UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _______________
Commission file number 0-25226
EMERSON RADIO CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3285224
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Entin Road Parsippany, New Jersey 07054
(Address of principal executive offices) (Zip code)
(201)884-5800
(Registrant's telephone number, including area code)
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of common stock as of June 30,
1995: 40,252,772.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
June 30,
1995 1994
Net sales . . . . . . . . . . . . . . $ 57,058 $137,140
Costs and Expenses:
Cost of sales . . . . . . . . . . . 50,886 128,906
Other operating costs and expenses . 1,617 2,752
Selling, general & administrative
expenses . . . . . . . . . . . . . 5,242 7,855
57,745 139,513
Operating loss . . . . . . . . . . . . (687) (2,373)
Interest expense . . . . . . . . . . . 622 454
Loss before income taxes . . . . . . . (1,309) (2,827)
Provision for income taxes . . . . . . 92 67
NET LOSS . . . . . . . . . . . . . . . $ (1,401) $ (2,894)
Net loss per common share. . . . . . . $ (.03) $ (.09)
Weighted average number of
common shares outstanding . . . . . . 40,253 33,333
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
June 30, March 31,
1995 1995
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . $ 14,474 $ 17,020
Accounts receivable (less allowances of
$9,996 and $9,350, respectively) . . . . . 25,151 34,309
Inventories . . . . . . . . . . . . . . . . 35,312 35,336
Prepaid expenses and other current assets . 15,895 15,715
Total current assets . . . . . . . . . . . 90,832 102,380
Property and equipment - (at cost less
accumulated depreciation and amortization
of $5,676 and $7,102, respectively) . . . . . 4,798 4,676
Other assets . . . . . . . . . . . . . . . . . 7,792 6,913
Total Assets . . . . . . . . . . . . . . . $103,422 $113,969
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . . . $ 25,219 $ 27,296
Current maturities of long-term debt . . . . 458 508
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . 19,929 18,982
Accrued sales returns . . . . . . . . . . . 5,171 12,713
Income taxes payable . . . . . . . . . . . . 184 283
Total current liabilities . . . . . . . . 50,961 59,782
Long-term debt . . . . . . . . . . . . . . . . 193 214
Other non-current liabilities . . . . . . . . 324 322
Shareholders' Equity:
Preferred stock - $.01 par value, 1,000,000
shares authorized, 10,000 shares issued
and outstanding . . . . .. . . . . . . . . 9,000 9,000
Common stock - $.01 par value, 75,000,000
shares authorized, 40,252,772. . . . . . . .
shares issued and outstanding. . . . . . . . 403 403
Capital in excess of par value . . . . . . . . 107,969 107,969
Accumulated deficit . . . . . . . . . . . . . (65,662) (64,086)
Cumulative translation adjustment . . . . . . 234 365
Total shareholders' equity . . . . . . . 51,944 53,651
Total Liabilities and Shareholders' Equity $103,422 $113,969
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
Three Months Ended
June 30,
1995 1994
Cash Flows from Operating Activities:
Net cash provided (used) by operating
activities . . . . . . . . . . . . . . . . $ 1,428 $(20,879)
Cash Flows from Investing Activities:
Redemption of (investment in)
certificates of deposit. . . . . . . . . . (16) 8,493
Additions to property and equipment . . . . (635) (1,443)
Other . . . . . . . . . . . . . . . . . . . (526) -
Net cash provided (used) by investing
activities . . . . . . . . . . . . . . . (1,177) 7,050
Cash Flows from Financing Activities:
Net borrowings (repayments) under line of
credit facility. . . . . . . . . . . . . . (2,077) 836
Other . . . . . . . . . . . . . . . . . . . (720) (336)
Net cash provided (used) by financing
activities . . . . . . . . . . . . . . . . (2,797) 500
Net decrease in cash and cash
equivalents . . . . . . . . . . . . . . . . (2,546) (13,329)
Cash and cash equivalents at beginning
of year. . . . . . . . . . . . . . . . . . . 17,020 21,623
Cash and cash equivalents at end of period . . $ 14,474(a) $ 8,294 (a)
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . $ 884 $ 481
Income taxes paid . . . . . . . . . . . . . $ 114 $ 275
(a) The balances at June 30, 1995 and 1994, include $9.1 million and $2.0
million of cash and cash equivalents, respectively, pledged to assure the
availability of certain letter of credit facilities.
The accompanying notes are an integral part of the interim consolidated
financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
The unaudited interim consolidated financial statements reflect all
adjustments that management believes necessary to present fairly the results
of operations for the periods being reported. The unaudited interim
consolidated financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission and accordingly do
not include all of the disclosures normally made in the Emerson Radio Corp.
("the Company") annual consolidated financial statements. It is suggested
that these unaudited interim consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto for
the year ended March 31, 1995, included in the Company's annual Form 10-K
filing.
Due to the seasonal nature of the Company's consumer electronics business,
the results of operations for the three months ended June 30, 1995 are not
necessarily indicative of the results of operations for the full year ending
March 31, 1996.
NOTE 2
Net loss per common share for the three month periods ended June 30, 1995
and 1994 are based on the weighted average number of shares of common stock
outstanding during each period. The net loss per share for both periods does
not include common stock equivalents assumed outstanding since they are
anti-dilutive.
NOTE 3
The provision for income taxes for the three months ended June 30, 1995
and 1994 consists primarily of taxes related to international operations. The
Company did not recognize tax benefits for losses incurred by its domestic
operations (after tax recognition of prior year book deductions) during the
three months ended June 30, 1995 and 1994.
NOTE 4
Spare parts inventories, net of reserves, aggregating $2,583,000 and
$2,763,000 at June 30, 1995 and March 31, 1995, respectively, are included in
"Prepaid expenses and other current assets".
NOTE 5
Long-term debt consists of the following:
(In thousands of dollars)
June 30, March 31,
1995 1995
Notes payable to unsecured
creditors . . . . . . . . . . . $ 342 $ 465
Equipment notes and other . . . . 309 257
651 722
Less current obligations. . . . . 458 508
$ 193 $ 214
NOTE 6
The 30 million shares of Common Stock issued to GSE Multimedia
Technologies Corp., Fidenas International Limited L.L.C. and Elision
International, Inc. on March 31, 1994, pursuant to the Company's bankruptcy
restructuring plan, are the subject of certain legal proceedings. Transfer of
certain shares owned by Fidenas International Limited L.L.C. have been enjoined
by court orders issued in the United States Bankruptcy Court for the Southern
District of New York and the Commonwealth of the Bahamas. The Company is not a
party to any of the proceedings described herein; it is possible that a court
of competent jurisdiction may order the turnover of all or a portion of the
shares of Common Stock owned by such persons to a third party. A turnover of a
substantial portion of the Common Stock could result in a "change of
controlling ownership" prohibited pursuant to the terms of the Company's loan
and security agreement with its primary United States lender. Additionally,
such a change in controlling ownership could result in a second "ownership
change" under Internal Revenue Code Section 382, which could affect the
Company's ability to use its net operating loss and tax credit carryforwards.
The Company does not believe the litigation or the results thereof will have a
material adverse effect on the Company or on the Company's financial position.
The Company is presently engaged in litigation regarding several
bankruptcy claims which have not been resolved since the restructuring of the
Company's debt. The largest claim was filed July 25, 1994 in connection with
the rejection of certain executory contracts with two Brazilian entities,
Cineral Electronica de Amazonia Ltda. and Cineral Magazine Ltda. (collectively,
"Cineral"). The contracts were executed in August 1993, shortly before the
Company's filing for bankruptcy protection. The amount claimed was $93,563,457,
of which $86,785,000 represents a claim for lost profits and $6,400,000 for
plant installation and establishment of offices, which were installed and
established prior to execution of the contracts. The claim was filed as an
unsecured claim and, therefore, will be satisfied, to the extent the claim is
allowed by the Bankruptcy Court, in the manner other allowed unsecured claims
are 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. Additionally, the Company has instituted an adversary proceeding in
the Bankruptcy Court asserting damages caused by Cineral. A motion filed by
Cineral to dismiss the adversary proceeding has been denied. The adversary
proceeding and claim objection have been consolidated into one proceeding. An
adverse final ruling on the Cineral claim could have a material adverse effect
on the Company, even though it would be limited to 18.3% of the final claim
determined by a court of competent jurisdiction; however, with respect to the
claim for lost profits, in light of the foregoing, the Company believes the
chances for recovery for lost profits are remote.
NOTE 7
The Company has a 50% investment in E & H Partners, a joint venture that
purchases, refurbishes and sells all of the Company's product returns. The
results of this joint venture are accounted for by the equity method. The
Company's equity in the earnings of the joint venture is reflected as a
reduction of cost of sales in the Company's unaudited interim Consolidated
Statements of Operations. Summarized financial information relating to the
joint venture is as follows (in thousands):
June 30, March 31,
1995 1995
Accounts receivable from
joint venture (a) $17,495(a) $15,283
Three Months
Ended
June 30, 1995
(In thousands)
Condensed income statement (c):
Net sales $ 7,274(b)
Net earnings 919
____________________
(a) Secured by a lien on the partnership's inventory. Such lien has been
assigned to the Company's primary lender as collateral for the U.S. line of
credit facility.
(b) Includes sales to the Company of $1,425,000.
(c) E&H Partners was inactive for substantially all of the three month period
ended June 30, 1994.
The Company filed suit on July 5, 1995 in the State Court of New Jersey
alleging Hopper Radio of Florida, Inc. ("Hopper"), the Company's partner in E&H
Partners, Barry Smith, the President of Hopper, and three former employees of
the Company (collectively, "the Defendants") have formed a business entity
for the purpose of engaging in the distribution of consumer electronics and
that the action of the Defendants in connection therewith violated certain
duties owed to and rights of the Company. E&H Partners has continued to
operate since the filing of said lawsuit. However, the Company cannot
predict at this time how this suit will, if at all, affect the joint venture
or the Company.
EMERSON RADIO CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
General
On February 22, 1995, the Company and Otake Trading Co. Ltd. and certain
affiliates ("Otake"), the Company's largest supplier, entered into two mutually
contingent agreements (the "Agreements"). Effective March 31, 1995, the
Company granted a license of certain trademarks to Otake for a three-year term.
The license permits Otake to manufacture and sell certain video products under
the Emerson trademark to Wal-Mart Stores, Inc. ("Wal-Mart"), the Company's
largest customer, in the U.S. and Canada. As a result, the Company will
receive royalties attributable to such sales over the three-year term of the
Agreements in lieu of reporting the full dollar value of such sales and
associated costs. The Company will continue to supply other products to Wal-
Mart directly. Further, the Agreements provide that Otake will 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
will receive non-refundable minimum annual royalties from Otake to be credited
against royalties earned from sales of video cassette recorders and players,
television/video cassette recorder and player combination units, and color
televisions to Wal-Mart. In addition, effective August 1, 1995, Otake assumed
responsibility for returns and after-sale and warranty services on all video
products manufactured by Otake and sold to Wal-Mart, including video products
sold by the Company prior to August 1, 1995. As a result, the impact of sales
returns on the Company's net sales and operating results are expected to be
significantly reduced commencing with the second quarter of the fiscal year
ended March 31, 1996 ("Fiscal 1996"). The Company has reported lower direct
sales in the quarter ended June 30, 1995 and expects to report lower direct
sales in Fiscal 1996 as a result of the Agreements, but no negative material
impact is expected on its net operating results for such year.
The Company expects to realize a more stable cash flow over the three-year
term of the Agreements, and expects to reduce short-term borrowings used to
finance accounts receivable and inventory, thereby reducing interest costs.
The Company reported a significant decline in its net direct sales for
the first quarter of Fiscal 1996 as compared to the same period in the fiscal
year ended March 31, 1995 ("Fiscal 1995") primarily due to the licensed
video sales. However, the Company's United States sales to other customers
also declined in the current quarter due to increased price competition,
primarily in video product categories, higher retail stock levels, a
slowdown in retail activity and the higher levels of sales achieved in the
first quarter of Fiscal 1995. The Company expects its United States
sales for the second quarter of Fiscal 1996 to remain comparable with the
second quarter of Fiscal 1995, exclusive of the licensed video sales.
Net sales of video product to Wal-Mart in the second quarter of Fiscal 1995
(quarter ended September 30, 1994) were $104,357,000 or 53% of consolidated
net sales.
The Company's operating results and liquidity are impacted by the
seasonality of its business. The Company records the majority of its annual
sales in the quarters ending September 30 and December 31 and receives the
largest percentage of customer returns in the quarters ending March 31 and
June 30. Therefore, the results of operations discussed below are not
necessarily indicative of the Company's prospective annual results of
operations.
Results of Operations
Consolidated net sales for the three month period ended June 30, 1995
decreased $80,082,000 (58%) as compared to the same period in Fiscal 1995. The
effects of the Agreements described above accounted for approximately 80% (or
$64,452,000) of the decrease in sales, net of licensing revenues received, and
as a result, sales to Wal-Mart were reduced to 16% of consolidated net sales
for the first quarter of Fiscal 1996, as compared to 49% for the same period in
Fiscal 1995. Net sales to Wal-Mart of video products bearing the Emerson
trademark were reported by Otake to the Company to be $61,307,000 for the first
quarter of Fiscal 1996. In addition, the decrease resulted from decreases in
unit sales of video cassette recorders, televisions and television/video
cassette recorder combination units due to higher retail stock levels and
increased price competition in these product categories. Furthermore, the
Company's European sales decreased $6.5 million relating to the Company's
discontinuance of its Spanish branch, and plan to sell products in Spain
through a distributor.
Cost of sales, as a percentage of consolidated sales, was 89% for the
three month period ended June 30, 1995 as compared to 94% for the same period
in Fiscal 1995. Gross profit margins in the three month period ended June
30, 1995 were favorably impacted by a change in product mix, the recognition of
licensing income, reduced reserve requirements for sales returns due primarily
to the Agreements with Otake, and reduced fixed costs associated with the
downsizing of the Company's foreign offices, partially offset by lower sales
prices.
Other operating costs and expenses declined $1,135,000 in the three month
period ended June 30, 1995 as compared to the same period in Fiscal 1995,
primarily as a result of a decrease in compensation expense and other expenses
incurred to process product returns, both relating to the Company's downsizing
program and change in the resale arrangement for product returns (See Note 7 of
Notes to Interim Consolidated Financial Statements).
Selling, general and administrative expenses ("S,G & A") as a percentage
of sales, was 9% for the three month period ended June 30, 1995, as
compared to 6% for the same period in Fiscal 1995. In absolute terms,
S,G & A decreased by $2,613,000 in the three month period ended June 30, 1995
as compared to the same period in Fiscal 1995. The decrease was primarily
attributable to lower compensation expense relating to the Company's downsizing
program in both the U.S. and in its foreign offices, and lower selling expenses
attributable to the lower sales. The increase in the S,G & A percentage of
sales is due primarily to the allocation of fixed S,G & A costs over a
significantly lower sales base resulting from the licensing of video sales.
Additionally, the Company's exposure to foreign currency fluctuations,
primarily in Canada and Spain, resulted in the recognition of net foreign
currency exchange gains aggregating $432,000 and $401,000 in the three month
periods ended June 30, 1995 and 1994, respectively.
Interest expense increased by $168,000 in the three month period ended
June 30, 1995 as compared to the same period in Fiscal 1995. The increase
in interest expense in the current quarter was attributable to higher average
borrowings and higher interest rates. The average rate in effect for the three
month periods ended June 30, 1995 and 1994 was approximately 11.3% and 9.1%,
respectively.
As a result of the foregoing factors, the Company incurred a net loss of
$1,401,000 for the three month period ended June 30, 1995, compared to a net
loss of $2,894,000 for the same period in Fiscal 1995.
Liquidity and Capital Resources
Net cash provided by operating activities was $1,428,000 for the three
months ended June 30, 1995. Cash was provided by a decrease in accounts
receivable partially offset by a loss from operations. The decrease in
accounts receivable was due to a decrease in sales and an increase in cash
collections in the current quarter.
Net cash utilized by investing activities was $1,177,000 for the three
months ended June 30, 1995. Investing activities consisted primarily of capital
expenditures for the purchase of new product molds.
In the three months ended June 30, 1995, the Company's financing
activities utilized $2,797,000 of cash. The Company reduced its borrowings
under its U.S. line of credit facility by $2,077,000 through the collection of
accounts receivable.
The Company maintains an asset-based revolving line of credit facility
with a U.S. financial institution (the "Lender"). The facility provides for
revolving loans and letters of credit, subject to individual maximums and, in
the aggregate, not to exceed the lesser of $60 million or a "Borrowing Base"
amount based on specified percentages of eligible accounts receivable and
inventories. All credit extended under the line of credit is secured by all
U.S. and Canadian assets of the Company. The interest rate on all borrowings is
2.25% above the prime rate. At June 30, 1995, there were approximately $25.2
million outstanding on the Company's revolving loan facility, and
approximately $2.1 million of letters of credit outstanding issued for
inventory purchases. Based on the "Borrowing Base" amount at June 30,
1995, $2,939,000 of the credit facility was not utilized. Pursuant to the
terms of the credit facility, effective November 1, 1994, the Company is
required to maintain a minimum net worth of $42,000,000 excluding net
proceeds received by the Company from the sale of equity securities, which
minimum will increase to $50,000,000 effective January 1, 1996.
The Company's Hong Kong subsidiary maintains various credit facilities
aggregating $114.3 million with a bank in Hong Kong consisting of the
following: (i) a $12.3 million credit facility generally used for
letters of credit for a foreign subsidiary's direct import business and
affiliates' inventory purchases, (ii) a $2 million standby letter of credit
facility, and (iii) a $100 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 June 30, 1995, the Company's
Hong Kong subsidiary had pledged $4 million in certificates of deposit to this
bank to assure the availability of these credit facilities. At June 30, 1995,
there were approximately $11.9 million and $9.9 million of letters of credit
outstanding on the $12.3 million and $100 million credit facilities,
respectively.
The Company's Hong Kong subsidiary maintains an additional credit facility
with another bank in Hong Kong. The facility provides for a $10 million line
of credit for documentary letters of credit and a $10 million back-to-back
letter of credit line collateralized by a $5 million certificate of deposit.
At June 30, 1995, the Company's Hong Kong subsidiary had pledged $5.1 million
in certificates of deposit to assure the availability of these credit
facilities. At June 30, 1995, these credit facilities were not utilized.
Management's strategy to compete more effectively in the highly
competitive consumer products market in the United States and Canada, is
to combine innovative approaches to the Company's current product line,
such as value-added promotions, augment its product line with higher
margin complementary products, including personal and home security products,
a home theater system, ready-to-assemble furniture, clocks and watches, and
car audio products and engage in the sale of distribution, sourcing and
other services to third parties. Management believes that these new
products and services will contribute to the Company's sales and operating
results commencing in the second half of Fiscal 1996. The Company also
intends to undertake efforts to expand the international distribution of
its products into areas where management believes low to moderately priced,
dependable consumer electronics and microwave oven products will have a broad
appeal. The Company has in the past and intends in the future to pursue
such plans either on its own or by forging new relationships, including
through license arrangements, partnerships or joint ventures.
Management believes that cash flow from operations and the institutional
financing described above will need to be supplemented by additional financing
to fund all of the Company's cash requirements for the next year for its
core business and to exploit new business opportunities. The Company is
seeking to restructure its revolving credit facility and raise long-term
financing pursuant to a private placement of convertible debentures for the
expansion of its core business and new product introductions. There can be
no assurance that the Company will successfully consummate these transactions
or do so on terms which will be advantageous to the Company. If the Company
does not consummate these transactions, the Company may not have sufficient
working capital to pursue all of its business opportunities. Cash flow
from operations will be negatively impacted by any increase in the prime
rate of interest and by a decrease in the proportion of the Company's
direct import sales to consolidated sales. A lower percentage of direct
import sales will require increased use of the Company's credit facility
with the Lender and may restrict growth of the Company's sales.
EMERSON RADIO CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings.
The information required by this item is included in Notes 6
and 7 of Notes to Interim Consolidated Financial Statements
filed in Part I of Form 10-Q for the quarter ended June 30,
1995, and is incorporated herein by reference.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits pursuant to provisions of Item 601 of
Regulation S-K are not applicable.
(b) Reports on Form 8-K:
(1) During the three month period ended
June 30, 1995, no Form 8-K was filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMERSON RADIO CORP.
(Registrant)
Date: August 14, 1995 /s/Geoffrey P. Jurick
Geoffrey P. Jurick
Chief Executive Officer
Date: August 14, 1995 /s/Eugene I. Davis
Eugene I. Davis
President, Interim Chief
Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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