana (the "District
Court"), Orion has executed a pre-judgment garnishment of these funds and
deposited them with the Clerk of the District Court pursuant to an Order of the
District Court. Orion has not contested the Company's entitlement to these
royalty payments. Orion has also posted a bond with the District Court
sufficient to compensate Emerson for any and all damages that may result from
the pre-judgment garnishment.
The Company has withheld payment of the sum of $3.2 million for certain
consumer electronic products that Orion and its affiliates sold and delivered to
Emerson pursuant to a certain Agreement dated February 22, 1995 by and between
Emerson on the one hand and Orion, Otake Trading Co., Inc. and Technos
Development Limited on the other (the "Supply Agreement"). Emerson has
vigorously contested Orion and its affiliates' entitlement to the $3.2 million
payment.
Both the Company and Orion have asserted claims for interest accruing on
the unpaid principal balances respectively due them, which are presently pending
before the District Court. The Company's management believes that it will
receive the $5 million due pursuant to the license agreement and has meritorious
defenses to Orion's claim for the $3.2 million payment, and, also, the interest
allegedly accrued thereon. 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 in March 31, 1994. The largest claim was filed on or about July 25, 1994,
with the United States Bankruptcy Court for the District of New Jersey, 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 $93.6 million, of
which $86.8 million 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, the Company
believes the chances for recovery for lost profits are remote. There has been
no activity regarding this litigation during the current fiscal year.
TAX CLAIM
A wholly owned subsidiary of the Company, Emerson Radio (Hong Kong) Ltd.
was assessed $858,000 by the Hong Kong Inland Revenue Department (the "IRD") in
May 1998. The assessment relates to the 1992/1993 to 1997/1998 tax years and
asserts that certain revenues reported as non taxable by Emerson Radio (Hong
Kong) Ltd. are subject to a profits tax. Emerson Radio (Hong Kong) Ltd.
is also in litigation with the IRD regarding a separate assessment
of $489,000 pertaining to the deduction of certain expenses that relate
to the taxable years 1991/1992 to 1997/1998. The outcome of both actions is
uncertain at this time. However, the Company believes that it will
prevail in both cases. During June 1998 the Company received a
favorable ruling in regards to the assessment of $489,000, which is
subject to appeal.
GRACE BROTHERS
The Company has filed legal proceedings on May 15, 1998 in the United
States District Court for the District of New Jersey against Grace Brothers
seeking damages and injunctive relief arising from its claims that Grace
violated sections of the Exchange Act and Securities and Exchange Act as a
result of its dealings with the Company's Series A Convertible Preferred Stock.
EISENBACH
On January 19, 1998, the Company was served with a lawsuit filed in June
1997 in the German Regional Court Frankfurt Am Main, filed by Professor Gerhard
Eisenbach against the Company, Geoffrey P. Jurick, the Company's Chairman, Chief
Executive Officer and President, Fidenas International Ltd. LLC, an affiliate of
Mr. Jurick, and Eugene I. Davis, a former executive officer of the Company,
jointly and severally, alleging breach of contractual duty, tort and investment
fraud arising from Eisenbach's $1,000,000 investment in the Company, on or about
March 31, 1994, in conjunction with the Company's reorganization in the
Bankruptcy Court. While the outcome of this action is not certain at this time,
the Company believes it has meritorious defenses to the claims made and intends
to vigorously defend this action.
EUGENE DAVIS
On September 24, 1997, pursuant to the terms of his Employment Agreement,
as amended, Mr. Davis was requested to resign as a director. On September 25,
1997 the Company terminated Mr. Davis' employment for cause. The circumstances
surrounding such termination of employment are the subject of two proceedings
filed on September 30, 1997 and October 2, 1997, respectively, in the Superior
Court of the State of New Jersey ("Superior Court") seeking injunctive relief
and money damages, respectively, in which the Company, the Affiliate and Mr.
Davis are parties. While the outcome of these actions is not certain at this
time, the Company believes the results of the litigation should not have a
material adverse effect on the financial condition of the Company or on its
results of operations.
The Company is involved in other legal proceedings and claims of various
types in the ordinary course of business. While any such litigation to which
the Company is a party contains an element of uncertainty, management presently
believes that the outcome of each such proceeding or claim which is pending or
known to be threatened, or all of them combined, will not have a material
adverse effect on the Company's consolidated financial position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's shareholders was held on January 6,
1998, at which time the shareholders elected the following slate of nominees to
remain on the Board of Directors: Peter G. Bunger, Robert H. Brown, Jr., Jerome
H. Farnum, Geoffrey P. Jurick and Raymond L. Steele. Election of the Board of
Directors was the only matter submitted for shareholder vote. There were
45,739,099 shares of outstanding capital stock of the Company entitled to vote
at the record date for this meeting and there were present at such meeting, in
person or by proxy, stockholders holding 42,861,567 shares of the Company's
Common Stock which represented 93.7% of the total capital stock outstanding and
entitled to vote. There were 42,861,567 shares voted on the matter of the
election of directors. The result of the votes cast regarding each
nominee for office was:
Nominee for Director Votes For Votes Withheld
Robert H. Brown, Jr. 42,213,563 648,004
Peter G. Bunger 42,215,336 646,231
Jerome H. Farnum 42,215,336 646,231
Geoffrey P. Jurick 42,196,331 665,236
Raymond L. Steele 42,215,836 645,731
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information
The Company's Common Stock has traded on the American Stock Exchange since
December 22, 1994 under the symbol MSN. The following table sets forth the
range of high and low sales prices for the Company's Common Stock as reported by
the American Stock Exchange during the last two fiscal years.
Fiscal 1997 Fiscal 1998
High Low High Low
First Quarter $3 $2 $1-1/16 $1/2
Second Quarter 3 2 3/ 4 7/16
Third Quarter 2-1/4 1-1/8 3/ 4 3/ 8
Fourth Quarter 1-7/8 7/8 9/16 3/ 8
There is no established trading market for the Company's Common Stock
Purchase Warrants.
(b) Holders
At June 24, 1998, there were approximately 511 stockholders of record of
the Company's Common Stock, and 11 holders of the Warrants.
(c) Dividends
The Company's policy has been to retain all available earnings, if any, for
the development and growth of its business. The Company has never paid cash
dividends on its Common Stock. In deciding whether to pay dividends on the
Common Stock in the future, the Company's Board of Directors will consider
factors it deems relevant, including the Company's earnings and financial
condition and its working capital and anticipated capital expenditures. The
Company's United States credit facility and the Indenture contain certain
dividend payment restrictions on the Company's Common Stock. Additionally, the
Company's Certificate of Incorporation, defining the rights of the Series A
Preferred Stock, prohibits Common Stock dividends unless the Series A Preferred
Stock dividends are paid or put aside. The Series A Preferred Stock accrues
dividends, payable on a quarterly basis, at a 7% dividend rate through March 31,
1997, then declining by a 1.4% dividend rate each succeeding year until March
31, 2001 when no further dividends are payable. The Company is currently in
arrears on $727,000 of dividends of the Company's Series A Preferred Stock. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
(d) Unregistered Securities
The Company issued 10 million shares of Series A Convertible Preferred
Stock ("Series A Preferred Stock") in conjunction with the Company's Plan of
Reorganization completed March 31, 1994.
The Series A Preferred Stock is convertible into shares of the Company's
common stock at any time during the period beginning on March 31, 1997 and
ending on March 31, 2002. The conversion rate is equal to 80% times the average
of the daily market prices of a share of the Company's common stock for the 60
consecutive days immediately preceding the conversion date.
During the three months ended April 3, 1998, the Company issued a total of
1,818,201 shares of the common stock, upon conversion of 650 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.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for the five years ended April 3, 1998. For the year ended April 3,
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
ended on April 3, 1998. The selected consolidated financial data should be read
in conjunction with the Company's consolidated financial statements, including
the notes thereto, and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" set forth elsewhere in this Form 10-K.
Year Ended
April 3, March 31, March 31, March 31, March 31,
1998 1997 1996 1995 1994
(In thousands, except per share data)
Summary of Operations:
Net Revenues (1) $162,730 $178,708 $245,667 $654,671 $487,390
Net Earnings (Loss) (2):
Before Extraordinary
Gain $(1,430) $(23,968) $(13,389) $ 7,375 $(73,654)
Extraordinary Gain -- -- -- -- 129,155
$(1,430) $(23,968) $(13,389) $ 7,375 $ 55,501
Balance Sheet Data at
Period End:
Total Assets $51,920 $58,768 $ 96,576 $113,969 $ 119,021
Current Liabilities 17,043 21,660 35,008 59,782 76,083
Long-Term Debt 20,929 21,079 20,886 214 227
Shareholders'Equity 13,948 16,029 40,382 53,651 42,617
Working Capital 11,164 13,258 48,434 42,598 32,248
Current Ratio 1.7 to 1 1.6 to 1 2.4 to 1 1.7 to 1 1.4 to 1
Per Common Share: (2) (3)
Earnings (Loss) Per Common
Share: Basic
Income (Loss) Before
Extraordinary Gain $ (.04) $ (0.61) $(0.35) $ 0.25 $ (1.95)
Extraordinary Gain -- -- -- -- 3.38
Net Income (Loss)
Per Common Share $ (.04) $ (0.61) $(0.35) $ 0.25 $ 1.43
Earnings (Loss) Per Common
Share: Diluted
Income (Loss) Before
Extraordinary Gain $ (.04) $ (0.61) $(0.35) $ 0.19 $ (1.95)
Extraordinary Gain -- -- -- -- 3.38
Net Income (Loss)
Per Common Share $ (.04) $ (0.61) $(0.35) $ 0.19 $ 1.43
Weighted Average Shares
Outstanding:
Basic 45,167 40,292 40,253 36,530 38,191
Diluted 45,167 40,292 40,253 47,900 38,191
Common Shareholders'
Equity per Common
Share (4) $ 0.18 $ 0.15 $ 0.75 $ 1.08 $ 0.98
(1) The decline in net direct revenues for Fiscal 1995 through 1998 was due
primarily to the implementation of the Agreement signed with the Supplier
effective March 31, 1995. Net Revenues for Fiscal 1995 included $340,465,000
of sales of video products covered by the arrangement with the Supplier which
expired on March 31, 1998. See "Business-Licensing and Related Activities".
(2) Net earnings for Fiscal 1994 includes an extraordinary gain of
$129,155,000, or $3.38 per common share, on the extinguishment of debt
settled in the Plan of Reorganization. Accordingly, the Company recorded
reorganization expenses of $17,385,000 relating primarily to the writedown of
assets transferred to creditors under the Plan of Reorganization and
professional fees and other related expenses incurred during the bankruptcy
proceedings.
(3) Earnings (loss) per common share for Fiscal 1994 are based on the weighted
average number of old common shares outstanding . Earnings per common share
for Fiscal 1995 is based on the weighted average number of shares of new
Common Stock and related potentially dilutive securities outstanding during
the year. Potentially dilutive securities include 4,664,000 shares assuming
conversion of $10 million of Series A Preferred Stock at a price equal to 80%
of the weighted average market value of a share of Common Stock, determined
as of March 31, 1995. Since the Series A Preferred Stock was not convertible
into Common Stock until March 31, 1997, the number of shares issuable upon
conversion may have been significantly different. Loss per common share for
Fiscal 1996, Fiscal 1997 and Fiscal 1998 are based on the net loss and
deduction of preferred stock dividend requirements (resulting in additional
loss attributable to common stockholders) and the weighted average of new
Common Stock outstanding during each fiscal year. Loss per share does not
include potentially dilutive securities assumed outstanding since they are
anti-dilutive.
(4) Calculated based on common shareholders' equity divided by actual shares of
Common Stock outstanding. Common shareholders' equity at April 3, 1998, is
equal to total shareholders' equity less $5,713,000 for the liquidation
preference of the Series A Preferred Stock. Common shareholders' equity at
March 31, 1997, 1996, 1995 and 1994 is equal to total shareholders' equity
less $10 million for the liquidation preference of the Series A Preferred
Stock.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL
The Company reported a decline in its net sales for Fiscal 1998, 1997 and
1996 as compared to Fiscal 1995 primarily due to the licensing of video sales.
However, the Company's sales of video products to other customers in the United
States also declined during these periods due to increased price competition,
higher retail stock levels, weak consumer demand, a soft retail market and the
extremely high level of sales achieved in Fiscal 1995. The Company expects its
sales in the United States for the first two quarters of Fiscal 1999 to be
higher than the first two quarters of Fiscal 1998 due to an improved retail
climate, improved sales of microwave products, and that licensing and commission
revenues will increase in future years.
RESULTS OF OPERATIONS - FISCAL 1998 COMPARED WITH FISCAL 1997
NET REVENUES Consolidated net revenues for Fiscal 1998 decreased $16.0
million (9%) as compared to Fiscal 1997. The decrease in net revenues resulted
primarily from decreases in unit sales of video cassette recorders, televisions
and television/video cassette recorder combination units due to the Company's
licensing agreement with Daewoo and The Supplier. The decrease also resulted
from decreases in unit sales of (i) home theater products, due to a reduction in
the variety of products offered, and (ii) car audio products, which were
discontinued in Fiscal 1998, and the transfer of the Company's Canadian sales to
a local distributor. The reduced revenues were partially offset by increased
sales of microwave ovens attributable to a broader product line, by the
introduction of the Company's CinemaSurround(R) product, and by the sales
of home audio products into foreign markets as well
as the U.S. market. Revenues recognized from the licensing
of the Emerson and G-Clef trademark were $5.6
million in Fiscal 1998 as compared to $5.0 million for Fiscal 1997.
The Company reports royalty and commission revenues earned from its
licensing arrangements, covering various products and territories, in lieu of
reporting the full dollar value of such sales and associated costs. (See
"Business-Licensing and Related Activities"). The Company expects its U.S. gross
sales on its Core Products to improve and its margins on such sales to also
improve due to the change in product mix to higher margin products.
Cost of Sales Cost of Sales, as a percentage of consolidated revenues,
was 87% in Fiscal 1998 as compared to 97% in Fiscal 1997. In absolute dollars,
cost of sales decreased by $31.8 million (18%) for Fiscal 1998 as compared to
Fiscal 1997. Cost of sales in Fiscal 1998 were significantly improved as a
percent of sales and in absolute dollars due to the change in the product mix to
higher margin products and the reduction of inventory overhead costs due to the
Company's successful efforts to shift a higher proportion of its sales to a
direct import basis. For Fiscal 1998, products representing approximately 77%
of net revenues were directly imported from manufacturers to the Company's
customers as compared to 46% for Fiscal 1997.
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 are generally placed in the low-to-medium priced category of the market
which tend to be the most competitive and generate the lowest profits. The
Company believes that the combination of the (i) arrangement with Daewoo, (ii)
license agreements with Cargil, W. W. Mexicana and Tel-Sound; (iii) introduction
of its new home theater product, CinemaSurround(R), and (iv) distributor
agreements in Canada, Europe and parts of Asia will all 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 is reviewing new products which can
generate higher margins than its current business, either through license
arrangements, acquisitions and joint ventures or on its own.
OTHER OPERATING COSTS AND EXPENSES Other operating costs and expenses
increased $1.3 million in Fiscal 1998 as compared to Fiscal 1997, primarily as a
result of the Company's implementation of its return to vendor program.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("S,G&A") S,G&A, as a
percentage of net revenues, were 9.5% in Fiscal 1998 as compared to 10.5% in
Fiscal 1997. In absolute terms, S,G&A decreased by $3.2 million in Fiscal 1998
as compared to Fiscal 1997. The decrease in S,G&A as a percentage of net
revenues and in absolute terms was primarily attributable to the following: (i)
a decrease in salary expense associated with the Company's reduced staffing
levels; (ii) a decrease in professional fees; and (iii) a decrease in
depreciation expense.
RESTRUCTURING AND OTHER NONRECURRING CHARGES The Company did not record
any restructuring charges in Fiscal 1998, compared to charges of $3.0 million in
Fiscal 1997. The charges recorded in Fiscal 1997 includes charges for the
closure of the Company's local Canadian office; employee severance; asset write-
downs; and $1.9 million of nonrecurring charges relating to the proposed but
unsuccessful acquisition of International Jensen Incorporated.
EQUITY IN EARNINGS OF AFFILIATE The Company's 28% share in the earnings of
an Affiliate amounted to $1.5 million for Fiscal 1998 as compared to a loss of
$66,000 for Fiscal 1997. During Fiscal 1998, fourteen months of earnings were
included in the Consolidated Statement of Operations, compared to Fiscal 1997
when only two months of operations were included in the Statement of Operations
due to the acquisition of the Affiliates stock on December 10, 1996 and a change
in the Affiliate's Fiscal year.
INTEREST EXPENSE Interest expense decreased by $919,000 in Fiscal 1998
as compared to Fiscal 1997. The decrease was attributable to a significant
reduction in borrowings on the U.S. revolving line of credit facility primarily
due to the reduction in trade accounts receivable and inventory.
NET LOSS As a result of the foregoing factors, the Company generated a
net loss of $1.4 million for Fiscal 1998 as compared to a net loss of
approximately $24.0 million for Fiscal 1997.
RESULTS OF OPERATIONS - FISCAL 1997 COMPARED WITH FISCAL 1996
NET REVENUES Consolidated net revenues for Fiscal 1997 decreased $66.9
million (27%) as compared to Fiscal 1996. The decrease in revenues resulted
primarily from decreases in unit sales of video cassette recorders, televisions
and television/video cassette recorder combination units due to higher retail
stock levels, increased price competition in these product categories, weak
consumer demand, a soft retail market and closure of Emerson's Canadian office
in December 1996. The reduced revenues were partially offset by increased sales
of microwave ovens attributable to a broader product line; the introduction of
the Company's new home theater product, CinemaSurround(TM);
and car audio products which were not introduced
until the second and third quarters of Fiscal 1996.
Revenues recognized from the licensing of theEmerson and G-Clef trademark were
$5.0 million in Fiscal 1997 as compared to $4.4 million for Fiscal 1996.
The Company reports royalty and commission revenues earned from its
licensing arrangements, covering various products and territories, in lieu of
reporting the full dollar value of such sales and associated costs.
COST OF SALES Cost of sales, as a percentage of consolidated revenues,
was 97% in Fiscal 1997 as compared to 94% in Fiscal 1996. In absolute dollars,
cost of sales decreased by $57.3 million (25%) for Fiscal 1997 as compared to
Fiscal 1996. Cost of sales margins in Fiscal 1997 were unfavorably impacted by
lower sales prices, a higher proportion of closeout sales, the allocation of
reduced fixed costs over a lower revenue base, and the recognition of income
relating to reduced reserve requirements for sales returns in Fiscal 1996. These
increases in cost of sales were partially offset by the introduction of higher
margin products_home theater and car audio products_and by a reduction in the
costs associated with product returns.
OTHER OPERATING COSTS AND EXPENSES Other operating costs and expenses
declined $1.7 million in Fiscal 1997 as compared to Fiscal 1996, primarily as a
result of (i) reduced sales levels and reduced customer returns and (ii) 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") S,G&A, as a
percentage of net revenues, were 10.5% in Fiscal 1997 as compared to 8% in
Fiscal 1996. In absolute terms, S,G&A decreased by $781,000 in Fiscal 1997 as
compared to Fiscal 1996. The increase in S,G&A as a percentage of net revenues
was primarily attributable to the allocation of S,G&A costs over a lower sales
base. In absolute terms the decrease in S,G&A 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 its foreign offices and
lower selling expenses attributable to lower sales, partially offset by the
reversal of accounts receivable reserves in the prior year and foreign currency
exchange losses.
RESTRUCTURING AND OTHER NONRECURRING CHARGES The Company recorded charges
of approximately $3.0 million in Fiscal 1997. Of this total, $1.1 million
related to restructuring charges for the closure of the Company's local Canadian
office and distribution operations in favor of utilizing 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. The remaining portion of the $3 million charge included
$1.9 million of nonrecurring charges relating to the proposed but unsuccessful
acquisition of International Jensen Incorporated. These costs primarily include
investment banking, loan commitment, and professional fees, including litigation
costs, relating to the proposed acquisition.
EQUITY IN EARNINGS OF AFFILIATE The Company's 28% share in the loss of
the Affiliate amounted to $66,000 for Fiscal 1997. During Fiscal 1997 the
Company included two months of the Affiliate's operation in the Company's
consolidated statement of operations following the December 10, 1996 purchase of
the Affiliate's shares.
INTEREST EXPENSE Interest expense increased by $154,000 in Fiscal 1997 as
compared to Fiscal 1996. The increase was attributable to interest incurred on
the debentures issued in August 1995 partially offset by lower average
borrowings at lower average interest rates on the U.S. revolving line of credit
facility.
NET LOSS As a result of the foregoing factors, the Company generated a
net loss of $24.0 million for Fiscal 1997 as compared to a net loss of $13.4
million for Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $6,091,000 for Fiscal 1998.
Cash was primarily provided by the reduction in accounts receivables and
inventories partially offset by an increase in prepaid expenses. The decrease
in accounts receivable is due primarily to the change in the nature of the
Company's sales to a direct shipment basis and the decrease in inventory is
primarily due to a more conservative purchasing strategy focusing on reducing
inventory levels combined with a majority of the Company's sales being made on a
direct basis.
Net cash used by financing activities was $6,096,000. Cash was used
primarily to reduce the Company's borrowings under its U.S. line of credit
facility. On March 31, 1998, the Company amended its Loan and Security
Agreement which includes a senior secured credit facility. The facility
provides for revolving loans and letters of credit, subject to certain limits
which, in the aggregate, cannot exceed the lesser of $10 million or a
"Borrowing Base" amount based on specified percentages of eligible accounts
receivable and inventories. The Company is required to maintain certain working
capital and net worth levels, and is in compliance with these requirements. At
April 3, 1998, there were no outstanding borrowings under the facility, and no
outstanding letters of credit issued for inventory purchases.
The Company's Hong Kong subsidiary currently 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 which is
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. At April 3, 1998, the
Company's Hong Kong subsidiary pledged $1 million in certificates of deposit to
this bank to assure the availability of these credit facilities. At April 3,
1998, there were $1,958,000 and $23,700,000 respectively, of letters of credit
outstanding under these credit facilities.
The Company successfully concluded 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. (See "Business-Licensing and Related Activities").
SHORT-TERM LIQUIDITY. 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 fiscal
year. However, the adequacy of future cash flow from operations is dependent
upon the Company achieving its operating plan. During Fiscal 1998, the Company
reduced inventory levels approximately 15%, accounts receivable by 58% and
executed cost-reduction programs. The Company intends to maintain these reduced
inventory levels and to continue the sale of its products on a direct basis. In
Fiscal 1998, products representing approximately 77% of net revenues were
directly imported from manufacturers to the Company's customers. The direct
import program implemented by the Company is critical in providing sufficient
working capital to meet its liquidity objectives. If the Company is unable
maintain its existing level of direct sales volume, it may not have sufficient
working capital to finance its operating plan.
The Company is currently in arrears on $727,000 of dividends on the
Company's Series A Preferred Stock. The preferred stock is convertible into
common stock until March 31, 2002 at a price per share of common stock equal to
80% of the defined average market value of a share of common stock on the date
of conversion. The preferred stock dividend rate for Fiscal 1999 is 4.2%.
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 higher amounts
of letters of credit during the quarters ending June 30 and September 30,
therefore increasing the Company's working capital needs during these periods.
Additionally, the Company receives the largest percentage of customer returns in
the quarters ending March 31 and June 30. The higher level of returns during
these periods adversely impacts the Company's collection activity, and therefore
its liquidity. The Company believes that the agreements with Cargil, Daewoo, WW
Mexicana, Tel-Sound and other licensees, as discussed above, and the
arrangements it has implemented concerning returned merchandise, should
favorably impact the Company's cash flow over their respective terms.
LONG-TERM LIQUIDITY. The Company has discontinued certain lower margin
lines of products and believes that this, together with the agreements covering
its North American video business and the introduction of CinemaSurround(TM),
can reverse the negative trends of net losses reported in Fiscal 1998 and Fiscal
1997. The senior secured credit facility with the Lender was amended in March
1998 and extended to March 31, 2001 and imposes financial covenants on the
Company which could materially affect its liquidity in the future. Management
believes that its direct import program and the anticipated cash flow from
operations and the financing noted above will provide sufficient liquidity to
meet the Company's operating and debt service cash requirements on a long-term
basis.
As of April 3, 1998 the Company had no material commitments for Capital
expenditures.
INFLATION AND FOREIGN CURRENCY
Neither inflation nor currency fluctuations had a significant effect on the
Company's results of operations during Fiscal 1998. 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 its relationship with its suppliers
and its ability to acquire products for resale.
YEAR 2000
The Company has developed and is in the process of implementing a plan to
modify its management information system to be year 2000 compliant. The Company
currently expects to be substantially complete with this conversion by mid-1999.
The incremental cost of conversion is estimated to be less than $300,000. The
Company does not expect the conversion to have a significant effect 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 effect of the year 2000 problem on such entities.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
Recent pronouncements of the Financial Accounting Standards Board ("FASB")
which are not required to be adopted at April 3, 1998, include the following
Statements of Financial Accounting Standards ("SFAS"):
SFAS no. 129, "Disclosure of Information about Capital Structure," which
will be effective for the Company for the fiscal year ending March 31, 1999,
consolidates existing disclosure requirements. This new standard requires the
Company to report its capital structure and relevant information in summary
format. The Company voluntarily adopted SFAS No. 129 in the 1998 fiscal year.
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 the Company for the fiscal year ending March 31, 1999, 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 the fiscal year ending
March 31, 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 INFORMATION
This report contains various forward looking statements under the Private
Securities Litigation Reform Act of 1995 (the "Reform Act') and information that
are 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 which 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 the
litigation. (See "Legal Proceedings"); (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; and (viii) general economic conditions.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8 are
set forth at the pages indicated in Item 14(a) below.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. Directors And Executive Officers
The information required is incorporated herein by reference to the
Company's definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders.
Item 11. Executive Compensation
The information required is incorporated herein by reference to the
Company's definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required is incorporated herein by reference to the
Company's definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders.
Item 13. Certain Relationships and Related Transactions
The information required is incorporated herein by reference to the
Company's definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, STATEMENT SCHEDULE AND REPORTS ON FORM
8-K
(a) Financial Statements and Schedule:
Report of Independent Auditors F- 1
Consolidated Statements of Operations for the years ended
April 3, 1998, March 31, 1997 and 1996 F- 2
Consolidated Balance Sheets at April 3, 1998
and March 31,1997 F- 3
Consolidated Statements of Changes in
Shareholders' Equity
for the years ended April 3, 1998,
March 31, 1997 and 1996 F- 4
Consolidated Statements of Cash Flows for
the years ended April 3, 1998, March 31, 1997
and 1996 F- 5
Notes to Consolidated Financial Statements F- 6
Schedule VII Valuation and Qualifying
Accounts and Reserves F- 27
ALL OTHER SCHEDULES ARE OMITTED BECAUSE THEY ARE NOT APPLICABLE OR THE REQUIRED
INFORMATION IS SHOWN IN THE FINANCIAL STATEMENTS OR NOTES THERETO.
(b) No reports on Form 8-K were filed by the Company during the last
quarter of the fiscal year ended April 3, 1998.
(c) Exhibits
(2) Confirmation Order and Fourth Amended Joint Plan of Reorganization of
Emerson Radio Corp. ("Old Emerson") and certain subsidiaries under
Chapter 11 of the United States Bankruptcy Code, dated March 31, 1994
(incorporated by reference to Exhibit (2) of Emerson's Registration
Statement on Form S-1, Registration No. 33-53621, declared effective
by the Securities and Exchange Commission ("SEC") on August 9, 1994).
(3) (a) Certificate of Incorporation of Emerson (incorporated by reference to
Exhibit (3) (a) of Emerson's Registration Statement on Form S-1,
Registration No. 33-53621, declared effective by the SEC on August 9,
1994).
(3) (b) Certificate of Designation for Series A Preferred Stock (incorporated
by reference to Exhibit (3) (b) of Emerson's Registration Statement on
Form S-1, Registration No. 33-53621, declared effective by the SEC on
August 9, 1994).
(3) (c) Plan of Reorganization and Agreement of Merger by and between Old
Emerson and Emerson Radio (Delaware) Corp. (incorporated by reference
to Exhibit (3) (c) of Emerson's Registration Statement on Form S-1,
Registration No. 33-53621, declared effective by the SEC on August 9,
1994).
(3) (d) Certificate of Merger of Old Emerson with and into Emerson Radio
(Delaware) Corp. (incorporated by reference to Exhibit (3) (d) of
Emerson's Registration Statement on Form S-1, Registration No. 33-
53621, declared effective by the SEC on August 9, 1994).
(3) (e) Amendment dated February 14, 1996 to the Certificate of Incorporation
of Emerson (incorporated by reference to Exhibit (3) (a) of Emerson's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1995).
(3) (f) By-Laws of Emerson adopted March 1994 (incorporated by reference to
Exhibit (3) (e) of Emerson's Registration Statement on Form S-1,
Registration No. 33-53621, declared effective by the SEC on August 9,
1994).
(3) (g) Amendment dated November 28, 1995 to the By-Laws of Emerson adopted
March 1994 (incorporated by reference to Exhibit (3) (b) of Emerson's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1995).
(4) (a) Warrant Agreement to Purchase 750,000 shares of Common Stock, dated as
of March 31, 1994 (incorporated by reference to Exhibit (4) (a) of
Emerson's Registration Statement on Form S-1, Registration No. 33-
53621, declared effective by the SEC on August 9, 1994).
(4) (b) Indenture, dated as of August 17, 1995 between Emerson and Bank One,
Columbus, NA, as Trustee (incorporated by reference to Exhibit (1) of
Emerson's Current Report on Form 8-K filed with the SEC on September
8, 1995).
(4) (c) Common Stock Purchase Warrant Agreement to purchase 50,000 shares of
Common Stock, dated as of December 8, 1995 between Emerson and Michael
Metter (incorporated by reference to Exhibit (10) (e) of Emerson's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1995).
(4) (d) Common Stock Purchase Warrant Agreement to purchase 200,000 shares of
Common Stock, dated as of December 8, 1995 between Emerson and Kenneth
A. Orr (incorporated by reference to Exhibit (10) (f) of Emerson's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1995).
(10) (a) Form of Promissory Note issued to certain Pre-Petition Creditors
(incorporated by reference to Exhibit (10) (e) of Emerson's
Registration Statement on Form S-1, Registration No. 33-53621,
declared effective by the SEC on August 9, 1994).
(10) (b) Loan and Security Agreement, dated March 31, 1994, by and among
Emerson, Majexco Imports, Inc. and Congress Financial Corporation
("Congress") (incorporated by reference to Exhibit (10) (f) of
Emerson's Registration Statement on Form S-1, Registration No. 33-
53621, declared effective by the SEC on August 9, 1994).
(10) (c) Amendment No. 1 to Financing Agreements, dated as of August 24, 1995,
among Emerson, Majexco Imports, Inc. and Congress (incorporated by
reference to Exhibit (2) of Emerson's Current Report on Form 8-K filed
with the SEC on September 8, 1995).
(10) (d) Amendment No. 2 to Financing Agreements, dated as of February 13, 1996
(incorporated by reference to Exhibit (10) (c) of Emerson's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1995).
(10) (e) Amendment No. 3 to Financing Agreements, dated as of August 20, 1996
(incorporated by reference to Exhibit (10) (b) of Emerson's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1995).
(10) (f) Amendment No. 4 to Financing Agreements, dated as of
November 14, 1996 (incorporated by reference to Exhibit (10) (c)
of Emerson's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996).
(10) (g) Amendment No. 5 to Financing Agreements, dated as of February 18, 1997
(incorporated by reference to Exhibit (10) (e) of Emerson's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1996).
(10) (h) Stipulation of Settlement and Order dated June 11, 1996 by and among
the Official Liquidator of Fidenas International Bank Limited, Petra
Stelling, Barclays Bank PLC, the Official Liquidator of Fidenas
Investment Limited, Geoffrey P. Jurick, Fidenas International Limited,
L.L.C., Elision International, Inc., GSE Multimedia Technologies
Corporation and Emerson.
(10) (i) Pledge Agreement dated as of February 4, 1997 by Fidenas International
Limited, L.L.C. ("FIN") in favor of TM Capital Corp. (incorporated by
reference to Exhibit (10) (a) of Emerson's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1996).
(10) (j) Registration Rights Agreement dated as of February 4, 1997 by and
among Emerson, FIN, the Creditors, FIL and TM Capital Corp.
(incorporated by reference to Exhibit (10) (b) of Emerson's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1996).
(10) (k) License and Exclusive Distribution Agreement with Cargil International
Corp. dated as of February 12, 1997 (incorporated by reference to
Exhibit (10) (c) of Emerson's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996).
(10) (l) Agreement dated April 10, 1997 between Emerson and Daewoo Electronics
Co., Ltd.
(10) (m) Securities Purchase Agreement dated as of November 27, 1996, by and
between Sport Supply Group, Inc. ("SSG") and Emerson (incorporated by
reference to Exhibit (2)(a) of Emerson's Current Report on Form 8-K
dated November 27, 1996).
(10) (n) Form of Warrant Agreement by and between SSG and Emerson
(incorporated by reference to Exhibit (4)(a) of Emerson's Current
Report on Form 8-K dated November 27, 1996).
(10) (o) Form of Registration Rights Agreement by and between SSG and Emerson
(incorporated by reference to Exhibit (4)(b) of Emerson's Current
Report on Form 8-K dated November 27, 1996).
(10) (p) Consent No. 1 to Financing Agreements among Emerson, certain of its
subsidiaries, and Congress (incorporated by reference to Exhibit
(10)(b) of Emerson's Current Report on Form 8-K dated November 27,
1996).
(10) (q) Form of Termination of Employment Agreement between Emerson and John
Walker dated as of January 15, 1998.*
(10) (r) License Agreement dated as of March 30, 1998 by and between
Tel-Sound Electronics, Inc. and Emerson. *
(10) (s) License Agreement dated as of March 31, 1998 by and between WW
Mexicana, S. A. de C. V. and Emerson. *
(10) (t) Amendment No. 7 to Financing Agreements, dated as of March 31,
1998. *
(10) (u) Amendment No. 1 to Pledge and Security Agreement dated as of
March 31, 1998.*
(10) (v) Second Lease Modification dated as of May 15, 1998 between
Hartz Mountain, Parsippany and Emerson. *
(12) Computation of Ratio of Earnings (Loss) to Combined Fixed Charges
and Preferred Stock Dividends. *
(21) Subsidiaries of the Company as of April 3, 1998.*
(23) Consent of Independent Auditors*
(27) Financial Data Schedule for year ended April 3, 1998.*
* Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
EMERSON RADIO CORP.
By: /s/ Geoffrey P. Jurick
Geoffrey P. Jurick
Chairman of the Board
Dated: July 1, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Geoffrey P. Jurick Chairman of the Board, July 1, 1998
Geoffrey P. Jurick Chief Executive Officer and
President
/s/ John P. Walker Executive Vice President July 1, 1998
John P. Walker Chief Financial Officer
/s/ Robert H. Brown, Jr. Director July 1, 1998
Robert H. Brown, Jr.
/s/ Peter G. Bunger Director July 1, 1998
Peter G. Bunger
/s/ Jerome H. Farnum Director July 1, 1998
Jerome H. Farnum
/s/ Raymond L. Steele Director July 1, 1998
Raymond L. Steele
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Emerson Radio Corp.
We have audited the accompanying consolidated balance sheets of Emerson Radio
Corp. and Subsidiaries as of April 3, 1998 and March 31, 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended April 3, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Emerson
Radio Corp. and Subsidiaries at April 3, 1998 and March 31, 1997, and the
consolidated results of its operations and cash flows for each of the three
years in the period ended April 3, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
New York, New York
July 1, 1998
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended April 3, 1998, March 31, 1997 and 1996
(In thousands, except per share data)
1998 1997 1996
Net revenues $ 162,730 $ 178,708 $ 245,667
Cost of sales 142,372 174,184 231,455
Other operating costs and
expenses 4,351 3,079 4,803
Selling, general and
administrative expenses 15,483 18,716 19,497
Restructuring and other
nonrecurring charges -- 2,972 --
162,206 198,951 255,755
Operating income (loss) 524 (20,243) (10,088)
Equity in earnings (loss) of
Affiliate 1,524 (66) --
Write-down of investment in
and advances to Joint Venture (714) -- --
Interest expense, net (2,510) (3,429) (3,275)
Loss before income taxes (1,176) (23,738) (13,363)
Provision for income taxes 254 230 26
Net loss $ (1,430) $(23,968) $(13,389)
Net loss per common share $ (.04) $ (.61) $ (.35)
Weighted average shares
outstanding
Basic 45,167 40,292 40,253
Diluted 45,167 40,292 40,253
The accompanying notes are an integral part of the consolidated financial
statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of April 3, 1998 and March 31, 1997
(In thousands, except share data)
1998 1997
ASSETS
Current Assets:
Cash and cash equivalents $ 2,608 $ 2,640
Accounts receivable (less allowances
of $4,884 and $6,001, respectively) 5,247 12,452
Other receivables 6,474 2,117
Inventories 11,375 13,329
Prepaid expenses and other current assets 2,503 4,380
Total current assets 28,207 34,918
Property and equipment (net of accumulated
depreciation of $3,152 and 1,381 2,130
$3,521, respectively)
Investment in Affiliates and Joint Venture 17,522 16,033
Other assets 4,810 5,687
Total Assets $51,920 $58,768
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ -- $ 5,689
Current maturities of long-term debt 85 85
Accounts payable and other current liabilities 12,256 13,053
Accrued sales returns 4,511 2,730
Income taxes payable 191 103
Total current liabilities 17,043 21,660
Long-term debt, less current maturities 20,750 20,856
Other non-current liabilities 179 223
Shareholders' Equity:
Preferred shares -- 10,000,000 shares authorized;
5,237 and 10,000 shares issued
and outstanding, respectively 4,713 9,000
Common shares -- $.01 par value, 75,000,000 shares
authorized; 51,044,730 and 40,335,642 shares
issued and outstanding, respectively 510 403
Capital in excess of par value 113,201 109,278
Accumulated deficit (104,673) (102,843)
Cumulative translation adjustment 197 191
Total shareholders' equity 13,948 16,029
Total Liabilities and Shareholders' Equity $51,920 $ 58,768
The accompanying notes are an integral part of the consolidated financial
statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For The Years Ended April 3, 1998, March 31, 1997 and 1996
(In thousands, except share data)
Common Shares Issued
Cap-
ital Cumula-
in tive
Excess Trans-
Prefer- Number of Accum- lation
red of Par Par ulated Adjust-
Stock Shares Value Value Deficit ment
Balance-March 31,
1995 $9,000 40,252,772 $ 403 $107,969 $(64,086) $ 365
Issuance of
common stock
warrants 1,065
Preferred
stock dividends (700)
Other (43) (202)
Net loss (13,389)
Balance-March 31,
1996 9,000 40,252,772 403 108,991 (78,175) 163
Issuance of
common stock
warrants 257
Exercise of
stock options
and warrants 82,870 40
Preferred
stock dividends (700)
Other (10) 28
Net loss (23,968)
Balance-March 31,
1997 9,000 40,335,642 403 109,278 (102,843) 191
Issuance of
common stock
upon conversion
of preferred
stock (4,287) 10,709,088 107 4,180
Cancellation of
common stock
warrants (257)
Preferred stock dividends (400)
Other 6
Net loss (1,430)
Balance-April
3, 1998 $4,713 $51,044,730 $510 $ 113,201 $(104,673) $ 197
The accompanying notes are an integral part of the consolidated financial
statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended April 3, 1998, March 31, 1997 and 1996
(In thousands)
1998 1997 1996
Cash Flows from Operating
Activities:
Net loss $ (1,430) $ (23,968) $ (13,389)
Adjustments to reconcile net
loss to net cash provided
(used) by operating
activities:
Depreciation and amortization 1,759 2,844 3,664
Equity in earnings of
affiliate (1,524) 66 --
Restructuring and other
nonrecurring charges -- 2,782 --
Asset valuation and loss
reserves (2,378) ( 752) (14,209)
Other (251) 1,048 298
Changes in assets and
liabilities:
Accounts receivable 9,151 11,230 17,391
Other receivables (4,357) (2,117) --
Inventories 3,418 20,871 (437)
Prepaid expenses and
other current assets 845 3,884 3,231
Other assets ( 71) (896) (601)
Accounts payable and
other current liabilities 841 1,827 (9,092)
Income taxes payable 88 (98) (53)
Net cash provided (used) by
operations 6,091 16,721 (13,197)
Cash Flows from Investing
Activities:
Investment in affiliates -- (14,513) 1,840
Additions to property and
equipment (27) (255) (1,666)
Redemption of certificates of
deposit -- 100 945
Other -- 12 (477)
Net cash provided (used) by
investing activities (27) (14,656) 642
Cash Flows from Financing
Activities:
Net repayments under line of
credit facility (5,689) (15,462) (6,145)
Net proceeds from issuance of
senior subordinated
convertible debentures -- -- 19,208
Retirement of long-term debt (106) (118) (298)
Payment of preferred stock
dividends (257) (231) (700)
Payment of debt costs -- -- (237)
Other (44) 253 (160)
Net cash provided (used) by
financing activities (6,096) (15,558) 11,668
Net decrease in cash and cash
equivalents (32) (13,493) (887)
Cash and cash equivalents at
beginning of year 2,640 16,133 17,020
Cash and cash equivalents at end
of year $2,608 $ 2,640 $16,133
The accompanying notes are an integral part of the consolidated financial
statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 3, 1998
Note 1 -- Significant Accounting Policies:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Emerson Radio
Corp. and its majority-owned subsidiaries (the "Company"). All significant
intercompany transactions and balances have been eliminated. A 28% owned
investment in an Affiliate and a 50% ownership of a domestic joint venture are
accounted for by the equity method (see Notes 3 and 15).
EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles 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.
CASH AND CASH EQUIVALENTS
Short-term investments with original maturities of three months or less at
the time of purchase are considered to be cash equivalents. The carrying amount
reported in the balance sheet for cash and cash equivalents approximates fair
value.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by
the Company using available market information, including current interest
rates, and the following valuation methodologies:
Cash and cash equivalent and accounts receivable -- the carrying amounts
reported in the balance sheet for cash and cash equivalents approximate their
fair values because of the short maturity of these instruments. The carrying
amount of accounts receivable approximate their fair value.
Other receivables -- the fair value is estimated on the basis of discounted
cash flow analyses, using appropriate interest rates for similar instruments.
Notes payable and long-term debt -- the fair value is estimated on the
basis of rates available to the Company for debt of similar maturities.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
CONCENTRATIONS OF CREDIT RISK
Certain financial instruments potentially subject the Company to
concentrations of credit risk. Accounts receivable represent sales to retailers
and distributors of consumer electronics throughout the United States and
Canada. The Company periodically performs credit evaluations of its customers
but generally does not require collateral.
DEPRECIATION AND AMORTIZATION AND VALUATION OF INTANGIBLES
Property and equipment, stated at cost, are being depreciated by the
straight-line method over their estimated useful lives. Leasehold improvements
are amortized on a straight-line basis over the shorter of the useful life of
the improvement or the term of the lease.
Goodwill (resulting from its investment in an Affiliate) and trademarks are
amortized using the straight-line method, principally over 40 years. Management
periodically evaluates the recoverability of goodwill and trademarks. The
carrying value of goodwill and trademarks would be reduced if it is probable
that management's best estimate of future operating income before amortization
of goodwill and trademarks will be less than the carrying value over the
remaining amortization period.
FOREIGN CURRENCY
The assets and liabilities of foreign subsidiaries have been translated at
current exchange rates, and related revenues and expenses have been translated
at average rates of exchange in effect during the year. Related translation
adjustments are reported as a separate component of shareholders' equity. Gains
and losses resulting from foreign currency transactions are included in the
Consolidated Statements of Operations and amounted to a gain (loss) of
($39,000), ($79,000), and $475,000 for the years ended April 3, 1998, March 31,
1997 and 1996, respectively.
The Company does not enter into foreign currency exchange contracts to
hedge its exposures related to foreign currency fluctuations.
RECLASSIFICATION
Certain amounts in the prior period's consolidated financial
statements have been reclassified to conform to current periods presentation.
CHANGE IN ACCOUNTING PERIOD
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 ended on April 3, 1998.
Note 2 -- Inventories:
Inventories are comprised primarily of finished goods. Spare parts
inventories, net of reserves, aggregating $384,000 and $1,469,000 at April 3,
1998 and March 31, 1997, respectively, are included in "Prepaid expenses and
other current assets."
Note 3 -- Investment in Unconsolidated Affiliate
On December 10, 1996, the Company purchased from Sport Supply Group, Inc.
("Affiliate") 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 expiring 2001 (the "SSG
Warrants") to acquire an additional 1,000,000 shares of SSG 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 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 28% of the outstanding SSG common shares. If the Company
exercises all of the SSG Warrants, it will beneficially own approximately 36% of
the SSG common shares. In July 1997, the Company entered into a Management
Services Agreement with SSG, whereby SSG would provide various managerial and
administrative services to the Company.
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 and is
being amortized on a straight line basis over 40 years. At April 3, 1998, the
aggregate market value quoted on the New York Stock Exchange of Emerson's shares
of SSG common shares was approximately $21 million. Summarized financial
information derived from SSG's financial reports to the Securities and Exchange
Commission was as follows (in thousands):
(Unaudited)
April 3, 1998 January 31, 1997
Current assets $ 37,282 $ 39,850
Property, plant and
equipment and
other assets 19,878 36,748
Current liabilities 8,395 39,011
Long-term debt 7,498 324
(Unaudited)
For the 14 For the 3
Months Ended Months Ended
April 3, 1998 January 31, 1997
Net sales $ 111,214 $ 14,580
Gross profit 43,275 5,905
Earnings (loss) from
continuing operations 5,903 (1,356)
Loss from discontinued
operations -- (2,574)
Net (loss) income 5,903 (3,930)
Note 4 -- Property and Equipment:
As of April 3, 1998 and March 31, 1997, property and equipment is comprised
of the following:
1998 1997
(In thousands)
Furniture and fixtures. . . . . . $3,745 $4,021
Machinery and equipment . . . . . 532 891
Leasehold improvements. . . . . . 256 739
4,533 5,651
Less accumulated depreciation and
amortization . . . . . . . . . 3,152 3,521
$1,381 $2,130
Depreciation and amortization of property and equipment amounted to
$776,000, $1,631,000 and $2,800,00 for the years ended April 3, 1998, March 31,
1997 and 1996, respectively.
Note 5 -- Credit Facility:
On March 31, 1998, the Company amended its existing Loan and Security
Agreement (the "Loan and Security Agreement") which includes a senior secured
credit facility with a U.S. financial institution. The amendment to the
facility reduced the facility to $10 million from $35 million, and amended
certain financial covenants as defined below. The facility provides for
revolving loans and letters of credit, subject to individual maximums which, in
the aggregate, cannot exceed the lesser of $10 million or a "Borrowing Base"
amount based on specified percentages of eligible accounts receivable and
inventories. Amounts outstanding under the senior credit facility are secured by
substantially all of the Company's U.S. and Canadian assets except for
trademarks, which are subject to a negative pledge covenant and a majority of
its investment in an unconsolidated Affiliate. At April 3, 1998 and March 31,
1997, the weighted average interest rate on the outstanding borrowings was 9.75%
and 9.5%, respectively, which is the prime rate of interest plus 1.25%.
Interest paid totaled $316,000, $1,494,000 and $2,429,000 respectively, for the
years ended April 3, 1998, March 31, 1997 and 1996. Pursuant to the Loan and
Security Agreement, the Company is restricted from, among other things, paying
cash dividends (other than on the Series A Preferred Stock), redeeming stock,
and entering into certain transactions and is required to maintain certain
working capital and equity levels. An event of default under the credit
facility may trigger a default under the Company's 8-1/2% Senior Subordinated
Convertible Debentures Due 2002. At March 31, 1998, there were no outstanding
borrowings under the facility, and no outstanding letters of credit issued for
inventory purchases. At March 31, 1997, there was $5,689,000 outstanding
borrowing and $444,000 outstanding letters of credit.
Note 6 -- Long-Term Debt:
As of April 3, 1998 and March 31, 1997, long-term debt consisted of the
following:
1998 1997
(in thousands)
8-1/2% Senior Subordinated
Convertible Debentures Due 2002. . . $20,750 $20,750
Notes payable to unsecured
creditors . . . . . . . . . . . . . -- 3
Equipment notes and other . . . . . . . 85 188
20,835 20,941
Less current obligations. . . . . . . . 85 85
Long term debt $20,750 $20,856
The Senior Subordinated Convertible Debentures Due 2002 ("Debentures") were
issued in August 1995. The Debentures bear interest at the rate of
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 an initial 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 holder of Debentures has the right to cause the
Company to redeem the Debentures if certain designated events (as defined)
should occur. The Debentures are subject to certain restrictions on transfer,
although the Company has registered the offer and sale of the Debentures and the
underlying common stock.
Note 7 -- Income Taxes:
The income tax provision for the years ended April 3, 1998, March 31, 1997
and 1996 consisted of the following:
1998 1997 1996
(In thousands)
Current:
Federal $ 13 $ -- $ (39)
Foreign, state and other 241 230 65
$ 254 $ 230 $ 26
The difference between the effective rate reflected in the provision for income
taxes and the amounts determined by applying the statutory U.S. rate of 34% to
earnings (loss) before income taxes for the years ended April 3, 1998, March 31,
1997 and 1996 are analyzed below:
1998 1997 1996
(In thousands)
Statutory provision
benefit) $ (400) $ (8,071) $ (4,543)
U. S. and foreign net
operating losses
without tax benefit (930) 8,098 4,493
Expiration of state
net operating
losses 1,384 -- --
Rate differential on
foreign income 223 248 96
Other, net (23) (45) (20)
Total income tax
provision $ 254 $ 230 $ 26
As of April 3, 1998 and March 31, 1997 the significant components of the
Company's deferred tax assets and liabilities are as follows:
1998 1997
(In thousands)
Deferred tax assets:
Accounts receivable reserves $ 5,003 $ 4,255
Inventory reserves 2,332 2,880
Federal operating loss
carryforwards 15,469 15,682
State net operating loss
carryforwards 6,759 8,161
Other 1,050 322
Total deferred tax assets 30,613 31,300
Valuation allowance for
deferred tax assets (29,844) (31,091)
Net deferred tax assets 769 209
Deferred tax liabilities (769) (209)
Net deferred taxes $ -- $ --
Total deferred tax assets of the Company at April 3, 1998 and March 31, 1997
represent the tax-effected net operating loss carryforwards subject to annual
limitations (as discussed below), and tax-effected deductible temporary
differences. The Company has established a valuation reserve against any
expected future benefits.
Cash paid for income taxes was $152,000, $125,000 and $151,000 for the
years ended April 3, 1998, March 31, 1997 and 1996, respectively.
Income (loss) of foreign subsidiaries before taxes was $3,065,000,
($2,512,000) and ($6,233,000) for the years ended April 3, 1998, March 31, 1997
and 1996, respectively. Provision is made for federal income taxes which may be
payable on earnings of foreign subsidiaries to the extent that the Company
anticipates they will be remitted. It is the policy of the Company to
permanently reinvest all the earnings from its foreign subsidiaries.
As of March 31, 1997, the Company has a federal net operating loss
carryforward of approximately $132,265,000, of which $29,160,000, $13,385,000,
$50,193,000, $20,575,000, and $18,952,000 will expire in 2006, 2007, 2009, 2011
and 2013, respectively. The utilization of these net operating losses are
limited based on the effects of a Plan of Reorganization consummated on March
31, 1994. Pursuant to the Plan, an ownership change occurred with respect to
the Company and subjected the Company's net operating loss and foreign tax
credit carryforwards to limitations provided in Sections 382 and 383,
respectively, of the Internal Revenue Code. Subject to special rules regarding
increases in the annual limitation for the recognition of net unrealized
built-in gains, the Company's annual limitation is approximately $2.2 million.
Note 8 -- Commitments and Contingencies:
Leases:
The Company leases warehouse and office space at minimum aggregate rentals
net of sublease income as follows:
Fiscal
Years Amount
1999 $1,225
2000 963
2001 577
2002 384
2003 384
Later years 128
Rent expense, net of rental income, aggregated $1,570,000, $1,790,000 and
$1,705,000 for the years ended March 31, 1998, 1997 and 1996, respectively.
Rental income from the sublease of warehouse and office space aggregated
$238,000, $256,000 and $278,000 in the years ended April 3, 1998, March 31, 1997
and 1996, respectively.
Letters of Credit:
There were no letters of credit outstanding under the Loan and Security
Agreement (See Note 5) at April 3, 1998 and $444,000 of Letters of Credit were
outstanding at March 31, 1997. The Company's Hong Kong subsidiary also currently
maintains various credit facilities aggregating $28.5 million with a bank in
Hong Kong subject to annual review consisting of the following: (i) a $3.5
million credit facility which is generally used for letters of credit for a
foreign subsidiary's direct import business and an 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 Company's largest customer. At April 3, 1998, 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 April 3, 1998, there
were $1,958,000 and $23,700,000 of letters of credit outstanding under these
credit facilities, respectively.
Tax Assessments:
A wholly owned subsidiary of the Company, Emerson Radio (Hong Kong) Ltd.
was assessed $858,000 by the Hong Kong Inland Revenue Department (the "IRD") in
May 1998. The assessment relates to the 1992/1993 to 1997/1998 tax years and
asserts that certain revenues reported as non taxable by Emerson Radio (Hong
Kong) Ltd. are subject to a profits tax. Emerson Radio Hong Kong Ltd. is also
in litigation with the IRD regarding a separate assessment of $489,000
pertaining to the deduction of certain expenses that relate to the taxable years
1991/1992 to 1997/1998. The outcome of both actions is uncertain at this time.
However, the Company believes that it will prevail in both cases. During June
1998 the Company received a favorable ruling in regards to the assessment of
$489,000, which is subject to appeal.
Note 9-- Shareholders' Equity:
In July 1994, the Company adopted a Stock Compensation Program ("Program")
intended to secure for the Company and its stockholders the benefits arising
from ownership of the Company's common stock by those selected directors,
officers, other key employees, advisors and consultants of the Company who are
most responsible for the Company's success and future growth. The maximum
aggregate number of shares of common stock available pursuant to the Program is
2,000,000 shares and the Program is comprised of 4 parts-the Incentive Stock
Option Plan, the Supplemental Stock Option Plan, the Stock Appreciation Rights
Plan and the Stock Bonus Plan. A summary of transactions during the last three
years is as follows:
Number of Price Aggregate
Shares Per Share Price
Outstanding-March 31, 1995 1,830,000 $1.00 - $1.10 $1,890,000
Granted 125,000 $2.63 - $2.88 341,000
Canceled (287,000) $1.00 (287,000)
Outstanding-March 31, 1996 1,668,000 $1.00 - $2.88 1,944,000
Granted 50,000 $2.25 - $2.56 119,000
Exercised (69,000) $1.00 (69,000)
Canceled (59,000) $1.00 - $2.56 (67,000)
Outstanding-March 31, 1997 1,590,000 $1.00 - $2.88 1,927,000
Granted 207,000 $1.00 207,000
Canceled (790,000) $1.00 - $2.88 (1,067,000)
Outstanding-April 3, 1998 1,007,000 $1.00 - $1.10 $1,067,000
The term of each option is ten years, except for options issued to any
person who owns more than 10% of the voting power of all classes of capital
stock, for which the term is five years. Options may not be exercised during
the first year after the date of the grant. Thereafter each option becomes
exercisable on a pro rata basis on each of the first through third anniversaries
of the date of the grant. The exercise price of options granted must be at
least equal to the fair market value of the shares on the date of the grant,
except that the option price with respect to an option granted to any person who
owns more than 10% of the voting power of all classes of capital stock shall not
be less than 110% of the fair market value of the shares on the date of the
grant.
The Company has elected to follow APB25 and related interpretations for
stock-based compensation and accordingly has recognized no compensation expense.
Had compensation cost been determined based upon the fair value at grant date
for awards consistent with the methodology prescribed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"), the Company's net loss would have increased approximately $21,000,
$45,000 and $81,000 for the years ended April 3, 1998, March 31, 1997 and 1996,
respectively.
The fair value of these options, and all other options and warrants of the
Company, was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions for the years ended April 3, 1998
and March 31, 1997 and 1996; risk-free interest rate of 5%, an expected life of
10 years and a dividend yield of zero. For the years ended April 3, 1998 and
March 31, 1997 and 1996, volatility was 56%, 73% and 85%, respectively. The
effects of applying FAS 123 and the results obtained are not likely to be
representative of the effects on future pro-forma income.
In October 1994, the Company's Board of Directors adopted, and the
stockholders subsequently approved, the 1994 Non-Employee Director Stock Option
Plan. The maximum number of shares of common stock available under such plan is
300,000 shares. A summary of transactions since inception of the plan is as
follows:
Number of Price Aggregate
Shares Per Share Price
Outstanding-March 31, 1995 175,000 $1.00 $175,000
Canceled (25,000) $1.00 (25,000)
Outstanding_March 31, 1996,
March 31, 1997,
April 3, 1998 150,000 $1.00 $150,000
The provisions for exercise price, term and vesting schedule are the same
as noted above for the Stock Compensation Program.
On September 29, 1993, the Company and five of its U.S. subsidiaries filed
voluntary petitions for relief under the reorganization provisions of Chapter 11
of the United States Bankruptcy Code and operated as debtors-in-possession under
the supervision of the Bankruptcy Court while their reorganization cases were
pending. The precipitating factor for these filings was the Company's severe
liquidity problems relating to its high level of indebtedness and a significant
decline in sales from the prior year. Effective March 31, 1994, the Bankruptcy
Court entered into an order confirming the Plan of Reorganization. The Plan of
Reorganization provided for the implementation of a recapitalization of the
Company.
Pursuant to the Plan of Reorganization, on March 31, 1994, the Company
issued Series A Preferred Stock, $.01 par value, with a face value of $10
million and an estimated fair market value of approximately $9 million. 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; the preferred
stock is convertible into common stock at a price per share of common stock
equal to 80% of the defined average market value of a share of common stock on
the date of conversion. The preferred stock bears dividends on a cumulative
basis currently at 5.6% and declines by 1.4% each June 30th until no dividends
are payable.
The preferred stock is non-voting. However, the terms of the preferred
stock provide that holders shall have the right to appoint two directors to the
Company's Board of Directors if the preferred stock dividends are in default for
six consecutive quarters. At April 3, 1998, the Company was in arrears on
$727,000 of dividends.
Pursuant to the Plan of Reorganization the Noteholders received warrants
for the purchase of 750,000 shares of common stock. The warrants are
exercisable for a period of seven years from March 31, 1994 and provide for an
exercise price of $1.00 per share for the first three years, escalating by $.10
per share per annum thereafter until expiration of the warrants.
In connection with the Debentures offering, the Company in August 1995,
issued to the placement agent and its authorized dealers warrants for the
purchase of 500,000 shares of common stock. The warrants are exercisable for a
period of four years from August 24, 1996 and provide for an exercise price of
$3.9875 per share, subject to adjustment under certain circumstances.
In connection with a consulting agreement, the Company in December 1995,
issued warrants for the purchase of 250,000 shares of common stock at an
exercise price of $4.00 per share. The warrants may be exercised until December
8, 2000, when such warrants shall expire.
In November 1995, the Company filed a shelf registration statement covering
5,000,000 shares of common stock owned by FIN to finance a settlement of the
Litigation Regarding Certain Outstanding Common Stock. The shares covered by
the shelf registration are subject to certain contractual restrictions and may
be offered for sale or sold only by means of an effective prospectus following
registration under the Securities Act of 1933, as amended.
In November 1995, the Company's Board of Directors approved a plan to
repurchase up to two million of its common shares, from time to time in the open
market. In May 1998, the plan was modified to approve the repurchase of $2
million of common shares. Although there are 51,044,730 shares outstanding,
approximately 29.2 million shares are held directly or indirectly by affiliated
entities of Geoffrey Jurick, Chairman, Chief Executive Officer and
President of the Company. The Company has agreed with Mr. Jurick that
such shares will not be subject to repurchase under the Plan approved in
1995. The stock repurchase program is subject to consent of certain of the
Company's lenders, certain court imposed restrictions, price and availability of
shares, compliance with securities laws and alternative capital spending
programs, including new acquisitions. The repurchase of common shares is
intended to be funded by working capital.
Note 10 -- Capital Structure:
In February 1997 the Financial Accounting Standards Board issued Statement
No. 129 "Disclosure of Information About Capital Structure" which requires
companies to adopt a method for reporting an entity's capital structure and
relevant information in summary format. The following disclosure sets forth the
required information.
The outstanding capital stock of the Company at April 3, 1998 consisted of
common stock and Series A convertible preferred stock. The preferred shares are
convertible to common shares at any time beginning March 31, 1997 until March
31, 2002.
During the year ended April 3, 1998, 4,763 shares of Series A Preferred
Stock were converted into 10.7 million shares of common stock. If all existing
outstanding Preferred shares were converted at April 3, 1998, an estimated 14.7
million additional common shares would be issuable. Dividends for the Preferred
Stock accrue and are payable quarterly at 7% up to March 31, 1997 then decline
by 1.4% each succeeding year until March 31, 2001 when no further dividends are
payable. The dividend rate at April 3, 1998 was 5.6% and as of April 3, 1998,
$727,000 of dividends were in arrears. Preferred shareholders have liquidation
rights subordinated to the Company's Senior Secured Lender and 8-1/2%
Senior Subordinated Convertible Debentures.
The Company has outstanding approximately 1.0 million options with exercise
prices ranging from $1.00 to $1.10. If the options were exercised, the holders
would have rights similar to common shareholders. Outstanding warrants total
approximately 670,000 common shares and have conversion prices ranging
from $1.10 to $4.00. If the warrants were exercised, the holders would
have rights similar to common shareholders.
The Company has outstanding $20.8 million of Senior Subordinated
Convertible Debentures due in 2002 and pay interest quarterly. The Debentures
are redeemable, in whole or in part, at the Company's option at the following
redemption prices beginning August 15, 1998 of 104% and declining by 1% per year
until maturity.
Holders may redeem the Debentures at any time at a conversion price of
$3.9875 per share of common stock, subject to certain adjustments which would
result in 5.2 million additional common shares being issued. The Debentures are
subordinated to all existing and future senior indebtedness.
Note 11 --Net Earnings (Loss) per Share:
The following table sets forth the computation of basic and diluted loss
per share for the years ended April 3, 1998, March 31, 1997 and 1996:
(In thousands, except per share amount)
1998 1997 1996
Loss $(1,430) $(23,968) $(13,389)
Less: Preferred Stock
Dividends 400 700 700
Loss available to
Common Stockholders
(numerator) (1,830) (24,668) (14,089)
Weighted average
shares (denominator) 45,167 40,292 40,253
Loss per share $ (.04) $ (.61) $ (.35)
Options and warrants to purchase 1,826,000, 2,410,000, and 2,510,000 of common
stock were not included in computing diluted earnings per share for 1998, 1997
and 1996, respectively, because the effect would be antidilutive.
Preferred stock convertible into 14,700,000, 9,000,000 and 5,400,000 shares of
common stock were not included in computing diluted earnings per share for 1998,
1997 and 1996, respectively, because the effect would be antidilutive.
Senior subordinated debentures convertible into 5,204,000 shares of common stock
if converted were not included in computing diluted earnings per share for 1998,
1997 and 1996, respectively, because the effect would be antidilutive.
Note 12 -- License Agreements:
The Company has several license agreements in place, which allow licensees
the use of the Emerson and G-Clef trademark for the manufacture and/or the sale
of consumer electronics and other products. The license agreements cover
various countries throughout the world and are subject to renewal at the
expiration of the agreements. Additionally, the Company has entered into
several sourcing and inspection agreements that require the Company to provide
these services in exchange for a fee. License revenues recognized in Fiscal
years 1998 and 1997 were $5,597,000 and $5,040,000 respectively. The Company
records a majority of licensing revenues as it is earned over the term of the
related agreement. In Fiscal 1998 and Fiscal 1997, $908,000 and $1,074,000 of
license revenues recognized represented the discounted value of the minimum
royalties due under the term of the agreements. This will reduce the revenue
recognized related to such agreements in future years.
In February 1995, the Company and one of its largest Suppliers and certain
of the Supplier's affiliates (collectively, the "Supplier") entered into two
mutually contingent agreements (the "Agreements"). Effective March 31, 1995,
the Company granted a license of certain trademarks to the Supplier for a three-
year term. The license permitted the Supplier to manufacture and sell certain
video products under the Emerson and G-Clef trademark to one of the Company's
largest customers (the "Customer") in the U.S. and Canada, and precluded the
Supplier from supplying product to the Customer other than under the Emerson
and G-Clef trademark or the Supplier's other trademarks. Further, the
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 the Agreements, the Company
received non-refundable minimum annual royalties from the Supplier to be
credited against royalties earned from sales of video cassette recorders
and players, television/video cassette recorder and player combinations,
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 similar video products sold by the
Company prior to April 1, 1995. Royalty income recognized by the Company
pursuant to the Agreements was $4,000,000, $4,000,000 and $4,442,000 in Fiscal
1998, 1997 and 1996, respectively. The agreement expired on March 31, 1998.
In anticipation of the expiration of the Agreements, Emerson executed a
four-year agreement ("Daewoo Agreement") with Daewoo Electronics Co. Ltd.,
("Daewoo") in April 1997. This agreement provides that Daewoo will manufacture
and sell television and video products bearing the Emerson and G-Clef trademark
to customers in the U.S. market. Daewoo is responsible for and assumes all
risks associated with, order processing, shipping, credit and collections,
inventory, returns and after-sale service. The Company will arrange sales and
provide marketing services and in return receive a commission for such services.
This agreement can be terminated without cause by either party upon 90 days
notice.
The Daewoo Agreement may result in commission revenues that will
be less than, equal to or exceed those earned from the Supplier
Agreement. The agreement with Daewoo does not contain minimum annual
commissions and is entirely dependent on the volume of sales made by
the Company that are subject to the Daewoo Agreement. Should the
Company not generate commission revenues that are at levels
substantially equal to the revenues generated from the Supplier
Agreement the Company's results of operations will be effected
adversely.
In February 1997, the Company executed five-year license/supply agreements
with Cargil International Corp. ("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 require Emerson to source and inspect product for Cargil. Under the terms
of the agreements, the Company will receive minimum annual royalties and a
separate fee for the provision of sourcing and inspection service. Cargil
assumes all costs and expenses associated with the purchasing, marketing and
after-sales support of such products.
In October 1994, the Company entered into a license agreement with Jasco
Products Co., Inc., ("Jasco"), as amended, whereby the Company granted a license
of certain trademarks to Jasco for use on consumer electronics accessories.
Under the terms of the agreement, as amended in April 1997, the Company will
receive minimum annual royalties through the life of the agreement, which
expires on December 31, 1998.
In June 1997, the Company entered into an eighteen month license
agreement with World Wide One, Ltd., 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 to Makro International Far East Ltd. for
sales of these products in China, Indonesia, Malaysia, Philippines, South Korea,
Taiwan and Thailand. The Company will provide sourcing and inspection services
for at least 50% of the licensee's purchase requirement. The licensee is
required to meet certain minimum sales requirements as well as to ensure the
establishment of adequate service centers or agents for after-sales warranty
services.
In March 1998, the Company executed three-year license and supply
agreements with WW Mexicana, S. A. de C. V. ("WW Mexicana"), a distributor
located in Mexico covering the Mexico market. The agreements provide for the
license of the Emerson and G-Clef trademark for use on certain consumer products
to be sold in Mexico and sourcing and inspection services. Under the terms of
these agreements, the Company will receive minimum annual royalties through the
life of the agreement and will receive a separate fee for sourcing and
inspection services.
In March 1998 the Company executed a three-year license agreement with Tel-
Sound Electronics, Inc. ("Tel-Sound"), covering the United States and Canada
markets. The agreement provides for the license of the Emerson and G-Clef
trademark for use with telephones, answering machines and caller ID products.
Under the terms of this agreement, the Company will receive minimum annual
royalties through the life of the agreement.
Note 13 --Legal Proceedings:
CERTAIN OUTSTANDING COMMON STOCK
Pursuant to the Company's bankruptcy restructuring plans on March 31, 1994,
30 million shares of the Company's 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 in proceedings before the United States District Court for the District
of New Jersey, 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 the Affiliated Entities (the
"Creditors"), to be paid from the proceeds of the sale of certain of the 29.2
million 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, TM Capital
(the "Advisor") pursuant to 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 have been divided into two pools. The Pool A Shares
currently consist of 15.3 million shares of Emerson's common stock. The Pool B
Shares currently 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 of the
Settlement Shares may be made 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% per quarter of the Emerson common stock outstanding, 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.
All of the Settlement Shares secure payment of the $49.5 million owed to
the Creditors on a first priority basis. Any Creditor may apply to the Court
for an order to terminate the Settlement Agreement if certain events occur.
Such events include, without limitation, delisting of the Settlement Shares from
a national securities exchange or a determination that there is no reasonable
prospect that the goals contemplated by the Settlement Agreement can be
achieved. In November 1997, Petra Stelling and Barclays Bank filed a motion with
the Court for an order (i) terminating the Settlement Agreement on the ground
that there is no reasonable prospect that the goals contemplated by the
Settlement Agreement can be accomplished, and (ii) granting the Creditors
authorization to exercise all the rights and remedies provided by the Settlement
and Pledge Agreements in the event of termination including authorizing the
Collateral Agent to sell the Emerson Shares to fund payment of the Settlement
Amount and to vote the Emerson Shares pending such sale, directing the entry and
release of the Consent Judgments, authorizing Petra Stelling to enforce the
Swiss Judgment and for such other relief as the Court deems appropriate. The
Company and Mr. Jurick responded, the Creditors replied and a hearing on the
motion was held in April 1998 at which time it was adjourned. The hearing is
currently scheduled to resume on July 9, 1998.
If the Court enters an order terminating the Settlement Agreement, the
Creditors may take any action permitted by law to execute the Consent Judgments
given to them in connection with the Settlement Agreement to collect the unpaid
balance (including, without limitation, foreclosing on the Settlement Shares).
If the Creditors foreclose on the Settlement Shares and such foreclosure results
in a change of control (as defined in the Senior Secured Credit Facility), such
foreclosure will be deemed an event of default under the Company's Senior
Secured Credit Facility entitling the holders to accelerate payment of such
indebtedness. In addition, if a change of control (as defined in the Indenture
governing the Debentures) occurs, each of the holders of the Debentures, subject
to the right of the Senior Secured Creditors to impose a 120 day payment block,
has the right to require the Company to repurchase its Debentures at the par
value hereof plus accrued by unpaid interest. Such repurchases may have a
material adverse effect on the Company's future business activities.
In 1994, Petra and Donald Stelling ("the Stellings"), two of the Creditors,
filed a complaint with the Swiss Authorities alleging that Messrs. Jurick and
Jerome H. Farnum ("Farnum"), directors of the Company, had conducted banking
operations in Switzerland without appropriate licenses and that Messrs. Jurick,
Farnum, and Peter G. Bunger ("Bunger"), also a director of the Company, engaged
in improper activities in the financing of the Plan of Reorganization.
Although, as part of the settlement discussed herein, the Stellings
requested the discontinuance of the criminal investigations of these
individuals, the matter is presently pending before a Swiss Court with a
trial, if any, to be held no earlier than 1999. The Federal Banking Commission
of Switzerland previously issued a decree purporting to determine that certain
entities affiliated with Messrs. Jurick and Farnum were subject to Swiss banking
laws and had engaged in banking activities without a license.
OTAKE
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") seeking damages and 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, subsequently amended, 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 declaratory and injunctive relief and damages in the amount of $3.2
million, together with interest thereon, attorneys' fees, and certain other
costs. The Company is presently owed the sum of $5 million from Orion
representing royalty payments past due and owing pursuant to a certain License
Agreement dated February 22, 1995 by and between the Company and Orion. In the
context of the action Orion Sales, Inc. v. Emerson Radio Corp., pending in the
United States District Court for the Southern District of Indiana (the "District
Court"), Orion has executed a pre-judgment garnishment of these funds and
deposited them with the Clerk of the District Court pursuant to an Order of the
District Court. Orion has not contested the Company's entitlement to these
royalty payments. Orion has also posted a bond with the District Court
sufficient to compensate Emerson for any and all damages that may result from
the pre-judgment garnishment.
The Company has withheld payment of the sum of $3.2 million for certain
consumer electronic products that Orion and its affiliates sold and delivered to
Emerson pursuant to a certain Agreement dated February 22, 1995 by and between
Emerson on the one hand and Orion, Otake Trading Co., Inc. and Technos
Development Limited on the other (the "Supply Agreement"). Emerson has
vigorously contested Orion's and its affiliates' entitlement to the $3.2
million payment.
Both the Company and Orion have asserted claims for interest accruing on
the unpaid principal balances respectively due them, which are presently pending
before the District Court. The Company's management believes that it will
receive the $5 million due pursuant to the License Agreement and has meritorious
defenses to Orion's claim for the $3.2 million payment, and, also, the interest
allegedly accrued thereon. 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 in March 31, 1994. 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 $93.6
million, of which $86.8 million 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, the
Company believes the chances for recovery for lost profits are remote. There
has been no activity regarding this litigation during the current fiscal year.
The Company is involved in other legal proceedings and claims of various
types in the ordinary course of business. While any such litigation to which
the Company is a party contains an element of uncertainty, management presently
believes that the outcome of each such proceeding or claim which is pending or
known to be threatened, or all of them combined, will not have a material
adverse effect on the Company's consolidated financial position.
Note 14-- Business Segment Information and Major Customers:
The consumer electronics business is the Company's only business segment.
Operations in this business segment are summarized below by geographic area:
Year Ended April 3, 1998
(In thousands)
U.S. Foreign Eliminations Consolidated
Sales to unaffiliated
customers $159,108 $ 3,622 $ - $ 162,730
Earnings (loss) before
income taxes $ (2,368) $ 938 $ - $ (1,430)
Identifiable assets $ 51,008 $ 912 $ - $ 51,920
Year Ended March 31, 1997
U.S. Foreign Eliminations Consolidated
Sales to unaffiliated
customers $172,417 $ 6,291 $ - $ 178,708
Transfers between
geographic areas 2,592 581 (3,173) -
Total net revenues $175,009 $ 6,872 $ (3,173) $ 178,708
Earnings (loss) before
income taxes $(20,677) $(1,791) $ - $ (22,468)
Identifiable assets $ 58,382 $ 386 $ - $ 58,768
Year Ended March 31, 1996
Sales to unaffiliated
customers $234,369 $11,298 $ - $ 245,667
Transfers between
geographic areas 2,884 876 (3,760) -
Total net revenues $237,253 $12,174 $ (3,760) $ 245,667
Earnings (loss) before
income taxes $(11,324) $(2,039) $ - $ (13,363)
Identifiable assets $ 90,350 $ 6,226 $ - $ 96,576
Transfers between geographic areas are accounted for on a cost basis.
Identifiable assets are those assets used in operations in each geographic area.
At April 3, 1998, March 31, 1997 and 1996, total assets include $9,187,000,
$10,657,000 and $27,779,000, respectively, of assets located in foreign
countries.
The Company's net sales to one customer aggregated approximately 58%, 36%
and 18% of consolidated net revenues for the years ended April 3, 1998, March
31, 1997 and 1996, respectively. This customer approximated 17% of the Company's
trade accounts receivable at April 3, 1998, and has not been collateralized. The
Company's net sales to another customer aggregated 16%, 13% and 16% for the
years ended April 3, 1998, March 31, 1997 and 1996, respectively. Trade
accounts receivable from this customer were less than 10% of total trade
receivables.
Note 15 - Investment in Joint Venture:
The Company has a 50% investment in E & H Partners, a joint venture in
liquidation that refurbishes and sells certain of the Company's product returns.
The results of this joint venture were accounted for by the equity method and
the Company's equity in the earnings (loss) of the joint venture was reflected
as an increase or reduction of cost of sales. Summarized financial information
relating to the joint venture for the years ended April 3, 1998, March 31, 1997
and 1996 is as follows:
1998 1997 1996
(In thousands)
Activity between Company and
E & H Partners
Accounts receivable from joint
venture (a) $1,438 $3,522 $13,270
Investment in joint venture - 440 1,265
Sales to joint venture - 5,792 17,629
E & H Partners Summarized
Financial Information
Condensed balance sheet:
Current assets $1,889 $7,947 $19,326
Noncurrent assets - - 162
Total $1,899 $ 7,947 $19,488
Current liabilities $2,609 $ 7,476 $16,958
Partnership equity (720) 471 2,530
Total $1,889 $ 7,947 $19,488
Condensed income statement:
Net sales (b) $1,772 $31,564 $27,712
Net loss (318) (2,058) (600)
(a) Accounts receivable are secured by a shared lien on the partnership's
inventory with the other partner in the joint venture, and such lien had been
assigned to the Lender as collateral for the U.S. line of credit facility.
(b) Includes sales to the Company of $0, $7,058,000 and $5,964,000,
respectively.
Effective January 1, 1997, the partners to the E&H Partnership mutually
agreed to dissolve the joint venture and wind down its operations. The partners
have elected to extend such wind down in order to facilitate a more orderly
liquidation of the joint venture.
EMERSON RADIO CORP. AND SUBSIDIARIES
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
Column A Column B Column C Column D Column E
Balance Charged Balance
at to at
beginning costs Deduc- end of
Decription of year expenses tions year (C)
Allowance for doubtful
accounts/chargebacks:
Year ended:
April 3, 1998 $2,686 $1,165 $ 337(A) $ 3,514
March 31, 1997 2,831 2,558 2,703 2,686
March 31, 1996 4,150 1,111 2,430 2,831
Inventory reserves:
Year ended:
April 3, 1998 $2,161 $1,507 $2,971(B) $ 697
March 31, 1997 1,222 4,560 3,621 2,161
March 31, 1996 470 1,087 335 1,222
(A) Accounts written off, net of recoveries.
(B) Net realizable value reserve removed from account when inventory is sold.
(C) Amounts do not include certain accounts receivable reserves that are
disclosed as "allowances" on the Consolidated Balance Sheets since they
are not valuation reserves.
INDEX TO EXHIBITS
PAGE NUMBER
IN SEQUENTIAL
NUMBERING
EXHIBIT DESCRIPTION SYSTEM
(2) Confirmation Order and Fourth Amended Joint Plan of
Reorganization of Emerson Radio Corp. ("Old Emerson") and
certain subsidiaries under Chapter 11 of the United
States Bankruptcy Code, dated March 31, 1994
(incorporated by reference to Exhibit (2) of Emerson's
Registration Statement on Form S-1, Registration No. 33-
53621, declared effective by the Securities and Exchange
Commission ("SEC") on August 9, 1994).
(3) (a) Certificate of Incorporation of Emerson (incorporated by
reference to Exhibit (3) (a) of Emerson's Registration
Statement on Form S-1, Registration No. 33-53621,
declared effective by the SEC on August 9, 1994).
(3) (b) Certificate of Designation for Series A Preferred Stock
(incorporated by reference to Exhibit (3) (b) of
Emerson's Registration Statement on Form S-1,
Registration No. 33-53621, declared effective by the SEC
on August 9, 1994).
(3) (c) Plan of Reorganization and Agreement of Merger by and
between Old Emerson and Emerson Radio (Delaware) Corp.
(incorporated by reference to Exhibit (3) (c) of
Emerson's Registration Statement on Form S-1,
Registration No. 33-53621, declared effective by the SEC
on August 9, 1994).
(3) (d) Certificate of Merger of Old Emerson with and into
Emerson Radio (Delaware) Corp. (incorporated by reference
to Exhibit (3) (d) of Emerson's Registration Statement
on Form S-1, Registration No. 33-53621, declared
effective by the SEC on August 9, 1994).
(3) (e) Amendment dated February 14, 1996 to the Certificate of
Incorporation of Emerson (incorporated by reference to
Exhibit (3) (a) of Emerson's Quarterly Report on Form 10-
Q for the quarter ended December 31, 1995).
(3) (f) By-Laws of Emerson adopted March 1994 (incorporated by
reference to Exhibit (3) (e) of Emerson's Registration
Statement on Form S-1, Registration No. 33-53621,
declared effective by the SEC on August 9, 1994).
(3) (g) Amendment dated November 28, 1995 to the By-Laws of
Emerson adopted March 1994 (incorporated by reference to
Exhibit (3) (b) of Emerson's Quarterly Report on Form 10-
Q for the quarter ended December 31, 1995).
(4) (a) Warrant Agreement to Purchase 750,000 shares of Common
Stock, dated as of March 31, 1994 (incorporated by
reference to Exhibit (4) (a) of Emerson's Registration
Statement on Form S-1, Registration No. 33-53621,
declared effective by the SEC on August 9, 1994).
(4) (b) Indenture, dated as of August 17, 1995 between Emerson
and Bank One, Columbus, NA, as Trustee (incorporated by
reference to Exhibit (1) of Emerson's Current Report on
Form 8-K filed with the SEC on September 8, 1995).
(4) (c) Common Stock Purchase Warrant Agreement to purchase
50,000 shares of Common Stock, dated as of December 8,
1995 between Emerson and Michael Metter (incorporated by
reference to Exhibit (10) (e) of Emerson's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1995).
(4) (d) Common Stock Purchase Warrant Agreement to purchase
200,000 shares of Common Stock, dated as of December 8,
1995 between Emerson and Kenneth A. Orr (incorporated by
reference to Exhibit (10) (f) of Emerson's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1995).
(10) (a) Form of Promissory Note issued to certain Pre-Petition
Creditors (incorporated by reference to Exhibit (10)
(e) of Emerson's Registration Statement on Form S-1,
Registration No. 33-53621, declared effective by the SEC
on August 9, 1994).
(10) (b) Loan and Security Agreement, dated March 31, 1994, by
and among Emerson, Majexco Imports, Inc. and Congress
Financial Corporation ("Congress") (incorporated by
reference to Exhibit (10) (f) of Emerson's Registration
Statement on Form S-1, Registration No. 33-53621,
declared effective by the SEC on August 9, 1994).
(10) (c) Amendment No. 1 to Financing Agreements, dated as of
August 24, 1995, among Emerson, Majexco Imports, Inc.
and Congress (incorporated by reference to Exhibit (2)
of Emerson's Current Report on Form 8-K filed with the
SEC on September 8, 1995).
(10) (d) Amendment No. 2 to Financing Agreements, dated as of
February 13, 1996 (incorporated by reference to Exhibit
(10) (c) of Emerson's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995).
(10) (e) Amendment No. 3 to Financing Agreements, dated as of
August 20, 1996 (incorporated by reference to Exhibit
(10) (b) of Emerson's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995).
(10) (f) Amendment No. 4 to Financing Agreements, dated as of
November 14, 1996 (incorporated by reference to
Exhibit (10) (c) of Emerson's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996).
(10) (g) Amendment No. 5 to Financing Agreements, dated as of
February 18, 1997 (incorporated by reference to Exhibit
(10) (e) of Emerson's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1996).
(10) (h) Stipulation of Settlement and Order dated June 11, 1996
by and among the Official Liquidator of Fidenas
International Bank Limited, Petra Stelling, Barclays
Bank PLC, the Official Liquidator of Fidenas Investment
Limited, Geoffrey P. Jurick, Fidenas International
Limited, L.L.C., Elision International, Inc., GSE
Multimedia Technologies Corporation and Emerson.
(10) (i) Pledge Agreement dated as of February 4, 1997 by Fidenas
International Limited, L.L.C. ("FIN") in favor of TM
Capital Corp. (incorporated by reference to Exhibit (10)
(a) of Emerson's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996).
(10) (j) Registration Rights Agreement dated as of February 4,
1997 by and among Emerson, FIN, the Creditors, FIL and
TM Capital Corp. (incorporated by reference to Exhibit
(10) (b) of Emerson's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1996).
(10) (k) License and Exclusive Distribution Agreement with Cargil
International Corp. dated as of February 12, 1997
(incorporated by reference to Exhibit (10) (c) of
Emerson's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996).
(10) (l) Agreement dated April 10, 1997 between Emerson and
Daewoo Electronics Co., Ltd.
(10) (m) Securities Purchase Agreement dated as of November 27,
1996, by and between Sport Supply Group, Inc. ("SSG")
and Emerson (incorporated by reference to Exhibit (2)(a)
of Emerson's Current Report on Form 8-K dated November
27, 1996).
(10) (n) Form of Warrant Agreement by and between SSG and
Emerson (incorporated by reference to Exhibit (4)(a) of
Emerson's Current Report on Form 8-K dated November 27,
1996).
(10) (o) Form of Registration Rights Agreement by and between SSG
and Emerson (incorporated by reference to Exhibit (4)(b)
of Emerson's Current Report on Form 8-K dated November
27, 1996).
(10) (p) Consent No. 1 to Financing Agreements among Emerson,
certain of its subsidiaries, and Congress (incorporated
by reference to Exhibit (10)(b) of Emerson's Current
Report on Form 8-K dated November 27, 1996).
(10) (q) Form of Termination of Employment Agreement between
Emerson and John Walker dated as of January 15, 1998.*
(10) (r) License Agreement dated as of March 30, 1998 by and
between Tel-Sound Electronics, Inc. and Emerson. *
(10) (s) License Agreement dated as of March 31, 1998 by and
between WW Mexicana, S. A. de C. V. and Emerson. *
(10) (t) Amendment No. 7 to Financing Agreements, dated as of
March 31, 1998. *
(10) (u) Amendment No. 1 to Pledge and Security Agreement dated
as of March 31, 1998. *
(10) (v) Second Lease Modification dated as of May 15, 1998
between Hartz Mountain, Parsippany and Emerson. *
(12) Computation of Ratio of Earnings (Loss) to Combined
Fixed Charges and Preferred Stock Dividends. *
(21) Subsidiaries of the Company as of April 3,
1998.*
(23) Consent of Independent Auditors.*
(27) Financial Data Schedule for year ended April 3,
1998.*
* Filed herewith.
EXHIBIT 12
EMERSON RADIO CORP. AND SUBSIDIARIES
EXHIBIT TO FORM 10-K
COMPUTATION OF RATIO OF EARNINGS (LOSS) TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
(In thousands, except ratio data)
Historical
Year Year Year Year Year
Ended Ended Ended Ended Ended
Apr. 3, Mar. 31, Mar. 31, Mar. 31, Mar. 31,
1998 1997 1996 1995 1994
Pretax earnings
(loss) $(1,176) $(23,738) $(13,363) $ 7,642 $(73,327)
Fixed charges:
Interest 1,911 2,789 2,788 2,582 10,243
Amortization of
debt expenses 677 640 487 300 -
2,588 3,429 3,275 2,882 10,243
Pretax earnings
(loss) before
fixed charges $1,412 $(20,309) $(10,088) $10,524 $(63,084)
Fixed charges:
Interest $1,911 $ 2,789 $ 2,788 $ 2,582 $10,243
Amortization of
debt expenses 677 640 487 300 -
Preferred stock
dividend
requirements 400 700 700 725(a)
requirements
$2,988 $ 4,129 $ 3,975 $3,607 $ 10,243
Ratio of earnings
(loss) to
combined fixed
charges and
preferred stock
dividends .47 (4.92) (2.54) 2.92 (6.16)
Coverage deficiency - $4,129 $ 3,975 - $10,243
(a) The preferred stock dividend requirements have been adjusted to reflect the
pretax earnings which would be required to cover such dividend requirements.
EXHIBIT 21
Emerson Radio Corp. and Subsidiaries
Exhibit to Form 10-K
Subsidiaries of the Registrant
Jurisdiction of Percentage of
Name of Subsidiary Incorporation Ownership
Emerson Radio (Hong Kong) Ltd. Hong Kong 100%*
Emerson Radio International Ltd. British Virgin Islands 100%
Sport Supply Group, Inc. Delaware 28%
* One share is owned by a resident director pursuant to local law.