-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SPzelzsw6+Azbw7y8qenY79n9jxY+m1h0q8aytBe1GXaW1W+yOUVDwY132qfvBSs /CRkUr93xT2uNhJyRRqLMA== 0000032621-97-000013.txt : 19970715 0000032621-97-000013.hdr.sgml : 19970715 ACCESSION NUMBER: 0000032621-97-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970714 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMERSON RADIO CORP CENTRAL INDEX KEY: 0000032621 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 223285224 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07731 FILM NUMBER: 97640308 BUSINESS ADDRESS: STREET 1: NINE ENTIN RD STREET 2: PO BOX 430 CITY: PARSIPPANY STATE: NJ ZIP: 07054-0430 BUSINESS PHONE: 2018845800 FORMER COMPANY: FORMER CONFORMED NAME: MAJOR ELECTRONICS CORP DATE OF NAME CHANGE: 19770921 10-K 1 ____________________________________________________________________________ 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 [NO FEE REQUIRED EFFECTIVE OCTOBER 7, 1996] FOR THE FISCAL YEAR ENDED MARCH 31, 1997 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 Number) incorporation or organization) Nine Entin Road, Parsippany, NJ 07054 (Address of principal executive offices) (Zip Code) 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 American Stock Exchange $.01 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 July 10, 1997 (computed by reference to the last reported sale price of the Common Stock on the American Stock Exchange on such date): $8,180,593. 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 July 10, 1997: 41,101,687 DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for the 1997 Annual Meeting of Stockholders: Part III ________________________________________________________________________________ PART I Item 1. BUSINESS General Emerson Radio Corp. ("Emerson" or the "Company"), one of the nation's largest volume consumer electronics distributors, directly and through subsidiaries, designs, sources, imports and markets a variety of televisions and other video products, microwave ovens, audio and home theater products. The Company also licenses the Emerson and G-Clef trademark for a variety of television, video, certain other consumer electronic products as well as other products domestically and internationally. The Company distributes its products primarily through mass merchants and discount retailers leveraging on 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 extensive distribution base and established relations with customers in the mass merchant and discount retail channels of distribution, (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 developing markets worldwide. The Company has in the past and intends in the future to form joint ventures and enter into licensing agreements which will take advantage of the Company's trademarks and utilize the Company's logistical and sourcing advantages. 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 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 itself 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" refers 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. COMPANY PRODUCTS The Company directly and through subsidiaries designs, sources, imports and markets a variety of television and other video products, microwave ovens, audio and home theater 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:
VIDEO PRODUCTS AUDIO PRODUCTS OTHER Color televisions Shelf systems Home theater Black and white CD stereo systems Microwave ovens specialty televisions Color specialty Portable audio, televisions cassette and CD systems Color TV/VCR Personal audio, combination units cassette and CD systems Video cassette Digital clock recorders radios Specialty video cassette players
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 15% in 1996 and are expected to increase another 7% in 1997. Emerson entered this market segment with two new products during the fiscal year ended March 31, 1996 ("Fiscal 1996") and is introducing another product in the fiscal year ending March 31, 1998 ("Fiscal 1998"). The new product is CinemaSurround (TM), a new concept in Home Theater Technology which uses a sophisticated patent pending 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 new customers, (ii) the development and sale of 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, companies in similar or complimentary businesses. As part of its efforts to expand through strategic mergers and acquisitions, the Company acquired 27% of the outstanding common stock of Sport Supply Group, Inc. ("SSG"), a New York Stock Exchange listed company, in December 1996. The Company also purchased five year warrants (the "SSG Warrants") to acquire an additional 1,000,000 shares of common stock at an exercise price of $7.50 per share, subject to standard anti-dilution adjustments. Assuming the exercise of all the SSG Warrants, the Company would beneficially own approximately 35% of SSG's outstanding common stock. As part of the securities acquisition, SSG appointed the Company's designees to become the majority of the members of its Board of Directors and certain of the Company's management is directly involved in SSG's day-to-day operations. Subsequent to such acquisition, SSG's stockholders elected Emerson's nominees as a majority of the members of its Board of Directors. In addition, the Company arranged for foreign trade credit financing of $2 million for the benefit of SSG. SSG is the largest direct mail distributor of sporting goods equipment and supplies in the United States. SSG sells its products at margins significantly higher than the average of Emerson's core business and to an institutional market which does not require the significant after-market servicing costs typical of Emerson's core business. The investment allows Emerson to diversify from its core business of consumer electronics distribution to another distribution business that offers what management believes to be significant growth potential. Emerson should also benefit by several cost sharing opportunities including sharing the compensation costs of senior management. SSG benefited from the investment by gaining the liquidity needed to cure its then-existing loan default with its senior lenders and amended its secured credit facility on more favorable terms. Also, SSG now possesses the capital necessary to take advantage of opportunities to increase its business in the institutional sporting goods market both in the U.S. and internationally and to continue marketing its products showcased at the 1996 Olympic games. The Company believes that the Emerson and G-Clef trademark is recognized on a world-wide basis. A principal component of the Company's growth strategy is to utilize this 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, partnerships and joint ventures. See "Business-Licensing and Related Activities." SALES AND DISTRIBUTION The Company has an integrated system to coordinate the purchasing, sales and distribution segments 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. All merchandise received by Emerson is automatically updated 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. The Company also makes available to its customers (through foreign subsidiaries) a direct import program, pursuant to which products are imported directly by the Company's customers. In the fiscal year ended March 31, 1997 ("Fiscal 1997") and Fiscal 1996, products representing approximately 49% and 44% of net revenues, respectively, were imported directly from manufacturers to the Company's customers. The Company intends to increase this percentage to approximately 80% in Fiscal 1998. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." If the Company experiences a decline in sales effected through direct imports and a corresponding increase in domestic sales, its working capital and inventory requirements will be incrementally affected. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." DOMESTIC MARKETING In the United States, the Company markets its products primarily through mass merchandisers and discount retailers. Wal-Mart Stores, Inc. ("Wal-Mart" or the "Customer") accounted for approximately 36% and 18%, and Target Stores, Inc., accounted for approximately 13% and 16% of the Company's net revenues in Fiscal 1997 and Fiscal 1996, respectively. Net revenues from Wal-Mart in Fiscal 1997 and 1996 exclude sales of certain video products which are subject to a license/supply arrangement, which became effective as of March 31, 1995. The Company reports the royalty revenues attributable to such sales, in lieu of reporting the full dollar value of such sales and associated costs. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." Net sales of these products to Wal-Mart accounted for approximately 47% of consolidated net revenues in Fiscal 1995. See "Business-Licensing and Related Activities." No other customer accounted for more than 10% of the Company's net revenues in either period. Approximately 43% and 58% of the Company's revenues in Fiscal 1997 and Fiscal 1996, respectively, were made through sales representative organizations which receive sales commissions and work closely with the Company's sales personnel. The sales representative organizations sell, in addition to the Company's products, allied, 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% and 19% of the Company's net revenues were made in Fiscal 1997 and Fiscal 1996, respectively, and one other through which 14% of the Company's net revenues were made in Fiscal 1996. No other sales representative organization accounted for more than 10% of the Company's net revenues in either period. The remainder of the Company's sales are made to retail customers serviced principally by the Company's sales personnel. The Company has three sales professionals based in the United States. The domestic sales force is based in the Company's New Jersey corporate headquarters, and in a regional office located in Missouri. FOREIGN MARKETING While the major portion of the Company's marketing efforts are directed toward the United States, approximately 4% and 5% of the Company's net revenues in Fiscal 1997 and Fiscal 1996, respectively, were made to foreign customers in Canada, Central and South America, Spain and the Middle East. See Note M of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition." LICENSING AND RELATED ACTIVITIES In February 1997, the Company executed five-year license/supply agreements, subject to renewals, 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 to be sold in those markets and the provision of 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. Cargil assumes all costs and expenses associated with the purchasing, marketing and after-sales support of such products. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." Subsequent to the end of Fiscal 1997, Emerson executed a four-year agreement with Daewoo Electronics Co. Ltd. and its U.S. affiliate (collectively, "Daewoo"). This agreement provides that, subject to existing agreements relating to sales to the Customer, Daewoo will manufacture and sell television and video products bearing the Emerson and G-Clef trademark to all customers in the U.S. market. Daewoo will also be responsible for, and assume all risks associated with, order processing, shipping, credit and collections, inventory, returns and after- sale services. The Company will arrange sales and provide marketing services and receive a commission for such services. Sales to the Customer are currently subject to a license/supply agreement with one of the Company's former suppliers and certain of its affiliates (collectively, the "Supplier"), as more fully described below. Additionally, in June 1997, the Company entered into a non-exclusive license agreement with World Wide One, a Hong Kong corporation, for use of the Emerson and G-Clef trademark in connection with the sale of certain consumer electronics products and other products to Makro International Far East Ltd. for their exclusive sale in in China, Indonesia, Malaysia, Philippines, South Korea, Taiwan and Thailand. The term is initially for a six month trial period at which time the agreement will either be terminated or continue for an additional twelve months. In addition, the Company will provide sourcing and inspection services for at least 50% of World Wide One's purchase requirements. World Wide One is required to meet certain minimum sales requirements as well as ensuring the establishment of adequate service centers or agents for after sales warranty services. In Fiscal 1995, the Company successfully concluded licensing agreements with (i) the Supplier for the sale of certain video products bearing the Emerson and G-Clef trademark to the Customer's locations in the United States and Canada, (ii) Jasco Products Co., Inc. ("Jasco"), one of the largest domestic electronics accessory companies, for distribution of electronic accessories in the United States, and (iii) the Franklin Mint for distribution of classic Emerson Radio reproductions. The Company intends to pursue additional licensing opportunities and believes that such licensing activities has had and will continue to have a positive impact on operating results by generating royalty income with minimal costs, if any, and without the necessity of utilizing working capital or accepting customer returns. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." 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 the Company's suppliers. The Company's engineers determine the detailed cosmetic and option specifications for new products, which typically incorporate commercially available electronic parts to be assembled according to the Company's designs. 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 needs of the local market, particularly in the case of international distribution, where products are generally introduced on a country-by-country basis. During Fiscal 1997 and Fiscal 1996, approximately 100% and 93%, respectively, of the cost value of the Company's purchases consisted of imported finished goods. Daewoo and Imarflex, Mfg. Co., Ltd. supplied approximately 22% and 16%, respectively, of the Company's total purchases in Fiscal 1997 and approximately 21% and 14%, respectively in Fiscal 1996. Additionally, Orient Power Electronics Limited supplied approximately 22% of the Company's total purchases in Fiscal 1997 and Kong Wah, the Supplier and Musical Electronics Limited supplied approximately 17%, 16% and 12%, respectively, of the Company's total purchases in Fiscal 1996. No other supplier accounted for more than 10% of the Company's total purchases in Fiscal 1997 or Fiscal 1996. Except as to the Supplier, the Company considers its relationships with its suppliers to be satisfactory and believes that, barring any unusual shortages or economic conditions, it could develop, and has developed, alternative sources for the products it currently purchases. Except for the agreement with Daewoo described above (See "Business-Licensing and Related Activities"), the Company does not have a contractual agreement with any of its suppliers for product purchases and no assurance can be given that certain brief shortages of product would not result if the Company were 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 The Company offers its United States consumers limited warranties comparable to those offered to consumers by its competitors and accepts returns from its customers in accordance with customary industry practices. RETURNED PRODUCTS The Company's customers return product to the Company for a variety of reasons, including liberal retailer return policies, damage to goods in transit and occasional cosmetic imperfections and mechanical failure. Effective April 1, 1994, the Company formed a partnership ("Partnership") with Hopper Radio of Florida, Inc. ("Hopper"). The Company and Hopper each own a 50% interest in the Partnership. The Partnership was formed to purchase (i) all returned consumer electronics products in the United States from the Company, refurbish them, if feasible, and sell them refurbished or "As-Is" on a worldwide basis in all countries where the Company has trademark rights, and (ii) new consumer electronics products from manufacturers sourced through a subsidiary of the Company or through third parties, if such new products could be obtained on more favorable prices and terms, for sale exclusively in Mexico and Central and South America. The Partnership, during its existence, enabled the Company to control the costs associated with product returns by providing a stable selling price for returned products and increased inventory turnover by utilizing the distribution network of Hopper to sell products. Effective January 1, 1997, the Company and Hopper mutually agreed to dissolve the Partnership and wind down its operations. The partners have elected to extend such wind down to facilitate a more orderly liquidation of the Partnership. The Company has executed an agreement with Hi Quality International (U.S.A.) Inc. ("Hi Quality") to replace the Partnership as an outlet for the Company's returned products. Hi Quality will purchase all returned consumer electronics products in the United States, that are not subject to the return to vendor agreements discussed below, from the Company, refurbish them, if feasible, and sell them refurbished or "As-Is" in the United States, Mexico and Canada. 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 agreements permit the Company to return defective- product returns to the supplier and to receive in exchange an "A" quality 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 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, 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 Cargil, Daewoo, World Wide One, the Supplier, Jasco and the Franklin Mint on a limited basis. See "Business - Licensing and Related Activities." COMPETITION The market segment of the consumer electronics industry in which the Company competes generates approximately $16 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, many of which are much larger and have greater financial resources than the Company. Emerson's major competitors are foreign-based manufacturers and distributors. The Company competes primarily on the basis of its products' reliability, quality, price and design, the Emerson and G-Clef trademark and 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 for its products in the quarters of each year ending September 30 and December 31. Accordingly, to accommodate such increased demand, the Company generally is required to place seasonally higher orders with its vendors during the quarters ending June 30 and September 30, thereby affecting 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 on March 31 and June 30, which adversely affects the Company's collection activities during such periods, also affecting its liquidity. 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 July 10, 1997, the Company had approximately 103 employees. The Company considers its labor relations to be generally satisfactory. ITEM 2. PROPERTIES The Company, directly and through its subsidiaries, leases warehouse and office space in New Jersey, Missouri, Canada, and the Far East under leases expiring at various times through calendar 1998, at minimum aggregate rentals, net of sublease income, as follows: FISCAL YEAR ENDING MARCH 31, (IN THOUSANDS) 1998 $1,231 1999 328 $1,559
In the past several years, the Company has closed substantially all of its leased or owned warehouse facilities in favor of utilizing 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. Such amounts are not included in the above table. The Company does not presently own any real property. In addition, the Company has subleased all of its Canadian office space and 12% of its New Jersey corporate headquarters. ITEM 3. LEGAL PROCEEDINGS BANKRUPTCY CLAIMS The Company is presently contesting claims submitted by several creditors in its reorganization under Chapter 11 of the Federal Bankruptcy Code. 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 approximately $93,563,457, of which $86,785,000 represents a claim for loss of 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, at 18.3% of the allowed claim. The Company believes the Bankruptcy Court will separately review the portion of the claim for lost profits from the substantially smaller claim for actual damages. The Company has objected to the claim, 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, on or about September 30, 1994, the Company instituted an adversary proceeding in the Bankruptcy Court asserting damages caused by Cineral and seeking declaratory relief and replevin. An adverse final ruling on the Cineral claim could have a material adverse effect on the Company, even though it would be limited to 18.3% of the final claim determined by a court of competent jurisdiction; however, in light of the foregoing, the Company believes the chances for recovery for lost profits are remote. TELETECH LITIGATION In December 1990, an action entitled Emerson Radio (Hong Kong) Limited (a wholly owned subsidiary of the Company) and Teletech (Hong Kong) Limited was commenced in the Supreme Court of Hong Kong High Court (the "Teletech Action") by Emerson Radio (Hong Kong) Limited ("Emerson (H.K.)") against Teletech (Hong Kong) Limited ("Teletech"). The Statement of Claim, filed and served in March 1991, alleges that Teletech breached its agreements to sell cordless telephones and telephone answering machines to Emerson (H.K.) and seeks damages of approximately $1,000,000. In March 1991, Teletech filed a counterclaim that essentially denies the allegations and alleges that Emerson (H.K.) breached its agreement to purchase cordless telephones and telephone answering machines arising from wrongful cancellation of placed orders. The counterclaim seeks damages of approximately $1,700,000. In May 1991, Emerson (H.K.) filed a reply to the counterclaim denying the allegations in the counterclaim. The case is presently dormant. This litigation was not affected by the bankruptcy proceedings. OTAKE LITIGATION On December 20, 1995, the Company filed suit in the United States District Court for the District of New Jersey against Orion Sales, Inc., Otake Trading Co. Ltd., Technos Development Limited, Shigemasa Otake, and John Richard Bond, Jr. (collectively, the "Otake Defendants") alleging breach of contract, breach of covenant of good faith and fair dealing, unfair competition, interference with prospective economic gain, and conspiracy in connection with certain activities of the Otake Defendants under certain agreements between the Company and the Otake Defendants. On December 21, 1995, Orion Sales, Inc. and Orion Electric (America), Inc. filed suit against the Company in the United States District Court, Southern District of Indiana, Evansville Division, alleging various breaches of certain agreements by the Company, including breaches of the confidentiality provisions, certain payment breaches, breaches of provisions relating to product returns, and other alleged breaches of those agreements, and seeking damages in the amount of $2,452,656, together with interest thereon, attorneys' fees, and certain other costs. While the outcome of the New Jersey and Indiana actions are not certain at this time, the Company believes it has meritorious defenses against the claims made by the plaintiffs in the Indiana action. In any event, the Company believes the results of that litigation should not have a material adverse effect on the financial condition of the Company or on its operations. TAX MATTERS In June and October 1988, the Franchise Tax Board of the State of California issued Notices of Proposed Assessment to the Company proposing additional state income tax of approximately $501,000 in the aggregate, plus interest, for the fiscal years 1980, 1985 and 1986. In August and November 1988, the Company filed protests with the Franchise Tax Board taking exception to the Notices of Proposed Assessment. After disallowing the Company's protest, on July 24, 1992, the Franchise Tax Board issued a formal Notice of Action assessing a deficiency in the aggregate of approximately $664,000, which includes interest through July 24, 1992. On August 24, 1992, the Company filed an appeal with the California State Board of Equalization. The Franchise Tax Board filed a response on April 29, 1993, and the Company filed its reply on July 16, 1993. This matter was temporarily stayed during the Company's bankruptcy proceeding, until the Bankruptcy Court entered an Order of Abstention directing the parties to litigate in California. The proceeding in California is currently pending. On February 15, 1994, the Franchise Tax Board issued Notices of Proposed Assessment to the Company proposing additional state income tax of approximately $382,000 in the aggregate, plus interest, for the fiscal years 1987, 1988 and 1989. The Company filed its protest with the Franchise Tax Board on April 15, 1994, taking exception to the Notices of Proposed Settlement. Management believes that adequate amounts of tax reserves have been provided for any adjustments which may result from the above assessments and any possible additional adjustments for years not currently under examination. LITIGATION REGARDING CERTAIN OUTSTANDING COMMON STOCK Subsequent to confirmation of the Plan of Reorganization, litigation arose among the principal shareholders of Fidenas Investment Limited ("FIL"), the Company's largest shareholder prior to confirmation of the Plan of Reorganization, with respect to various business relations and transactions entered into among the shareholders, certain affiliates and their principals, including Geoffrey Jurick, the Company's Chairman, Chief Executive Officer and President, and Petra and Donald Stelling. Mr. Stelling was the former Chairman of the Company. Based on certain charges raised by the Stellings, the Swiss authorities commenced investigations and have questioned Mr. Jurick, Mr. Peter Bunger and Mr. Jerome Farnum, directors of the Company. In connection with the settlement discussed below, letters were sent to the Swiss authorities requesting the discontinuance of the criminal investigations of these individuals. While the investigation is still pending, none of Messrs. Jurick, Bunger or Farnum have been indicted by the Swiss Court. The Federal Banking Commission of Switzerland has issued a decree purporting to determine that certain entities affiliated with Messrs. Jurick and Farnum are subject to Swiss banking laws and have engaged in banking activities without a license. On June 11, 1996, Petra Stelling and certain other creditors of Mr. Jurick and entities affiliated to him (which are the principal stockholders of the Company), (collectively, the "Creditors"), Mr. Jurick, the Company (together with the Creditors, the "Lead Parties"), and such principal stockholders signed a Stipulation of Settlement and Order (the "Settlement Agreement") providing for a settlement of all litigation among them on a global basis. Under the Settlement Agreement, Mr. Jurick and Fidenas International Limited L.L.C. have agreed to pay the Creditors the aggregate sum of $49.5 million (the "Settlement Amount") and Mr. Jurick will be paid the sum of $3.5 million. Such payments are contemplated to be solely from the proceeds of the sale of the 29,152,542 shares of Emerson's Common Stock (the "Settlement Shares") owned by such principal stockholders. All of such shares have been deposited with and will remain in the custody of the United States District Court in Newark, New Jersey ("the Court"), to prevent defaults under the Company's borrowing facilities. No definite time has been provided for the sale of any shares or the full payment of the Settlement Amount. However, a Creditor may apply to the Court, on notice to all other Lead Parties, to terminate the Settlement Agreement, based on the totality of the circumstances, on the grounds that its goals and purposes are not reasonably likely to be realized. No assurance can be given that sufficient proceeds will be realized from the sale of such shares to satisfy in full the Creditors. The Creditors will be able to resort to consent judgments against Mr. Jurick and his affiliates if the Settlement Agreement is terminated. Such a termination would also likely result in a default under the Company's borrowing facilities. JENSEN LITIGATION On May 10, 1996, International Jensen Incorporated ("Jensen") filed an action in the United States District Court for the Northern District of Illinois, Eastern Division, against the Company and Eugene I. Davis, an officer of the Company, for violations of proxy solicitation rules and for breach of a confidentiality agreement with Jensen. On May 20, 1996, the Company filed a counterclaim in this action alleging that Jensen and its Chairman, Chief Executive Officer and President, Robert G. Shaw fraudulently induced the Company to enter into a confidentiality agreement and failed to negotiate with the Company in good faith. Subsequently, Recoton Corporation ("Recoton"), the successful bidder in acquiring Jensen, filed an action in the same Court against Emerson. In June 1997, Emerson, Mr. Davis, Jensen, Recoton, and certain other related parties entered into a settlement agreement settling all disputes among them and releasing each other from all liability in connection with the subject matter of these actions on terms Emerson believes to be beneficial to it. OTHER LITIGATION 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 No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended March 31, 1997. 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 1996 HIGH LOW First Quarter $3-1/8 $2-1/4 Second Quarter 3-3/4 2-1/4 Third Quarter 3 1-3/8 Fourth Quarter 2-7/8 1-3/4 FISCAL 1997 HIGH LOW First Quarter $3 $2 Second Quarer 3 2 Third Quarter 2-1/4 1-1/8 Fourth Quarter 1-7/8 7/8
The Series A Preferred Stock and Warrants outstanding are freely tradable; however, there is no established trading market for either security. (b) Holders At July 10, 1997, there were approximately 465 stockholders of record of the Company's Common Stock, and 19 holders of record of the Series A Preferred Stock and 12 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 $469,000 of dividends of the Company's Series A Preferred Stock. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company for the years ended March 31, 1997, 1996, 1995, 1994 and 1993. 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 YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1993 1994 1995 1996 1997 (In thousands, except per share data) SUMMARY OF OPERATIONS: Net Revenues(1) $741,357 $487,390 $654,671 $245,667 $178,708 Net Earnings (Loss)(2): Before Extraordinary $(56,000) $(73,654) $ 7,375 $(13,389) $(23,968) Gain Extraordinary Gain 129,155 $(56,000) $ 55,501 $ 7,375 $(13,389) $(23,968) BALANCE SHEET DATA AT PERIOD END: Total Assets $194,510 $119,021 $113,969 $ 96,576 $58,768 Current Liabilities (3) 249,307 76,083 59,782 35,008 21,660 Long-Term Debt (3) 151 227 214 20,886 21,079 Shareholders' Equity (Deficit) (57,895) 42,617 53,651 40,382 16,029 Working Capital (Deficit) (89,949) 32,248 42,598 48,434 13,258 Current Ratio 0.6 to 1 1.4 to 1 1.7 to 1 2.4 to 1 1.6 to 1 PER COMMON SHARE: Net Earnings (Loss) Per Common Share (2) (4): Before Extraordinary Gain $(1.47) $(1.93) $ 0.16 $(0.35) $(0.61) Extraordinary Gain 3.38 $(1.47) $ 1.45 $ 0.16 $(0.35) $(0.61) Common Shareholders' Equity (Deficit) per Common Share (5) $(1.52) $ 0.98 $ 1.08 $ 0.75 $ 0.15 Weighted Average Number of Common and Common Equivalent Shares Outstanding 38,179 38,191 46,571 40,253 40,292
______________________________ (1) The decline in net direct revenues for Fiscal 1997 and 1996 was due primarily to the implementation of the Agreements signed with the Supplier, effective March 31, 1995. Net Revenues for Fiscal 1995 included $340,465,000 of sales of video products now covered by the arrangement with the Supplier. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." (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. The results of operations for the Fiscal 1993 include restructuring and other nonrecurring charges aggregating $35,002,000. These charges represent the cost of discontinuing its personal computer business, professional fees and other expenses related to the Company's financial restructuring, the up-front costs and writedowns of certain assets associated with implementing long-term cost reduction programs and costs related to the proxy contest settled in June 1992. (3) The aggregate outstanding principal balance of the Company's senior notes has been classified as current as of March 31, 1993. See Note B of Notes to Consolidated Financial Statements. (4) Net earnings (loss) per common share for Fiscal 1993 and Fiscal 1994 are based on the weighted average number of old common shares outstanding during each period. Net earnings per common share for Fiscal 1995 is based on the weighted average number of shares of new Common Stock and related common stock equivalents outstanding during the year. Common Stock equivalents include 9,081,000 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 on a quarterly basis. 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. Net loss per common share for Fiscal 1996 and Fiscal 1997 are based on the net loss and deduction of preferred stock dividend requirements (resulting in a loss attributable to common stockholders) and the weighted average of new Common Stock outstanding during each fiscal year. The net loss per share does not include common stock equivalents assumed outstanding since they are anti-dilutive. (5) Calculated based on common shareholders' equity (deficit) divided by actual shares of Common Stock outstanding. 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 In December 1996, the Company purchased from SSG 1,600,000 newly-issued shares of common stock (the "SSG Stock") for aggregate consideration of $11.5 million, or approximately $7.19 per share. In addition, the Company purchased, for aggregate consideration of $500,000, five year warrants to acquire an additional 1,000,000 shares of SSG Stock at an exercise price of $7.50 per share, subject to standard anti-dilution adjustments. Prior to such purchase, the Company beneficially owned 669,500 shares or approximately 9.9% of SSG's outstanding common stock which it had purchased for $4,228,000 in open market purchases. Following the stock acquisition, the Company owns 2,269,500 shares or approximately 27% of SSG's outstanding common stock. Assuming the exercise of all the SSG Warrants, the Company would beneficially own approximately 35% of the outstanding shares of SSG Stock. As part of the securities acquisition, SSG appointed the Company's designees to become the majority of the members of its Board of Directors and certain of the Company's management is directly involved in SSG's day-to-day operations. Subsequent to such acquisition, SSG's stockholders elected Emerson's nominees as a majority of the members of its Board of Directors. In addition, the Company arranged for foreign trade credit financing of $2 million for the benefit of SSG. The $12 million purchase price paid by the Company was obtained from the Lender (as hereinafter defined), under the terms of its existing credit facility, and in accordance with the terms of the consent obtained from such Lender. Pursuant to a Pledge and Security Agreement dated December 10, 1996, the Company has pledged to the Lender the 1,600,000 shares of SSG Stock and the SSG Warrants acquired on December 10, 1996. SSG is the largest direct mail distributor of sporting goods equipment and supplies in the United States. SSG sells its products at margins significantly higher than the average of Emerson's core business and to an institutional market which does not require the significant after-market servicing costs typical of Emerson's core business. The investment allows Emerson to diversify from its core business of consumer electronics distribution to another distribution business which offers what management believes to be significant growth potential. Emerson should also benefit by several cost sharing opportunities including sharing the compensation costs of senior management. SSG benefited from the investment by gaining the liquidity needed to cure its then-existing loan default with its senior lenders and amended its secured credit facility on more favorable terms. Also, SSG now possesses the capital necessary to take advantage of opportunities to increase its business in the institutional sporting goods market both in the U.S. and internationally and to continue marketing its products showcased at the 1996 Olympic games. In February 1997, the Company executed five-year license/supply agreements, subject to renewals, with Cargil covering the Caribbean and Central and South American markets. The agreements provide for the license of the Emerson and G-Clef trademark for certain consumer electronics and other products and the provision of sourcing and inspection services. Under the terms of the agreements, the Company will receive minimum annual royalties through the life of the agreements and will receive a separate fee for sourcing and inspection services. Cargil assumes all costs and expenses associated with the purchasing, marketing and after sales support of such products. The Company believes that this transaction will have a positive impact on operating results by generating royalty and servicing revenues with minimal costs while limiting its working capital risks. Subsequent to the end of Fiscal 1997, Emerson executed a four-year agreement with Daewoo. This agreement provides that, subject to existing agreements relating to sales to the Customer, Daewoo will manufacture and sell television and video products bearing the Emerson and G-Clef trademark to all customers in the U.S. market. Daewoo will also be responsible for and assume all risks associated with, order processing, shipping, credit and collections, inventory, returns and after-sale services. The Company will arrange sales and provide marketing services and receive a commission for such services. Sales to the Customer are currently subject to a license/supply agreement with the Supplier, as more fully described below. Additionally, in June 1997, the Company entered into a non-exclusive license agreement with World Wide One, a Hong Kong corporation, for use of the Emerson & G-Clef trademark in connection with the sale of certain consumer electronics products and other products for sale exclusively to Makro International Far East Ltd. in China, Indonesia, Malaysia, Philippines, South Korea, Taiwan and Thailand. The term is initially for a six month trial period at which time the agreement will either be terminated or continue for an additional twelve months. In addition, Emerson will provide sourcing and inspection services for at least 50% of World Wide One's purchase requirements. World Wide One is required to meet certain minimum sales requirements as well as ensuring the establishment of adequate service centers or agents for after sales warranty services for the goods. Effective March 31, 1995, the Company and the Supplier entered into the Agreements. The Company granted a license of certain trademarks to the Supplier for a three-year term. The license permits the Supplier to manufacture and sell certain video products under the Emerson and G-Clef trademark to the Customer, in the United States and Canada. As a result, the Company receives royalties attributable to such sales over the three-year term of the Agreements in lieu of reporting the full dollar value of such sales and associated costs. Net sales of these products to the Customer accounted for approximately 47% of consolidated net revenues for Fiscal 1995. The Company continues to supply other products to the Customer directly. Further, these agreements provided that the Supplier would supply the Company with certain video products for sale to other customers at preferred prices for a three-year term. Under the terms of these agreements, the Company receives non-refundable minimum annual royalties from the Supplier to be credited against royalties earned from sales of VCRs, VCPs, TV/VCR combination units, and color televisions to the Customer. In addition, effective August 1, 1995, the Supplier assumed responsibility for returns and after-sale and warranty services on all video products manufactured by the Supplier and sold to the Customer, including video products sold by the Company prior to August 1, 1995. As a result, the impact of sales returns on the Company's operating results have been significantly reduced, effective with the quarter ended September 30, 1995. The Company has reported lower net direct revenues in Fiscal 1997 and Fiscal 1996 as a result of these agreements, but its net operating results for such years have not been impacted negatively. The Company has realized a more stable cash flow, as well as reduced short-term borrowings necessary to finance accounts receivable and inventory and has thereby reduced interest costs. The Company reported a significant decline in its net direct sales for Fiscal 1997 and 1996 as compared to Fiscal 1995 primarily due to the licensed video sales. However, the Company's sales 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 1998 to be lower than the first two quarters of Fiscal 1997 due to the continuing weak retail climate and the increased level of price competition in most product categories. RESULTS OF OPERATIONS - FISCAL 1997 COMPARED WITH FISCAL 1996 Consolidated net revenues for Fiscal 1997 decreased $66,959,000 (or 27%) as compared to Fiscal 1996. The decrease resulted from decreases in unit sales of video cassette recorders, televisions, television/video cassette recorder combination units and audio products due to higher retail stock levels, increased price competition in these product categories, weak consumer demand, a soft retail market and closure of its Canadian office. This was partially offset by increased sales of microwave ovens attributable to a broader product line, larger size units and increased model selections by customers, and by sales of home theater and car audio products which were not introduced until the second and third quarters of Fiscal 1996. Excluding the Company's video products, the Company's U.S. gross sales increased by approximately 13% for Fiscal 1997. Revenues recorded from the licensing of the Emerson and G-Clef trademark were $5,040,000 in Fiscal 1997 as compared to $4,409,000 for Fiscal 1996. The increase in royalty income is primarily due to the execution of the Cargil license agreement in February 1997, partially offset by lower aggregate sales reported by the licensees of other Emerson and G-Clef brand products. The Company's Canadian operations reported a decline of $5.7 million in net revenues for Fiscal 1997 due to declines in unit volume and sales prices resulting from a weak Canadian retail economy and the closure of the Company's local office and Company-operated distribution operations in favor of an independent distributor. Cost of sales, as a percentage of consolidated net revenues, was 97% in Fiscal 1997 as compared to 94% in Fiscal 1996. Gross profit margins in Fiscal 1997 were unfavorably impacted by lower sales prices, a higher proportion of close-out sales, the allocation of reduced fixed costs over a lower revenue base in Fiscal 1997 and the recognition of income relating to reduced reserve requirements for sales returns in Fiscal 1996. However, gross profit margins were favorably impacted by the introduction of higher margin products --home theater and car audio products, and by a reduction in the costs associated with product returns related to the Company's agreements with a majority of its suppliers to return defective products and receive in exchange an "A" quality unit. The Company's margins continue to be impacted by the pricing category of the consumer electronics market in which the Company competes. The Company's products are generally placed in the low-to-medium priced category of the market. These categories tend to be the most competitive and generate the lowest profits. The Company believes that the combination of (i) the new television and video arrangement with Daewoo, (ii) the license agreement with Cargil, and (iii) the introduction of the new CinemaSurround(TM) product will all have a favorable impact on the Company's gross profit margins. The Company intends to promote its direct import programs to reduce its inventory levels and working capital risks thereby reducing its inventory overhead costs. In addition, the Company is focusing on its higher margin products and is reviewing new product categories which can generate higher margins than its current business, either through license arrangements, acquisitions, joint ventures or on its own. The Company also plans on expanding its sales and distribution channels into the Central and Southeast Asia markets. Other operating costs and expenses declined $1,724,000 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") as a percentage of net revenues were 11% in Fiscal 1997 as compared to 8% in Fiscal 1996. The increase in S,G&A as a percentage of net revenues is due primarily to the allocation of S,G&A costs over a lower sales base. In absolute terms, S,G&A decreased by $715,000 in Fiscal 1997 as compared to Fiscal 1996. The decrease was primarily attributable to a reduction in fixed costs and compensation expense relating to the Company's continuing cost reduction program in both the U.S. and 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. The Company's exposure to foreign currency fluctuations, primarily in Canada and Spain, resulted in the recognition of net foreign currency exchange losses aggregating $57,000 in Fiscal 1997 as compared to net foreign currency exchange gains aggregating $508,000 in Fiscal 1996. The Company has reduced its exposure to foreign currency fluctuations by conducting its Canadian and Spanish business in U.S. dollars. Interest expense increased $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. The Company recorded restructuring and other nonrecurring charges of $2,972,000 in Fiscal 1997. The Company recognized $1,065,000 of restructuring charges relating to the closure of the Company's local Canadian office and distribution operations in favor of an independent distributor and the downsizing of the Company's U.S. operations. The charges include costs for employee severance, asset write-downs, and facility and equipment lease costs. Additionally, the Company recognized $1,907,000 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. As a result of the foregoing factors, the Company incurred a net loss of $23,968,000 in Fiscal 1997 as compared to a net loss of $13,389,000 in Fiscal 1996. RESULTS OF OPERATIONS - FISCAL 1996 COMPARED WITH FISCAL 1995 Consolidated net revenues for Fiscal 1996 decreased $409,004,000 (or 62%) as compared to Fiscal 1995. The effects of the agreements with the Supplier described above accounted for a substantial portion of the decrease in revenues, and sales to the Customer were reduced to 18% of consolidated net revenues in Fiscal 1996 as compared to 53% in Fiscal 1995. Royalty income recognized by the Company from these sales was $4,442,000 in Fiscal 1996. In addition, sales to other customers for Fiscal 1996 decreased as a result of lower unit sales of televisions and television/video cassette recorder combination units due to increased price competition in these product categories. The Company's Canadian operations reported a decline of $17.8 million in sales for Fiscal 1996 due to declines in unit volume and sales prices due to a weak Canadian retail economy and the bankruptcy of two key customers in Fiscal 1995. The Company's European sales decreased $16.7 million in Fiscal 1996 due to the Company's discontinuance and wind-down of its Spanish branch and subsequent assignment, to an independent distributor, of the rights to sell Emerson Radio brand product in Spain. Cost of sales, as a percentage of consolidated revenues, was 94% in Fiscal 1996 as compared to 92% in Fiscal 1995. Gross profit margins in Fiscal 1996 were lower on a comparative basis due primarily to the recognition of large purchase discounts in Fiscal 1995 and the recognition of a loss experienced by the Company's 50%-owned joint venture which sells product returns in Fiscal 1996. Additionally, the Company experienced lower sales prices and the allocation of reduced fixed costs over a lower revenue base in Fiscal 1996 which were substantially offset by a change in product mix, the recognition of licensing income, reduced reserve requirements for sales returns and reduced fixed costs associated with the downsizing of the Company's foreign offices. The reduction in gross margins was unfavorably impacted by the accrual of $9.9 million in Fiscal 1995 of purchase discounts received from one of the Company's suppliers. Beginning in Fiscal 1996, the Company was not entitled to a purchase discount from this supplier due to a reduction in purchase volume associated with the Agreements. Due to the increase in the value of the Japanese Yen in 1995, and its impact on the cost of certain raw materials and subassemblies of the Company's suppliers, the Company absorbed certain price increases from its suppliers. Additionally, the Company was not able to recover such price increases from its customers due to increased price competition. As the value of the Yen has decreased in 1996, the Company has been able to negotiate lower prices from various sources of supply for certain audio and video products. Other operating costs and expenses declined $3,968,000 in Fiscal 1996 as compared to Fiscal 1995, primarily as a result of a decrease in (i) handling and freight charges associated with reduced customer returns and (ii) compensation and other expenses incurred to perform after-sale services as a result of the Company's downsizing program. S,G&A as a percentage of revenues were 8% in Fiscal 1996 as compared to 5% in Fiscal 1995. In absolute terms, S,G&A decreased by $11,550,000 in Fiscal 1996 as compared to Fiscal 1995. The decrease for Fiscal 1996 was primarily attributable to lower selling expenses due to lower revenues, a reduction in compensation and fixed overhead costs relating to the Company's downsizing program, lower provisions for accounts receivable reserves and higher professional fees incurred in Fiscal 1995 due to bankruptcy costs. The increase in S,G&A as a percentage of revenues is due primarily to the allocation of fixed S,G&A costs over a significantly lower revenue base. 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 $508,000 in Fiscal 1996 as compared to $354,000 in Fiscal 1995. Interest expense increased by $393,000 in Fiscal 1996 as compared to Fiscal 1995. The increase in interest expense was attributable to interest incurred on the Debentures issued in August 1995, partially offset by lower average borrowings on the Company's United States secured credit facility. As a result of the foregoing factors, the Company incurred a net loss of $13,389,000 in Fiscal 1996 as compared to net earnings of $7,375,000 in Fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $16,688,000 for Fiscal 1997. Cash was generally provided by the reduction in accounts receivables and inventories partially offset by a loss from operations. The decrease in accounts receivable is due primarily to the paydown of $9.8 million by the Company's 50% owned joint venture (E&H Partners). The decrease in inventory is primarily due to a more conservative purchasing strategy focusing on reducing inventory levels and associated carrying costs, and the closure of the Company's Canadian distribution operations. Net cash utilized by investing activities was $14,623,000 for Fiscal 1997. Cash was utilized primarily for the purchase of the Company's investment in SSG as noted above. Net cash utilized by financing activities was $15,558,000. Cash was utilized primarily to reduce the Company's borrowings under its U.S. line of credit facility through the collection of accounts receivable. 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 case was 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 an order confirming the Plan of Reorganization. The Plan of Reorganization provided for the implementation of a recapitalization of the Company. In accordance with the Plan of Reorganization, the Company's pre-petition liabilities (of approximately $233 million) were settled with the creditors in the aggregate, as follows: I. The Company's bank group (the "Bank Lenders") received $70 million in cash and the right to receive the initial $2 million of net proceeds from one of the Company's non-trade receivables. II. The institutional holders of the Company's senior notes (the "Noteholders") initially received $2,650,000 in cash and warrants to purchase 750,000 shares of common stock for a period of seven years at an exercise price of $1.00 per share, provided that the exercise price shall increase by 10% per year commencing in year four, and further received $1 million, payable $922,498 in cash from the initial public offering of common stock and $77,502 in common stock calculated on the basis of $1.00 per share. III. The Bank Lenders and Noteholders received their pro rata percentage of the following: A. $2,350,000 in cash (however $350,000 of this amount was distributable to the holders of allowed unsecured claims); B. 10,000 shares of Series A Preferred Stock with a face value of $10 million (estimated fair market value of approximately $9 million at March 31, 1994); C. 4,025,277 shares of common stock, including 691,944 shares issued in February 1995 pursuant to an anti-dilution provision; D. The net proceeds from the sale of the Company's Indiana land and building; and E. The net proceeds to be received from the non-trade receivables discussed in I. above in excess of $2 million. IV. Holders of allowed unsecured claims received a pro-rata portion of the $350,000 distribution and interest bearing promissory notes equal to 18.3% of the allowed claim amount, payable in two installments over 18 months. In accordance with the Plan of Reorganization, the Company completed an initial public offering of its Common Stock in September 1994 to shareholders of record as of March 31, 1994, excluding its largest pre-bankruptcy shareholder. The Company sold 6,149,993 shares of Common Stock for $1.00 per share resulting in proceeds to the Company, net of issuance costs, of $5,692,000. The Company maintains an asset-based revolving credit facility, as amended, with the Lender. The facility provides for revolving loans and letters of credit, subject to individual maximums which, in the aggregate, cannot exceed the lesser of $30 million or a "Borrowing Base" amount based on specified percentages of eligible accounts receivable and inventories. All credit extended under the line is secured by the U.S. and Canadian assets of the Company except for trademarks, which are subject to a negative pledge covenant. The interest rate on these borrowings is 1.25% above the stated prime rate. At March 31, 1997, the weighted average interest rate on the outstanding borrowings was 9.5%. Based on the "Borrowing Base" amount at March 31, 1997, $1.7 million of the credit facility was not utilized. The facility is also subject to an unused line fee of 0.25% per annum. Pursuant to the terms of this credit facility, as amended, 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 (as defined). The Company was required to maintain a minimum adjusted net worth, as defined, of $17,000,000 and a minimum working capital of $10,000,000 at March 31, 1997. Adjusted net worth at March 31, 1997 was $18,811,000. 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, 1997, there was $5,689,000 outstanding under the revolving loan facility, and $444,000 of 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 with the Customer. At March 31, 1997, the Company's Hong Kong subsidiary had pledged $1 million in certificates of deposit to this bank to assure the availability of these credit facilities. At March 31, 1997, there were $4,488,000 and $6,598,000, respectively, of letters of credit outstanding under these credit facilities. Since the emergence of the Company from bankruptcy, management believes that it has been able to compete more effectively in the highly competitive consumer electronics and microwave oven industries in the United States by combining innovative approaches to the Company's current product line such as value-added promotions, and augmenting its product line with higher margin complimentary products. The Company also intends to engage in the marketing of distribution, sourcing and other services to third parties similar to the sales and marketing arrangements to be provided to Daewoo and the sourcing and inspection services to be provided to Cargil. In addition, the Company intends to undertake efforts to expand the international distribution of its products into areas where management believes low to moderately priced, dependable consumer electronics and microwave oven products will have a broad appeal. The Company has in the past and intends in the future to pursue such plans either on its own or by forging new relationships, including license arrangements, partnerships, joint ventures or strategic mergers and acquisitions of, or controlling interests in, companies in similar or complimentary businesses. The Company successfully concluded several licensing agreements for existing core business products and new products, and intends to pursue additional licensing opportunities. The Company believes that such licensing activities will have a positive impact on net operating results by generating royalty income with minimal costs, if any, and without the necessity of utilizing working capital or accepting customer returns. 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 are dependent upon the Company achieving its business plan. During Fiscal 1997, the Company reduced inventory levels approximately 62% and executed cost-reduction programs in both its U.S. and foreign offices. The Company intends to further reduce inventory levels and shift a higher proportion of its sales to direct import thereby reducing its inventory and its needs for working capital. In Fiscal 1997, products representing approximately 49% of net revenues were directly imported from manufacturers to the Company's customers. The Company's business plan includes an increase in this percentage to approximately 80% in Fiscal 1998. This increase in the direct import portion of sales is critical in providing sufficient working capital to meet its sales objectives. If the Company does not obtain this objective, it may not have sufficient working capital to finance its sales plan. It may be necessary for the Company to margin or sell some of the SSG Stock to adequately finance the Company's operations. There can be no assurance that the Company will be able to successfully achieve its business plan in a time frame or manner which will permit the Company to fund current operations and other planned expenditures at current and expected sales volumes, if at all. Additionally, the Company is currently in arrears on $469,000 of dividends on the Company's Series A Preferred Stock. The preferred stock is convertible into common stock at any time during the period beginning on March 31, 1997 and ending on March 31, 2002 and at a price per share of common stock equal to 80% of the market value of a share of common stock on the date of conversion. The preferred stock dividend rate for Fiscal 1998 is 5.6%. The Company's liquidity is impacted by the seasonality of its business. The Company records the majority of its annual sales in the quarters ending September 30 and December 31. This requires the Company to open significantly higher amounts of letters of credit during the quarters ending June 30 and September 30, therefore significantly increasing the Company's working capital needs during these periods. Additionally, the Company receives the largest percentage of customer returns in the quarter ending March 31. The higher level of returns during this period adversely impacts the Company's collection activity during this period, and therefore its liquidity. The Company believes that the agreements with Daewoo and Cargil, as discussed above, and the arrangements it has implemented over the past twelve months concerning returned merchandise, should favorably impact the Company's cash flow over their respective terms. 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 operating losses reported in Fiscal 1997 and Fiscal 1996. Additionally, the Company believes that the SSG business offers significant growth potential. In its first full quarter under Emerson's management team, SSG reported record earnings and double digit sales growth as compared to the same period a year ago. The revolving credit facility with the Lender imposes financial covenants on the Company which could materially affect its liquidity in the future. The Company intends on renegotiating with the Lender to amend the U.S. revolving credit facility to ensure continued compliance with all covenants. Alternatively, the Company may seek replacement funding. Management believes that the execution of its business plan as well as 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. HONG KONG OPERATIONS A significant amount of the Company's activities are conducted through its Hong Kong subsidiary, and the Company's Chairman, Chief Executive Officer and President is resident in Hong Kong. Hong Kong, formerly a British administered territory, reverted to the sovereignty of The People's Republic of China on July 1, 1997. Accordingly, there is a risk that the Company's operations in Hong Kong may be interrupted or terminated. However, the Company cannot predict what impact, if any, the renewal of China's sovereignty will have on the Company, its business, or its results of operations. INFLATION AND FOREIGN CURRENCY Except as disclosed above, neither inflation nor currency fluctuations had a significant effect on the Company's results of operations during Fiscal 1997, Fiscal 1996 or Fiscal 1995. 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. However, the strength of the Japanese Yen in 1995 had raised the costs of certain raw materials and subassemblies of the Company's suppliers which were passed on to the Company in the form of price increases in Fiscal 1996. The Company was not able to recover such price increases from the selling price to its customers due to increased price competition. However, the Company has been able to negotiate lower prices from various sources of supply for certain audio products, commencing in the second half of Fiscal 1996 and for certain video products commencing in Fiscal 1997. FORWARD-LOOKING INFORMATION Certain statements in this annual report on Form 10-K under the captions "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this annual report and in future filings by the Company with the Securities and Exchange Commission, constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, among others, the following: product supply and demand; general economic and business conditions and condition of the retail consumer electronics market; price competition and competition from companies with greater resources; success of operating initiatives and new product introductions, including CinemaSurround(TM); operating costs including continuing the Company's cost reduction program and Company's return to vendor program; effects of foreign trade; effects of the reversion of Hong Kong to the sovereignty of the People's Republic of China; advertising and promotional efforts; brand awareness; the existence or absence of adverse publicity; success of the Company's acquisition strategy including results of SSG's operations; changes in business strategy or development plans; success of management's strategy to finance or refinance the Company's operations; quality of management; success of licensing arrangements; availability, use and terms of capital and compliance with debt covenants; business abilities and judgment of personnel; availability of qualified personnel; labor and employee benefit costs; changes in, or the failure to comply with, government regulations and other factors referenced in this annual report. 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 1997 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 1997 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 1997 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 1997 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 March 31, 1997, 1996 and 1995 F-2 Consolidated Balance Sheets at March 31, 1997 and 1996 F-3 Consolidated Statements of Changes in Shareholders' Equity for the years ended March 31, 1997, 1996 and 1995 F-4 Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995 F-5 Notes to Consolidated Financial Statements F-6 Schedule VIII -- 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 March 31, 1997. (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) Agreement, dated as of November 14, 1973, between National Union Electric Corporation ("NUE") and Emerson (incorporated by reference to Exhibit (10) (a) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (b) Trademark User Agreement, dated as of February 28, 1979, by and between NUE and Emerson (incorporated by reference to Exhibit (10) (b) of Emerson's Registration Statement on Form S-1, Registration No. 33- 53621, declared effective by the SEC on August 9, 1994). (10) (c) Agreement, dated July 2, 1984, between NUE and Emerson (incorporated by reference to Exhibit (10) (c) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (d) Agreement, dated September 15, 1988, between NUE and Emerson (incorporated by reference to Exhibit (10) (d) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (e) 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) (f) 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) (g) 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) (h) 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) (i) 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) (j) 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) (k) 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) (l) Emerson Radio Corp. Stock Compensation Program (incorporated by reference to Exhibit (10) (i) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (m) Employment Agreement between Emerson and Eugene I. Davis (incorporated by reference to Exhibit 6(a)(4) of Emerson's Quarterly Report on Form 10-Q for quarter ended June 30, 1992). (10) (n) Extension of Employment Agreement between Emerson and Eugene I. Davis dated April 16, 1997.* (10) (o) Employment Agreement between Emerson and Geoffrey P. Jurick (incorporated by reference to Exhibit 6(a)(6) of Emerson's Quarterly Report on Form 10-Q for quarter ended June 30, 1992). (10) (p) Employment Agreement between Emerson Radio (Hong Kong) Ltd. and Geoffrey P. Jurick (incorporated by reference to Exhibit 6(a)(6) of Emerson's Quarterly Report on Form 10-Q for quarter ended June 30, 1992). (10) (q) Employment Agreement between Emerson Radio International Ltd. (formerly Emerson Radio (B.V.I.), Ltd.) and Geoffrey P. Jurick (incorporated by reference to Exhibit 6(a)(6) of Emerson's Quarterly Report on Form 10-Q for quarter ended June 30, 1992). (10) (r) Extension of Employment Agreement between Emerson and Geoffrey P. Jurick dated April 16, 1997.* (10) (s) Lease Agreement dated as of March 26, 1993, by and between Hartz Mountain Parsippany and Emerson with respect to the premises located at Nine Entin Road, Parsippany, NJ (incorporated by reference to Exhibit (10) (ww) of Emerson's Annual Report on Form 10-K for the year ended December 31, 1992). (10) (t) Employment Agreement, dated April 1, 1994, between Emerson and John Walker (incorporated herein by reference to Exhibit (10)(ee) of Emerson's Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (u) Amendment No. 1 to Employment Agreement between Emerson and John P. Walker dated April 16, 1997.* (10) (v) Employment Agreement, dated January 29, 1996 between Emerson and Marino Andriani (incorporated herein by reference to Exhibit (10) (a) of Emerson's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). (10) (w) Partnership Agreement, dated April 1, 1994, between Emerson and Hopper Radio of Florida, Inc (incorporated by reference to Exhibit (10) (q) of Emerson's Annual Report on Form 10-K for the year ended March 31, 1995). (10) (x) Sales Agreement, dated April 1, 1994, between Emerson and E & H Partners (incorporated by reference to Exhibit (10) (r) of Emerson's Annual Report on Form 10-K for the year ended March 31, 1995). (10) (y) Agreement, dated as of April 24, 1996 by and among Emerson and E & H Partners relating to amendments of the Partnership Agreement dated April 1, 1994 and the Sales Agreement dated April 1, 1994 and the settlement of certain outstanding litigation. (10) (z) License Agreement, dated February 22, 1995, between Emerson and Otake Trading Co. Ltd. and certain affiliates ("Otake") (incorporated by reference to Exhibit 6(a)(1) of Emerson's Quarterly Report on Form 10- Q for quarter ended December 31, 1994). (10) (aa) Supply Agreement, dated February 22, 1995, between Emerson and Otake (incorporated by reference to Exhibit 6(a)(2) of Emerson's Quarterly Report on Form 10-Q for quarter ended December 31, 1994). (10) (ab) 1994 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit (10) (y) of Emerson's Annual Report on Form 10-K for the year ended March 31, 1995). (10) (ac) Consulting Agreement, dated as of December 8, 1995 between Emerson and First Cambridge Securities Corporation (incorporated by reference to Exhibit (10) (d) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995). (10) (ad) License Agreement, dated as of August 23, 1996 between Emerson and REP Investment Limited Liability Company (incorporated by reference to Exhibit (10) (d) of Emerson's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). (10) (ae) Distribution Agreement, dated as of September 11, 1996 between Emerson, Emerson Radio Canada Ltd. and AVS Technologies Inc. (incorporated by reference to Exhibit (10) (e) of Emerson's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). (10) (af) 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) (ag) 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) (ah) 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) (ai) 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) (aj) Supply and Inspection Agreement with Cargil International Corp. dated as of February 12, 1996 (incorporated by reference to Exhibit (10) (d) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996). (10) (ak) Agreement dated April 10, 1997 between Emerson and Daewoo Electronics Co., Ltd.* (10) (al) 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) (am) 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) (an) 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) (ao) 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) (ap) License Agreement dated as of June 16, 1997 by and between World Wide One Ltd. and Emerson.* (10) (aq) Agreement dated as of July 2, 1997 by and between Hi Quality International (U.S.A.) Inc. and Emerson.* (11) Computation of Primary Earnings Per Share.* (12) Computation of Ratio of Earnings (Loss) to Combined Fixed Charges and Preferred Stock Dividends.* (21) Subsidiaries of the Company as of March 31, 1997.* (27) Financial Data Schedule for year ended March 31, 1997.* ___________________ * 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 14, 1997 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 14, 1997 Geoffrey P. Jurick Chief Executive Officer and President /s/ Eugene I. Davis Vice Chairman and Director July 14, 1997 Eugene I. Davis /s/ John P. Walker Executive Vice President, July 14, 1997 John P. Walker Chief Financial Officer /s/ Robert H. Brown, Jr. Director July 14, 1997 Robert H. Brown, Jr. /s/ Peter G. Bunger Director July 14, 1997 Peter G. Bunger /s/ Jerome H. Farnum Director July 14, 1997 Jerome H. Farnum /s/ Raymond L. Steele Director July 14, 1997 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 March 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1997. 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 March 31, 1997 and 1996, and the consolidated results of its operations and cash flows for each of the three years in the period ended March 31, 1997, 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 11, 1997 EMERSON RADIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
YEARS ENDED MARCH 31, 1997 1996 1995 Net revenues $178,708 $245,667 $654,671 Costs and expenses: Cost of sales 174,184 231,455 604,329 Other operating costs and expenses 3,079 4,803 8,771 Selling, general and administrative expenses 18,782 19,497 31,047 Restructuring and other nonrecurring charges 2,972 - - 199,017 255,755 644,147 Operating profit (loss) (20,309) (10,088) 10,524 Interest expense 3,429 3,275 2,882 Earnings (loss) before income taxes (23,738) (13,363) 7,642 Provision for income taxes 230 26 267 Net earnings (loss) $(23,968) $(13,389) $7,375 Net earnings (loss) per common share $(0.61) $(0.35) $0.16 Weighted average number of common and common equivalent shares outstanding 40,292 40,253 46,571
The accompanying notes are an integral part of the consolidated financial statements. EMERSON RADIO CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
MARCH 31, 1997 1996 ASSETS Current Assets: Cash and cash equivalents $2,640 $16,133 Accounts receivable (less allowances of $6,001 and $6,139, respectively) 12,452 23,583 Inventories 13,329 35,292 Prepaid expenses and other current assets 6,497 8,434 Total current assets 34,918 83,442 Property and equipment, net 2,130 3,501 Investment in unconsolidated affiliate 16,033 1,872 Other assets 5,687 7,761 Total Assets $58,768 $96,576 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable $5,689 $21,151 Current maturities of long-term debt 85 173 Accounts payable and other current liabilities 13,053 10,391 Accrued sales returns 2,730 3,091 Income taxes payable 103 202 Total current liabilities 21,660 35,008 Long-term debt, less current maturities 20,856 20,886 Other non-current liabilities 223 300 Shareholders' Equity: Preferred shares -- 10,000,000 shares authorized, 10,000 shares issued and outstanding 9,000 9,000 Common shares -- $.01 par value, 75,000,000 shares authorized; 40,335,642 and 40,252,772 shares issued and outstanding, respectively 403 403 Capital in excess of par value 109,278 108,991 Accumulated deficit (102,843) (78,175) Cumulative translation adjustment 191 163 Total shareholders' equity 16,029 40,382 Total Liabilities and Shareholders' Equity $58,768 $96,576
The accompanying notes are an integral part of the consolidated financial statements. EMERSON RADIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except share data)
Commom Shares Issued Capital Cumu- in lative Pre- Number Excess Accumu- Trans- ferred of Par 0f lated lation Stock Shares Value Par Value Deficit Adjustment Balance-March 31, 1994 $9,000 33,333,333 $333 $103,427 $(70,761) $618 Issuance of common stock in public offering, net of expenses 6,149,993 62 5,630 Issuance of common stock to former creditors 769,446 8 (8) Payment to former creditors (922) Preferred stock dividends (700) Other (158) (253) Net earnings 7,375 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
The accompanying notes are an integral part of the consolidated financial statements. EMERSON RADIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended March 31, 1997 1996 1995 Cash Flows from Operating Activities: Net earnings (loss) ($23,968) $(13,389) $7,375 Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Depreciation and amortization 2,877 3,664 3,876 Restructuring and other nonrecurring charges 2,782 Asset valuation and loss reserves ( 752) (14,209) (2,268) Other 1,048 298 (969) Changes in assets and liabilities: Accounts receivable 11,230 17,391 (14,805) Inventories 20,871 (437) 11,032 Prepaid expenses and other current assets 1,767 3,231 (5,598) Other assets (896) (601) (605) Accounts payable and other current liabilities 1,827 (9,092) (18,633) Income taxes payable (98) (53) (379) Net cash provided (used) by operations 16,688 (13,197) (20,974) Cash Flows from Investing Activities: Investment in unconsolidated affiliate (14,480) 1,840 Additions to property and equipment (255) (1,666) (2,874) Redemption of certificates of deposit 100 945 8,455 Other 12 (477) 110 Net cash provided (used) by investing activities (14,623) 642 5,691 Cash Flows from Financing Activities: Net borrowings (repayments) under line of credit facility (15,462) (6,145) 7,256 Net proceeds from private placement of senior subordinated convertible debentures 19,208 Proceeds from issuances of common stock 5,692 Retirement of long-term debt (118) (298) (500) Payment to former creditors (922) Payment of preferred stock dividends (231) (700) (525) Payment of debt costs (237) Other 253 (160) (321) Net cash provided (used) by financing activities (15,558) 11,668 10,680 Net decrease in cash and cash equivalents (13,493) (887) (4,603) Cash and cash equivalents at beginning of year 16,133 17,020 21,623 Cash and cash equivalents at end of year $2,640 $16,133 $17,020
The accompanying notes are an integral part of the consolidated financial statements. EMERSON RADIO CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 NOTE A -- SIGNIFICANT ACCOUNTING POLICIES: (1) 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 50% ownership of a domestic joint venture and a 27% owned investment are accounted for by the equity method (see Notes D and N). Historical cost accounting was used to account for the plan of reorganization (the "Plan of Reorganization") (see Note B) since the transaction did not meet the criteria required for fresh-start reporting. (2) 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 differ from those estimates. (3) 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. (4) INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out) or market. (5) PROPERTY AND EQUIPMENT: Property and equipment, stated at cost, is being depreciated for financial accounting purposes on the straight-line method over its estimated useful life. 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. Upon the sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the accounts. Any resulting gains or losses are included in income. The cost of repairs and maintenance is charged to expense as incurred. (6) WARRANTY CLAIMS: The Company provides an accrual for future warranty costs when the product is sold. (7) NET EARNINGS (LOSS) PER SHARE: Net loss per common share for the years ended March 31, 1997 and 1996 are based on the net loss and deduction of preferred stock dividend requirements and the weighted average number of shares of common stock outstanding during each period. This calculation does not include common stock equivalents since they are anti-dilutive. Net earnings per common share for the year ended March 31, 1995 is based on the weighted average number of shares of common stock and common stock equivalents outstanding during the year. Common stock equivalents include shares issuable upon conversion of the Company's Series A Preferred Stock, exercise of stock options and warrants, and shares issued in the year ended March 31, 1995 primarily to satisfy an anti-dilution provision. The Series A Preferred Stock was first convertible into common stock beginning after March 31, 1997, and the number of shares of common stock issuable upon conversion will be dependent on the market value of the common stock at the time of conversion (See Note J(3)). No shares have been converted as of March 31, 1997. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("FAS 128"), which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock otions will be excluded. The impact of FAS 128 on the calculation of primary earnings per share is not expected to be material. (8) 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 loss of $79,000 and gains of $475,000 and $220,000 for the years ended March 31, 1997, 1996 and 1995, respectively. The Company does not enter into foreign currency exchange contracts to hedge its exposures related to foreign currency fluctuations. However, the Company is reducing its foreign currency exposure by conducting its European and Canadian businesses in U.S. dollars commencing in the fiscal year ending March 31, 1997. (9) RECLASSIFICATION: Certain amounts in the prior periods consolidated financial statements have been reclassified to conform to current periods presentation. NOTE B -- REORGANIZATION: 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 an order confirming the Plan of Reorganization. The Plan of Reorganization provided for the implementation of a recapitalization of the Company. In accordance with the Plan of Reorganization, the Company's pre-petition liabilities (of approximately $233 million) were settled with the creditors in the aggregate, as follows: I. The Company's bank group (the "Bank Lenders") received $70 million in cash and the right to receive the initial $2 million of net proceeds from one of the Company's non-trade receivables. II. The institutional holders of the Company's senior notes (the "Noteholders") initially received $2,650,000 in cash and warrants to purchase 750,000 shares of common stock for a period of seven years at an exercise price of $1.00 per share, provided that the exercise price shall increase by 10% per year commencing in year four, and further received $1 million, payable $922,498 in cash from the initial public offering of common stock (see Note J(5)) and $77,502 in common stock calculated on the basis of $1.00 per share. III. The Bank Lenders and Noteholders received their pro rata percentage of the following: A. $2,350,000 in cash (however $350,000 of this amount was distributable to the holders of allowed unsecured claims); B. 10,000 shares of Series A Preferred Stock with a face value of $10 million (estimated fair market value of approximately $9 million at March 31, 1994); C. 4,025,277 shares of common stock, including 691,944 shares issued in February 1995 pursuant to an anti-dilution provision; D. The net proceeds from the sale of the Company's Indiana land and building; and E. The net proceeds to be received from the non-trade receivables discussed in I. above in excess of $2 million. IV. Holders of allowed unsecured claims received a pro-rata portion of the $350,000 distribution and interest bearing promissory notes equal to 18.3% of the allowed claim amount, payable in two installments over 18 months (see Note G). Pursuant to the provisions of the Plan of Reorganization, as of March 31, 1994, the equity of the Company's shareholders, and the equity interest of holders of stock options and warrants were cancelled. Based on the settlement of the Chapter 11 proceedings, the Company recognized an extraordinary gain of $129.2 million from the extinguishment of debt. Additionally, the Company recognized a writedown of $12.9 million to estimated fair market value on the assets transferred for the benefit of the Bank Lenders and Noteholders. Pursuant to the Plan of Reorganization, and in consideration for $30 million, the reorganized Company issued 30 million shares of common stock, initially held by the following parties:
NUMBER OF SHARES Fidenas International Limited L.L.C. ("FIN") 16,400,000 Elision International, Inc. ("Elision") 1,600,000 GSE Multimedia Technologies Corporation ("GSE") 12,000,000
The Company's Chairman, Chief Executive Officer and President has a controlling beneficial ownership interest in each of the three entities listed above and, therefore holds an approximate 73% interest in the Company's outstanding common stock at March 31, 1997. Included above are 847,458 shares of common stock held by FIN, as nominee, as to which FIN and the Company's CEO, Mr. Geoffrey P. Jurick, disclaim beneficial ownership. In accordance with a Stipulation of Settlement and Order (the "Settlement Agreement") dated June 11, 1996, upon the effective date of the Settlement Agreement, Elision and GSE were to transfer all of their Emerson shares to FIN, to be registered in the name of FIN. See Note L. NOTE C -- INVENTORIES: Inventories are comprised primarily of finished goods. Spare parts inventories, net of reserves, aggregating $1,469,000 and $2,042,000 at March 31, 1997 and 1996, respectively, are included in "Prepaid expenses and other current assets." NOTE D -- INVESTMENT IN UNCONSOLIDATED AFFILIATE: On December 10, 1996, the Company purchased from Sport Supply Group, Inc. ("SSG") 1,600,000 shares of newly issued common stock, $.01 par value per share (the "SSG Stock"), for aggregate consideration of $11.5 million, or approximately $7.19 per share. In addition, the Company purchased, for an aggregate consideration of $500,000, five-year warrants (the "SSG Warrants") to acquire an additional 1,000,000 shares of SSG Stock at an exercise price of $7.50 per share, subject to standard anti-dilution adjustments, pursuant to a Warrant Agreement. Prior to such purchase, the Company beneficially owned approximately 9.9% of the outstanding shares of SSG Stock which it had purchased for $4,228,000 in open market transactions. Based upon the purchase of the SSG Stock as set forth above, the Company owns approximately 27% of the outstanding shares of the SSG Stock. If the Company exercises all of the SSG Warrants, it will beneficially own approximately 35% of the SSG Stock. In addition, the Company has arranged for foreign trade credit financing of $2 million for the benefit of SSG to supplement SSG's existing credit facilities. In connection with such purchase, SSG appointed the Company's designees to become the majority of the members of its Board of Directors and the Company's management is directly involved in SSG's day-to-day operations. In March 1997, SSG's stockholders elected Emerson's nominees as a majority of the members of its Board of Directors. The investment in and results of operations of SSG are accounted for by the equity method. SSG's fiscal year end is October 31; therefore, the Company's equity in earnings (losses) of SSG will be recorded on a two-month delay basis. The Company's investment in SSG includes goodwill of $3,973,000 and is being amortized on a straight line basis over 40 years. At March 31, 1997, the aggregate market value quoted on the New York Stock Exchange of Emerson's shares of SSG Stock was approximately $13,333,000. Summarized financial information derived from SSG's financial reports to the Securities and Exchange Commission was as follows (in thousands): (Unaudited) As of January 31, 1997 Current assets $39,850 Property, plant and equipment and other assets 36,748 Current liabilities 39,011 Long-term debt 324
(Unaudited) For the three months ended January 31, 1997 Net sales $14,580 Gross Profit 5,905 Loss from continuing operations (1,356) Loss from discontinued operations (2,574) Net loss (3,930)
NOTE E -- PROPERTY AND EQUIPMENT: Property and equipment is comprised of the following: MARCH 31, 1997 1996 (In thousands) Furniture and fixtures $ 4,021 $ 4,528 Molds and tooling - 1,281 Machinery and equipment 891 1,372 Leasehold improvements 739 742 5,651 7,923 Less accumulated depreciation and amortization 3,521 4,422 $ 2,130 $ 3,501
Depreciation and amortization of property and equipment amounted to $1,631,000, $2,800,000 and $3,267,000 for the years ended March 31, 1997, 1996 and 1995, respectively. NOTE F -- NOTES PAYABLE: Effective March 31, 1994, the Company entered into a Loan and Security Agreement, as amended, with a U.S. financial institution (the "Lender") providing for an asset-based revolving credit facility. The facility provides for revolving loans and letters of credit, subject to individual maximums and, in the aggregate, not to exceed the lesser of $30 million or a "Borrowing Base" amount based on specified percentages of eligible accounts receivable and inventories. All credit extended under the line of credit is secured by the U.S. and Canadian assets of the Company, except for trademarks which are subject to a negative pledge covenant. The interest rate on these borrowings is 1.25% above the stated prime rate. At March 31, 1997 and 1996, the interest rate on the outstanding borrowings was 9.5%. The facility is also subject to an unused line fee of 0.25% per annum. Pursuant to the Loan and Security Agreement, as amended, 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 (as defined). The Company was required to maintain a minimum adjusted net worth, as defined, of $17,000,000 and a minimum working capital of $10,000,000 at March 31, 1997. Adjusted net worth at March 31, 1997 was $18,811,000. 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, 1997, there was $5,689,000 outstanding under the revolving loan facility and approximately $444,000 of outstanding letters of credit issued for inventory purchases. The fair market value of these notes payable is estimated to approximate their carrying amount. Cash paid for interest was $3,436,000, $3,207,000 and $3,371,000 for the years ended March 31, 1997, 1996 and 1995, respectively. NOTE G -- LONG-TERM DEBT: Long-term debt consists of the following: MARCH 31, 1997 1996 (In thousands) 8 1/2% Senior Subordinated Convertible Debentures Due 2002 $20,750 $20,750 Notes payable to unsecured creditors 3 79 Equipment notes and other 188 230 20,941 21,059 Less current obligations 85 173 $20,856 $20,886
The 8 1/2% Senior Subordinated Convertible Debentures Due 2002 (the "Debentures") were issued in August 1995. The Debentures bear interest at the rate of 8 1/2% per annum, payable quarterly on the 15th of March, June, September and December, in each year. The Debentures 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. The Debentures are redeemable, at the option of the Company, three years from the date of issuance, 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. Pursuant to the Plan of Reorganization, the holders of allowed unsecured claims received interest bearing promissory notes equal to 18.3% of the claim amount. The notes were due in two installments: 35% of the outstanding principal was due 12 months from the date of issuance, and the remaining balance was due 18 months from the date of issuance. NOTE H -- INCOME TAXES: The income tax provision consists of the following: YEARS ENDED MARCH 31, 1997 1996 1995 (In thousands) Current: Federal $ 0 $ (39) $ 40 Foreign, state and other 230 65 227 $230 $ 26 $267
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 are analyzed below: YEARS ENDED MARCH 31, 1997 1996 1995 (In thousands) Statutory provision (benefit) $(7,561) $(4,543) $2,598 Utilization of net operating loss carryforwards --- --- (632) U.S. and foreign net operating losses without tax benefit 7,588 4,493 1,675 Foreign income subject to foreign tax, not subject to U.S. tax --- --- (785) Tax recognition of prior year book deductions --- --- (888) Rate differential on foreign income (loss) 248 96 (1,959) Nondeductible bankruptcy expenses 6 24 137 Other, net (51) (44) 121 Total income tax provision $ 230 $ 26 $ 267
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," under which the liability method (rather than the deferred method) is used in accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Significant components of the Company's deferred tax assets and liabilities are as follows: MARCH 31, 1997 1996 (In thousands) Deferred tax assets: Accounts receivable reserves $ 3,372 $2,995 Inventory reserves 2,553 2,259 Net operating loss carryforwards 24,978 18,250 Other 227 445 Total deferred tax assets 31,130 23,949 Valuation allowance for deferred tax assets (30,921) (23,287) Net deferred tax assets 209 662 Deferred tax liabilities 209 (662) Net deferred taxes $ -- $ --
Total deferred tax assets of the Company at March 31, 1997 and 1996 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 $125,000, $151,000 and $725,000 for the years ended March 31, 1997, 1996 and 1995, respectively. Losses before taxes of foreign subsidiaries was $2,512,000 and $6,233,000 for the years ended March 31, 1997 and 1996, respectively. Income before taxes of foreign subsidiaries was $3,786,000 for the year ended March 31, 1995. 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. Unremitted earnings of foreign subsidiaries which have been, or are intended to be permanently reinvested (and for which no federal income tax has been provided) aggregated $338,000, $1,034,000 and $3,396,000 at March 31, 1997, 1996 and 1995, respectively. As of March 31, 1996, the Company has a net operating loss carryforward of approximately $137,600,000, of which $33,074,000, $13,385,000, $50,193,000, $21,159,000 and $19,789,000 will expire in 2006, 2007, 2009, 2011 and 2012, respectively. The utilization of these net operating losses will be limited based on the effects of the Plan of Reorganization consummated on March 31, 1994. Pursuant to the Plan of Reorganization, the Bank Lenders, the Noteholders, FIN, Elision and GSE initially received 100% of the common stock. As a result, an ownership change occurred with respect to the Company, and subjected the Company's net operating losses and foreign tax credit carryforwards to the limitation provided for 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 will be approximately $2.2 million. NOTE I -- COMMITMENTS AND CONTINGENCIES: (1) LEASES: The Company leases warehouse and office space at minimum aggregate rentals net of sublease income as follows: Fiscal Year Ending March 31, Amount (In thousands) 1998 $1,231 1999 328 $1,559
Rent expense, net of rental income, aggregated $1,790,000, $1,705,000 and $2,731,000 for the years ended March 31, 1997, 1996 and 1995, respectively. Rental income from the sublease of warehouse and office space aggregated $256,000, $278,000 and $273,000 in the years ended March 31, 1997, 1996 and 1995, respectively. (2) LETTERS OF CREDIT: Outstanding letters of credit for the purchase of inventory aggregated $4,932,000 (including $444,000 issued under the Loan and Security Agreement -- see Note F) at March 31, 1997. $1,995,000 of such outstanding letters of credit are not reflected in the accompanying financial statements. The Company's Hong Kong subsidiary also currently maintains various credit facilities 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 with the Company's largest customer. At March 31, 1997, the Company's Hong Kong subsidiary had pledged $1 million in certificates of deposit to this bank to assure the availability of these credit facilities. At March 31, 1997, there were $4,488,000 and $6,598,000 of letters of credit outstanding under these credit facilities. NOTE J-- SHAREHOLDERS' EQUITY: (1) In July 1994, the Company's Board of Directors adopted, and the stockholders subsequently ratified, 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 since the inception of the Program is as follows: NUMBER OF PRICE AGGREGATE SHARES PER SHARE PRICE Granted 1,860,000 $1.00 - $1.10 $1,920,000 Cancelled (30,000) $1.00 (30,000) Outstanding--March 31, 1995 1,830,000 $1.10 - $1.10 1,890,000 Granted 125,000 $2.63 - $2.88 341,000 Cancelled (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) Cancelled (59,000) $1.00 - $2.56 (67,000) Outstanding--March 31, 1997 1,590,000 $1.00 - $2.56 $1,927,000
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 $45,000 and $81,000 for the years ended March 31, 1997 and 1996, respectively, and the Company's net income would have decreased by $1,342,000 or $0.03 per share for the year ended March 31, 1995. 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 March 31, 1997, 1996 and 1995; risk-free interest rate of 5%, an expected life of 10 years and a dividend yield of zero. For the years ended March 31, 1997, 1996 and 1995, volatility was 73%, 85% and 60%, 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. (2) 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 Granted 175,000 $1.00 $175,000 Outstanding--March 31, 1995 175,000 $1.00 175,000 Cancelled (25,000) $1.00 (25,000) Outstanding--March 31, 1996, March 31, 1997 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. Had compensation cost been determined based upon the fair value at grant date for awards consistent with the methodology prescribed by FAS 123, the Company's net income would have decreased approximately $130,000 for the year ended March 31, 1995. (3) 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 market value of a share of common stock on the date of conversion. The preferred stock bears dividends commencing June 30, 1994 on a cumulative basis at the following rates: DIVIDEND RATE Year 1 to 3 7.0% Year 4 5.6% Year 5 4.2% Year 6 2.8% Year 7 1.4% Thereafter None
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 March 31, 1997, the Company was in arrears on $469,000 of dividends. (4) 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. (5) In accordance with the Company's Plan of Reorganization, the Company completed an initial public offering of its common stock in September 1994 to shareholders of record (in those states in which the offering could be made) as of March 31, 1994, excluding the Company's former largest shareholder. The Company sold 6,149,993 shares of common stock for $1.00 per share resulting in proceeds to the Company, net of issuance costs, of approximately $5,692,000. Pursuant to the terms of the Plan of Reorganization, in January 1995, the Company paid approximately $922,000 to satisfy certain obligations owed to former creditors, and in February 1995 issued 769,446 shares of common stock to former creditors, primarily to satisfy an anti-dilution provision. The remainder of such funds were used for working capital and other corporate purposes. (6) In connection with the Debentures offering in August 1995, the Company 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. Had compensation cost been determined based upon the fair value at grant date for awards consistent with the methodology prescribed by FAS 123, the Company's net loss would have increased approximately $1,140,000 or $0.03 per share for the year ended March 31, 1996. (7) In connection with a consulting agreement in December 1995, the Company issued warrants for the purchase of 250,000 shares of common stock at an exercise price of $4.00 per share. The warrants vest and may be exercised by the holder (i) 50% at any time after six months from the date of issuance, and (ii) the balance at any time after one year from the date of issuance, in either event until December 8, 2000, when such warrants shall expire. Had compensation cost been determined based upon the fair value of grant date for awards consistent with the methodology prescribed by FAS 123, the Company's net loss would have increased approximately $145,000 for the year ended March 31, 1996. (8) 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 (See Note K). 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. (9) In November 1995, the Company's stockholders approved an amendment to the Company's certificate of incorporation increasing the number of authorized shares of preferred stock from one million shares to ten million shares. (10) In November 1995, the Company's Board of Directors approved a plan to repurchase up to two million of its common shares, or about 20% of the Company's current float of approximately eleven million shares, from time to time in the open market. Although there are 40,335,642 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. 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, if and when available. It is uncertain at this time when the Company might be able to so repurchase any of its shares of Common Stock. (11) In connection with a consulting agreement in August 1996, the Company issued warrants for the purchase of 250,000 shares of common stock at an exercise price of $4.00 per share. The warrants vest and may be exercised by the holder (i) 50% at any time after six months from the date of issuance, and (ii) the balance at any time after one year from the date of issuance, in either event until August 1, 2001, when such warrants shall expire. The fair value of these warrants at the date of grant was estimated to be approximately $225,000. These warrants are being amortized over the vesting period and accordingly, consulting expense related to the warrants amounted to approximately $182,000 for the year ended March 31, 1997. NOTE K -- LICENSE AGREEMENTS: (1) In February 1997, the Company executed five-year license/supply agreements, subject to renewals, 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 the provision of sourcing and inspection services. Under the terms of the agreements, the Company will receive minimum annual royalties through the life of the agreements and will receive a separate fee for sourcing and inspection services. Cargil assumes all costs and expenses associated with the purchasing, marketing and after sales support of such products. The Company believes that this transaction will have a positive impact on operating results by generating royalty and servicing revenues with minimal costs while limiting its working capital risks. (2) In February 1995, the Company and a large supplier and certain of its 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 permited the Supplier to manufacture and sell certain video products under the Emerson and G-Clef trademark to one of the Company's significant 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 or the Supplier trademarks. The Company continues to supply other products to the Customer directly. 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 receives 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 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 and $4,442,000 in Fiscal 1997 and 1996, respectively. Additionally, the Company and the Supplier agreed on a series of purchase discounts, consistent with agreements and past practices between the Supplier and the Company. Through March 31, 1995, the Supplier had paid the Company $6.3 million against an aggregate $10.2 million of purchase discounts for product purchased from January 1, 1993 to March 31, 1995, and the balance of $3.9 million was paid in September 1995. The Company recognized $9.9 million of discounts in the year ended March 31, 1995, of which $4.3 million of discounts were attributable to purchases prior to April 1, 1994. (3) 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 non-competing consumer electronics accessories. Under the terms of the agreement, the Company will receive minimum annual royalties through the life of the agreement, which expires on December 31, 1998, and the agreement is automatically renewable for three successive three-year periods based upon Jasco's compliance with the agreement. The minimum royalty was not exceeded in the first, second or third contract years ended December 31, 1996. The Company recognized license fee income of approximately $1,125,000 in the year ended March 31, 1995. In April 1997, the agreement was amended to extend the initial three-year period for one additional year. (4) Subsequent to the end of Fiscal 1997, Emerson executed a four-year agreement with Daewoo Electronics Co. Ltd. and its U.S. affiliate (collectively "Daewoo"). This agreement provides that, subject to existing agreements relating to sales to the Customer, Daewoo will manufacture and sell television products bearing the Emerson and G-Clef trademark to all customers in the U.S. market. Daewoo will also be responsible for, and assume all risks associated with, order processing, shipping, credit and collections, inventory, returns and after sale services. The Company will arrange sales and provide marketing services and receive a commission for such services. Sales to the Customer are currently subject to a license/supply agreement with the Supplier, as more fully described in Note K. NOTE L --LEGAL PROCEEDINGS: OTAKE LITIGATION On December 20, 1995, the Company filed suit in the United States District Court for the District of New Jersey against Orion Sales, Inc., Otake Trading Co. Ltd., Technos Development Limited, Shigemasa Otake, and John Richard Bond, Jr. (collectively, the "Otake Defendants") alleging breach of contract, breach of covenant of good faith and fair dealing, unfair competition, interference with prospective economic gain, and conspiracy in connection with certain activities of the Otake Defendants under certain agreements between the Company and the Otake Defendants. On December 21, 1995, Orion Sales, Inc. and Orion Electric (America), Inc. filed suit against the Company in the United States District Court, Southern District of Indiana, Evansville Division, alleging various breaches of certain agreements by the Company, including breaches of the confidentiality provisions, certain payment breaches, breaches of provisions relating to product returns, and other alleged breaches of those agreements, and seeking damages in the amount of $2,452,656, together with interest thereon, attorneys' fees, and certain other costs. While the outcome of the New Jersey and Indiana actions are not certain at this time, the Company believes it has meritorious defenses against the claims made by the plaintiffs in the Indiana action. In any event, the Company believes the results of that litigation should not have a material adverse effect on the financial condition of the Company or on its operations. LITIGATION REGARDING CERTAIN OUTSTANDING COMMON STOCK: The 30 million shares of Common Stock issued to GSE, FIN and Elision on March 31, 1994, pursuant to the Plan of Reorganization, were the subject of certain legal proceedings. On June 11, 1996, the Settlement Agreement was executed, which settles various legal proceedings in Switzerland, the Bahamas and the United States. The Settlement Agreement provides for, among other things, the payment by Mr. Jurick and his affiliated entities of $49.5 million to various claimants of Mr. Jurick and affiliated entities (the "Creditors"), to be paid from the proceeds of the sale of the 29,152,542 shares of Emerson common stock (the "Settlement Shares") owned by affiliated entities of Mr. Jurick. In addition, Mr. Jurick will be paid the sum of $3.5 million from the sale of such stock. The Settlement Shares will be sold over an extended, but indeterminate, period of time by a financial advisor, initially TM Capital (the "Advisor"). The Advisor will formulate a marketing plan taking into consideration (i) the interests of Emerson's minority stockholders, and (ii) the goal of generating sufficient proceeds to pay the Creditors and Mr. Jurick as quickly as possible. The Settlement Shares will be divided into two pools. The Pool A Shares will initially consist of 15,286,172 Emerson shares. The Pool B Shares 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 the Lender and/or the indenture governing the Debentures. Sales may be made of the Settlement Shares pursuant to a registered offering if the sales price in not less than 90% of the average of the three most recent closing prices (the "Average Closing Price"), or, other than in a registered offering, of up to 1% of the Emerson common stock outstanding per quarter, if the sales price is not less than 90% of the Average Closing Price. Any other attempted sales are subject to the consent of Mr. Jurick, the Creditors and if necessary, the United States District Court in Newark, New Jersey. BANKRUPTCY CLAIMS: The Company is presently engaged in litigation regarding several bankruptcy claims which have not been resolved since the restructuring of the Company's debt. The largest claim was filed 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 approximately $93,563,457, of which $86,785,000 represents a claim for loss of 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. Additionally, on or about September 30, 1994, the Company instituted an adversary proceeding in the Bankruptcy Court asserting damages caused by Cineral and seeking declaratory relief and replevin. 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. INTERNATIONAL JENSEN INCORPORATED ("JENSEN") LITIGATION On May 10, 1996, Jensen filed an action in the United States District Court for the Northern District of Illinois, Eastern Division, against the Company and Eugene I. Davis, an officer of the Company for violations of proxy solicitation rules and for breach of a confidentiality agreement with Jensen. On May 20, 1996, the Company filed a counterclaim in this action alleging that Jensen and its Chairman, Chief Executive Officer and President, Robert G. Shaw, fraudulently induced the Company to enter into a confidentiality agreement and failed to negotiate with the Company in good faith. In its counterclaim, the Company requests such other equitable or other relief as the Court finds proper and an award of attorneys' fees and expenses. Subsequently, Recoton Corporation ("Recoton"), the successful bidder in acquiring Jensen, filed an action in the same court against Emerson. In June 1997, Emerson, Mr. Davis, Jensen, Recoton and certain other related parties entered into a settlement agreement settling all disputes among them and releasing each other from all liability in connection with the subject matter of these actions on terms Emerson believes to be beneficial to it. OTHER LITIGATION: The Company is involved in other legal proceedings and claims of various types in the ordinary course of business. While any such litigation 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 M -- 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 MARCH 31, 1997 U.S. FOREIGN ELIMINATIONS CONSOLIDATED (In thousands) 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 $ 58,513 $ 1,520 $ -- $ 60,033 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 YEAR ENDED MARCH 31, 1995 Sales to unaffiliated customers $ 608,717 $45,954 $ -- $654,671 Transfers between geographic areas 5,954 184 (6,138) -- Total net revenues $ 614,671 $46,138 $ (6,138) $654,671 Earnings (loss) before income taxes $ 12,238 $(4,596) $ -- $ 7,642 Identifiable assets $ 98,604 $15,470 $ (105) $113,969
Transfers between geographic areas are accounted for on a cost basis. Identifiable assets are those assets used in operations in each geographic area. At March 31, 1997 and 1996, total assets include $10,657,000 and $27,779,000, respectively, of assets located in foreign countries. The Company's net sales to one customer aggregated approximately 36%, 18% and 53% of consolidated net revenues for the years ended March 31, 1997, 1996 and 1995, respectively. Trade receivables from this customer approximated 11% of accounts receivable at March 31, 1997, and has not been collateralized. At March 31, 1997, the Company had a liability balance to this customer for product returns. The Company's net sales to another customer aggregated 13%, 16%, and 10% for the years ended March 31, 1997, 1996 and 1995, respectively. NOTE N -- INVESTMENT IN JOINT VENTURE The Company has a 50% investment in E & H Partners, a joint venture that refurbishes and sells certain 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 (loss) of the joint venture is reflected as an increase or reduction of cost of sales in the Company's Consolidated Statements of Operations. Summarized financial information relating to the joint venture is as follows: MARCH 31, 1997 1996 1995 (In thousands) ACTIVITY BETWEEN COMPANY AND E & H PARTNERS Accounts receivable from joint venture (a) $3,522 $13,270 $15,283 Investment in joint venture 440 1,265 1,565 Sales to joint venture 5,792 17,629 32,500 E & H PARTNERS SUMMARIZED FINANCIAL INFORMATION Condensed balance sheet: Current assets $ 7,947 $19,326 $26,749 Noncurrent assets - 162 161 Total $ 7,947 $19,488 $26,910 Current liabilities $ 7,476 $16,958 $23,780 Partnership equity 471 2,530 3,130 Total $7,947 $19,488 $26,910 Condensed income statement: Net sales (b) $31,564 $27,712 $24,760 Net earnings (loss) (2,058) (600) 2,130
___________________ (a) Accounts receivable were secured by a full lien on all of the partnership's inventory at these dates, and such lien had been assigned to the Lender as collateral for the U.S. line of credit facility. In April 1996, the Company agreed to equally share the lien on the partnership's inventory with the other partner in the joint venture, in exchange for, among other things, a $5 million loan by such partner to the joint venture and a subsequent paydown of E&H Partners' obligation to the Company of the same amount. (b) Includes sales to the Company of $7,058,000, $5,964,000 and $3,796,000, 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 may 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 costs at end beginning and of year Decription of year expenses Deductions (C) Allowance for doubtful accounts/chargebacks: Year ended: March 31, 1997 $ 2,831 $ 2,558 $2,703(A) $ 2,686 March 31, 1996 4,150 1,111 2,430 2,831 March 31, 1995 3,349 1,306 505 4,150 Inventory reserves: Year ended: March 31, 1997 $1,222 $5,081 $4,142(B) $2,161 March 31, 1996 470 1,087 335 1,222 March 31, 1995 644 251 425 470
(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) Agreement, dated as of November 14, 1973, between National Union Electric Corporation ("NUE") and Emerson (incorporated by reference to Exhibit (10) (a) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (b) Trademark User Agreement, dated as of February 28, 1979, by and between NUE and Emerson (incorporated by reference to Exhibit (10) (b) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (c) Agreement, dated July 2, 1984, between NUE and Emerson (incorporated by reference to Exhibit (10) (c) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (d) Agreement, dated September 15, 1988, between NUE and Emerson (incorporated by reference to Exhibit (10) (d) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (e) 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) (f) 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) (g) 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) (h) 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) (i) 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) (j) 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) (k) 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) (l) Emerson Radio Corp. Stock Compensation Program (incorporated by reference to Exhibit (10) (i) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (m) Employment Agreement between Emerson and Eugene I. Davis (incorporated by reference to Exhibit 6(a)(4) of Emerson's Quarterly Report on Form 10-Q for quarter ended June 30, 1992). (10) (n) Extension of Employment Agreement between Emerson and Eugene I. Davis dated April 16, 1997.* (10) (o) Employment Agreement between Emerson and Geoffrey P. Jurick (incorporated by reference to Exhibit 6(a)(6) of Emerson's Quarterly Report on Form 10-Q for quarter ended June 30, 1992). (10) (p) Employment Agreement between Emerson Radio (Hong Kong) Ltd. and Geoffrey P. Jurick (incorporated by reference to Exhibit 6(a)(6) of Emerson's Quarterly Report on Form 10-Q for quarter ended June 30, 1992). (10) (q) Employment Agreement between Emerson Radio International Ltd. (formerly Emerson Radio (B.V.I.), Ltd.) and Geoffrey P. Jurick (incorporated by reference to Exhibit 6(a)(6) of Emerson's Quarterly Report on Form 10-Q for quarter ended June 30, 1992). (10) (r) Extension of Employment Agreement between Emerson and Geoffrey P. Jurick dated April 16, 1997.* (10) (s) Lease Agreement dated as of March 26, 1993, by and between Hartz Mountain Parsippany and Emerson with respect to the premises located at Nine Entin Road, Parsippany, NJ (incorporated by reference to Exhibit (10) (ww) of Emerson's Annual Report on Form 10-K for the year ended December 31, 1992). (10) (t) Employment Agreement, dated April 1, 1994, between Emerson and John Walker (incorporated herein by reference to Exhibit (10)(ee) of Emerson's Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (u) Amendment No. 1 to Employment Agreement between Emerson and John P. Walker dated April 16, 1997.* (10) (v) Employment Agreement, dated January 29, 1996 between Emerson and Marino Andriani (incorporated herein by reference to Exhibit (10) (a) of Emerson's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). (10) (w) Partnership Agreement, dated April 1, 1994, between Emerson and Hopper Radio of Florida, Inc (incorporated by reference to Exhibit (10) (q) of Emerson's Annual Report on Form 10-K for the year ended March 31, 1995). (10) (x) Sales Agreement, dated April 1, 1994, between Emerson and E & H Partners (incorporated by reference to Exhibit (10) (r) of Emerson's Annual Report on Form 10- K for the year ended March 31, 1995). (10) (y) Agreement, dated as of April 24, 1996 by and among Emerson and E & H Partners relating to amendments of the Partnership Agreement dated April 1, 1994 and the Sales Agreement dated April 1, 1994 and the settlement of certain outstanding litigation. (10) (z) License Agreement, dated February 22, 1995, between Emerson and Otake Trading Co. Ltd. and certain affiliates ("Otake") (incorporated by reference to Exhibit 6(a)(1) of Emerson's Quarterly Report on Form 10-Q for quarter ended December 31, 1994). (10) (aa) Supply Agreement, dated February 22, 1995, between Emerson and Otake (incorporated by reference to Exhibit 6(a)(2) of Emerson's Quarterly Report on Form 10-Q for quarter ended December 31, 1994). (10) (ab) 1994 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit (10) (y) of Emerson's Annual Report on Form 10-K for the year ended March 31, 1995). (10) (ac) Consulting Agreement, dated as of December 8, 1995 between Emerson and First Cambridge Securities Corporation (incorporated by reference to Exhibit (10) (d) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995). (10) (ad) License Agreement, dated as of August 23, 1996 between Emerson and REP Investment Limited Liability Company (incorporated by reference to Exhibit (10) (d) of Emerson's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). (10) (ae) Distribution Agreement, dated as of September 11, 1996 between Emerson, Emerson Radio Canada Ltd. and AVS Technologies Inc. (incorporated by reference to Exhibit (10) (e) of Emerson's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). (10) (af) 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) (ag) 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) (ah) 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) (ai) 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) (aj) Supply and Inspection Agreement with Cargil International Corp. dated as of February 12, 1996 (incorporated by reference to Exhibit (10) (d) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996). (10) (ak) Agreement dated April 10, 1997 between Emerson and Daewoo Electronics Co., Ltd.* 10) (al) Securities Purchase Agreement dated as of November 27, 1996, by and between Sports 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) (am) 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) (an) 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) (ao) 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) (ap) License Agreement dated as of June 16, 1997 by and between World Wide One Ltd. and Emerson.* (10) (aq) Agreement dated as of July 2, 1997 by and between Hi Quality International (U.S.A.) Inc. and Emerson.* (11) Computation of Primary Earnings Per Share.* (12) Computation of Ratio of Earnings (Loss) to Combined Fixed Charges and Preferred Stock Dividends.* (21) Subsidiaries of the Registrant as of March 31, 1997.* (27) Financial Data Schedule for year ended March 31, 1997.* ___________________ * Filed herewith. EXHIBIT 11 Emerson Radio Corp. and Subsidiaries Exhibit to Form 10-K Computation of Primary Earnings Per Share (in thousands, except per share data)
Years Ended March 31, 1997 1996 1995 Net earnings (loss) $(23,968) $(13,389) $ 7,375 Preferred stock dividends (700) (700) N/A Net earnings (loss) attributable to common stockholders $(24,668) $(14,089) $7,375 Weighted average number of actual shares outstanding 40,292 40,253 36,530 Additional shares assuming conversion or exercise of: Preferred stock (a) 9,081 Stock options and warrants 960 Weighted average number of common and common equivalent shares outstanding 40,292 40,253 46,571 Primary earnings (loss) per share $(0.61) $(0.35) $0.16 ___________________________ (a) Based on the assumed conversion of $10 million of Series A Preferred Stock into Common Stock at a price per share equal to 80% of the weighted average market value of a share of Common Stock, determined on a quarterly basis. 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 than noted above.
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 Mar. Mar. Mar. Mar. Mar. 31, 31, 31, 31, 31, 1993 1994 1995 1996 1997 Pretax earnings (loss) $(55,291) $(73,327) $7,642 $(13,363) $(23,968) Fixed charges: Interest 18,257 10,243 2,582 2,788 2,789 Amortization of debt expenses -- -- 300 487 640 18,257 10,243 2,882 3,275 3,429 Pretax earnings (loss) before fixed charges $(37,034) $(63,084) $10,524 $(10,088) $(20,539) Fixed charges: Interest $ 18,257 $ 10,243 $ 2,582 $ 2,788 $ 2,789 Amortization of debt expenses -- -- 300 487 640 Preferred stock dividend requirements 725(a) 700 700 $18,257 $ 10,243 $ 3,607 $ 3,975 $ 4,129 Ratio of earnings (loss) to combined fixed charges and preferred stock dividends (2.03) (6.16) 2.92 (2.54) (4.97) Coverage deficiency $18,257 $ 10,243 $ - $ 3,975 $ 4,129 ________________________ (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 Name of Subsidiary Incorporation of Ownership Emerson Radio (Hong Kong) Limited. Hong Kong 100%* Emerson Radio International Ltd. British Virgin Islands 100% Sport Supply Group, Inc. Delaware 27% * One share is owned by a resident director pursuant to local law.
EX-1 2 April 16, 1997 Mr. Eugene I. Davis c/o Emerson Radio Corp. Nine Entin Road P.O. Box 430 Parsippany, New Jersey 07054-0430 Re: Extension of Employment Agreement Dear Mr. Davis: This letter will serve as confirmation of our agreement to extend the terms of that certain Employment Agreement dated July 7, 1992 (the "Agreement") by and between you and Emerson Radio Corp. ("Emerson"). Under Section 1 of the Agreement, the "Term" as defined therein is to continue until July 7, 1997. By your signature below, you and Emerson agree to extend the Term of the Agreement until March 31, 2000. Notwithstanding the terms of the Agreement, you will only be obligated to devote approximately 60% of your business time to services on behalf of Emerson, its subsidiaries and affiliates, including Sport Supply Group, Inc. ("SSG"). You will initially serve as Vice Chairman of Emerson, and will no longer serve as President, and in such other duties or capacities for Emerson and/or its subsidiaries or affiliates (including SSG) from time to time in the future as may be requested or directed by Emerson's Board of Directors, Chairman, or Chief Executive Officer. You will continue to receive your current salary from Emerson, subject to adjustment as provided in the Agreement; however, Emerson shall be entitled, in its sole discretion, to credit against its salary obligations to you any amounts you have received or will receive in base compensation from SSG. It is understood that, initially, you shall receive base annual compensation from both companies of $450,000, of which you shall receive $200,000 from SSG and $250,000 from Emerson. You shall also be entitled to all other benefits and privileges currently available to you under the Agreement. It is understood that during the 40% of your business time not allocated directly to Emerson or SSG you shall, among other things, be engaged in developing new business opportunities. Any and all such business opportunities shall be subject to a right of first refusal by Emerson or a designated affiliate for a period of no less than 10 business days. You expressly agree that upon the written request of the Board of Directors or Chairman of Emerson, you will resign as a director of Emerson, and upon your receipt of such request you will be deemed to have so resigned. Any such resignation from the Board shall not have any effect upon your continued employment by Emerson, your rights under the Agreement, or otherwise. Except as specifically amended hereby, the Agreement shall not be deemed to be further amended or modified, and shall remain in full force and effect. Please indicate your agreement to the terms of this letter agreement in the space provided below. This letter agreement will be effective as of April 1, 1997. Very truly yours, EMERSON RADIO CORP. By: /s/ Geoffrey P. Jurick Geoffrey P. Jurick, Chairman and Chief Executive Officer ACKNOWLEDGED, UNDERSTOOD, AND AGREED TO AS OF THE 16th DAY OF APRIL, 1997 /s/ Eugene I. Davis EUGENE I. DAVIS EX-2 3 April 16, 1997 Mr. Geoffrey P. Jurick c/o Emerson Radio (Hong Kong) Ltd. 705 - 711, Tower 2 The Gateway 25-27 Canton Road Kowloon, Hong Kong Re: Extension of Employment Agreements Dear Mr. Jurick: This letter will serve as confirmation of our agreement to extend the terms of those certain Employment Agreements, each dated July 7, 1992 (the "Agreements"), by and between you and each of Emerson Radio (B.V.I.), Ltd., Emerson Radio (Hong Kong), Ltd., and Emerson Radio Corp. Under Section 1 of each of the Agreements, the "Term" as defined therein is to continue until July 7, 1997. By each of our respective signatures below, you and each of the above- referenced entities agree to extend the Term of each such Agreement until March 31, 2000. The parties also expressly acknowledge and agree that, except as expressly stated therein, no other agreement nor any breach or default under any other agreement shall have any effect on the rights and obligations of the parties hereto or under any of the Agreements, including, without limitation, under any employment or other agreement between Sport Supply Group, Inc., or any of its subsidiaries, and you. Except as specifically amended hereby, each of such Employment Agreements shall not be deemed to be further amended or modified, and shall remain in full force and effect. Please indicate your agreement to the terms of this letter in the space provided below. Very truly yours, EMERSON RADIO (B.V.I.), LTD. By:/s/ Eugene I. Davis Name: Eugene I. Davis Title: Director EMERSON RADIO (HONG KONG), LTD. By: /s/ Eugene I. Davis Name: Eugene I. Davis Title: Director EMERSON RADIO CORP. By: /s/ Eugene I. Davis Name: Eugene I. Davis Title: Vice-Chairman ACKNOWLEDGED, UNDERSTOOD, AND AGREED TO AS OF THE 16TH DAY OF APRIL, 1997 /s/ Geoffrey P. Jurick GEOFFREY P. JURICK EX-3 4 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (this "Amendment") is entered into as of the 16th day of April, 1997 by and between EMERSON RADIO CORP., a Delaware corporation (the "Company"), and JOHN P. WALKER (the "Executive"). W I T N E S S E T H: WHEREAS, the Company and Executive entered into that certain Employment Agreement dated as of April 1, 1994 (the "Agreement"), whereby, among other things, Executive agreed to serve the Company as Vice President-Finance (and currently as Executive Vice President and Chief Financial Officer), on the terms and conditions therein contained; and WHEREAS, the Company and Executive desire to extend the term of the Agreement, amend certain terms and conditions thereof, and further reflect Executive's other work-related commitments. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the Company and Executive hereby agree as follows: 1. TERM. Section 1(a) of the Agreement is hereby amended to extend and modify the definition of the "Term" to continue until April 1, 2000. Executive and the Company agree that any further extension of the Agreement beyond the Term expiring on April 1, 2000 shall be negotiated during the period from July 1, 1998 through December 31, 1998, to be effective after March 31, 2000. 2. POSITION AND DUTIES. Section 2 of the Agreement is hereby amended by deleting such Section 2 in its entirety and substituting the following in lieu thereof: During the Term, the Executive agrees to serve as Executive Vice President and Chief Financial Officer of the Company, and will have such powers and duties as are commensurate with such position and as may be conferred upon or delegated to him by the Board of Directors (the "Board") of the Company, the Chairman, the President or the Chief Executive Officer. In addition, the Executive agrees to serve from time to time in such other positions with the Company or its subsidiaries or affiliates (including, without limitation, Sport Supply Group, Inc. ("SSG") as may be specified by the Board, the Chairman, the President or the Chief Executive Officer of the Company and thereafter approved by the board of directors of the applicable entity. During the Term, and except for illness or incapacity, the Executive shall devote such business time, attention, skill and efforts as necessary for the business and affairs of the Company and its subsidiaries and affiliates and the promotion of their interests, and shall not take part in activities detrimental to the best interests of the Company. The Company understands and acknowledges that (i) Executive will devote approximately 30% of his business time on behalf of the Company, with the balance of such time being devoted to his responsibilities with SSG, and (ii) Executive will reside in the Dallas/Ft. Worth metropolitan area, in proximity to the principal offices of SSG, from which offices Executive will primarily perform his services. The Company will reimburse Executive for his normal and reasonable travel costs to the Company's offices which are reasonably deemed necessary or desirable to fulfill his responsibilities hereunder, including, without limitation, the cost of first class or business class air travel in those instances in which Executive does not have upgrade certificates, or upgrades are not available, from coach class air travel, estimated by Executive to be necessary on approximately 10% of all air travel so taken. 3. COMPENSATION. Section 3(a) of the Agreement is hereby amended to reflect Executive's time commitments, by modifying Executive's Base Salary effective as of December 11, 1996 (the "Effective Date"), which will be his initial salary under this Amendment, to $100,000 per annum (the "Initial Salary"). In addition, Executive hereby waives his right to any bonus from the Company or its subsidiaries for the fiscal year ending March 31, 1997, to which he would otherwise be entitled under Section 3(b) of the Agreement; provided, however, that Executive shall be entitled to be considered for a bonus from the Company if a material license or sale, if any, of the "Emerson and G-Clef" trademark for video products, is consummated by the Company on or prior to June 30, 1997. Notwithstanding the foregoing, Executive shall continue to be provided life insurance with a death benefit in an amount as provided immediately prior to the Effective Date, and which insurance shall be otherwise in accordance with the Company's policies for providing such insurance to its senior executives. 4. EFFECT OF TERMINATION OF EMPLOYMENT. Section 5 of the Agreement is hereby amended by deleting such Section 5 in its entirety and substituting the following in lieu thereof: (a) CERTAIN TERMINATIONS. If Executive's employment hereunder terminates due either to Permanent Disability, a Without Cause Termination or a Constructive Discharge, the Company shall, as liquidated damages or severance pay, or both, subject to the provisions of Section 6 below, pay the Executive his Initial Salary as Base Salary payments would otherwise become due and payable until (i) the expiration of the Term, if such termination occurs prior to July 1, 1998, or (ii) eighteen (18) months from the date of such termination, if such termination occurs on or after July 1, 1998 (the "Severance Period"), and the other benefits and qualified stock options provided hereunder shall continue to vest pursuant to the terms hereof during the Severance Period; provided, that in the case of Permanent Disability, such payments shall be offset by any amounts otherwise paid to Executive under the Company's disability program generally available to other employees. In addition, earned but unpaid Base Salary as of the date of termination of employment shall be payable in full. Group hospitalization, health, dental care, life or other insurance, travel or accident insurance and disability insurance shall continue through the end of the Severance Period. (b) OTHER TERMINATIONS. If the Executive's employment hereunder terminates due to a Termination for Cause or the Executive unilaterally severs the employment relationship or terminates employment with the Company for reason other than a Constructive Discharge or Permanent Disability, earned but unpaid Base Salary as of the date of termination of employment shall be payable in full and vested qualified stock options will remain vested in the Executive. However, no other payments of any nature whatsoever, including unearned Base Salary, shall be made, or benefits provided, by the Company under this Agreement except for stock options to the extent already vested and exercisable hereunder, benefits vested and payable under any retirement plan and benefit programs maintained by the Company or its affiliates of its employees, or as otherwise required by law. (c) DEFINITIONS. For purposes of this Agreement, the following terms have the following meanings: (i) The term "Termination for Cause" means, to the maximum extent permitted by applicable law, (x) a termination of the Executive's employment by the Company because the Executive has breached or failed to perform his duties under the Agreement and this Amendment, applicable law or the by-laws of the Company, including the unreasonable neglect or refusal to perform duties assigned by the Board, (y) abuse of office or malfeasance by Executive, or (z) conviction of the Executive of a felony which the Board reasonably deems to be an "abuse of office" or a crime of moral turpitude. (ii) The term "Constructive Discharge" means a termination of the Executive's employment by the Executive due to a failure of the Company or its successors without the prior consent of the Executive to fulfill its obligations under this Agreement in any material respect. (iii) The term "Without Cause Termination" means termination of the Executive's employment by the Company, upon 30 days written notice to the Executive, other than due to (v) Permanent Disability, (x) retirement, (y) expiration of the Term, or (z) Termination for Cause. (iv) The term "Permanent Disability" means the inability of the Executive as determined by the Board and confirmed by competent medical evidence, to work for a period of three consecutive full calendar months or 90 non-consecutive days during any twenty-four consecutive calendar months due to illness or injury of a physical or mental nature. To determine issues of disability, the Executive agrees to submit himself for appropriate medical examination to physicians reasonably acceptable to the Company and the Executive. (d) SURVIVAL. The terms of this Section 4 shall survive the expiration of this Agreement and Amendment. 5. FULL FORCE AND EFFECT. Except as specifically amended hereby, the Agreement shall not be deemed to be further amended or modified, and shall remain in full force and effect. In addition, the parties hereto expressly acknowledge and agree that no other agreement nor any breach of or default under any other agreement shall have any effect on the rights and obligations of the parties hereto, including, without limitation, under any employment or other agreement between Executive and SSG. IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by its duly authorized officer and the Executive has signed this Amendment, all effective as of the Effective Date. EMERSON RADIO CORP. By: /s/ Geoffrey P. Jurick Geoffrey P. Jurick Chief Executive Officer EXECUTIVE: /s/ John P. Walker John P. Walker EX-4 5 April 10, 1997 Daewoo Electronics Co., Ltd. c/o Mr. Kwi-Hyen Nam Mr. Tak-Myung Kang Mr. Chul Lee C. P. O. Box 8003 Seoul, Korea Gentlemen: I am pleased to send you this letter confirming the agreement between Emerson and Daewoo regarding the sale of Emerson Radio branded video and TV products manufactured by Daewoo for the U.S. market. I have taken the liberty of outlining below the points of our deal as I understand them. After reading the information below, please sign this letter in the space provided as confirmation of your agreement. 1. Emerson will procure business in the U.S. for Daewoo and the products will be shipped under the Emerson Radio brand name. Wal-Mart will not be included until the license with Orion has ended. 2. Our working groups have agreed to make the Daewoo products listed on the attached Exhibit available for sale to certain U.S. accounts under the Emerson Radio brand name, subject to the procedures set forth in paragraph 6 below. 3. All orders will be written directly to Daewoo which will be responsible for order processing, shipment, credit, collections, and after sale service. Daewoo will also be responsible for returns and returns processing for all products sold under this program, and all sales will be subject to Daewoo's return for credit policy. 4. Daewoo will pay Emerson the commission set forth on the attached Exhibit for Emerson's sales and marketing services. The commissions will be due monthly on invoiced sales of the product to U.S. retailers and payable to Emerson 15 days after each month end. However, the commissions will be calculated on a net sales basis and adjusted to reflect returns in subsequent periods when such returns can be accounted for. Daewoo Electronics Co., Ltd. April 10, 1997 Page 2 5. As we agreed, Emerson will be responsible for any commissions it pays to its sales representatives to acquire the business covered by this arrangement. 6. Emerson agrees that it will coordinate with DECA concerning the solicitation of each U.S. account and the pricing and credit terms for that account. Since both Emerson and Daewoo will continue to sell other products in the U.S. market, all decisions as to accounts, including all orders, must be acceptable to both DECA and Emerson, and, to the extent credit terms are applicable, Daewoo Credit Management. All such information shall be held confidential. 7. This agreement shall remain in effect for a 4-year period ending March 31, 2001. Either Emerson or Daewoo may terminate this agreement, in their respective discretions, on 90 days' prior written notice to allow for the closure of inventories and other related matters. However, if this agreement is so terminated, Emerson hereby gives Daewoo authorization to ship all production previously sold by Emerson to the date of termination even though merchandise may be shipped after the agreement has ended. Daewoo will be responsible for paying Emerson its commissions on such shipments. In the event any inventory is remaining after the 90 day period, Daewoo shall, subject to Emerson's right to purchase such inventory, have the right to sell such inventory at its discretion. Daewoo shall not pay Emerson its commissions on such sales. 8. Emerson will have, in its discretion, the right to protect the integrity of its trademarks. 9. All matters relative to this agreement including pricing and credit terms will be held in confidence. Daewoo Electronics Co., Ltd. April 10, 1997 Page 3 I feel that the working groups of Emerson and DECA have established a fine working relationship and I believe our efforts will be very successful for both companies. I would like to thank you for your help and patience over the last several weeks. EMERSON RADIO CORP. By: /s/ Geoffrey P. Jurick Geoffrey P. Jurick, Chairman GPJ/cs Agreed and Accepted by: /s/ Tak-Myung Kang April 22, 1997 Daewoo Electronics Co., Ltd. Date Tak-Myung Kang M. Director VCR Div. EX-5 6 LICENSE AGREEMENT This Agreement, dated effective as of June 16, 1997 (the "Effective Date"), is by and between EMERSON RADIO CORP., a Delaware corporation, having a place of business at Nine Entin Road, Parsippany, New Jersey 07054, and World Wide One Ltd., a Hong Kong corporation, having a place of business at Room 2, 4th Fl., Albion Plaza, 2-6 Granville Road, T.S.T., Kowloon, Hong Kong. Licensor (as hereinafter defined), directly and through affiliates, distributes a variety of consumer electronics products and microwave ovens in numerous countries throughout the world. Licensor is the owner of certain valuable and well-known trademarks, and the goodwill associated therewith; Licensee (as hereinafter defined) desires to obtain a license of certain of Licensor's trademarks in connection with the manufacturing, marketing, sale and distribution of certain consumer electronics and other products as specifically set forth on EXHIBIT A, together with replacement parts which may bear the trademarks (collectively referred to herein as the "Goods"); Licensee desires to sell the Goods bearing the trademarks in the geographic regions set forth on EXHIBIT B ("Territory") and use certain of Licensor's trademarks in conjunction therewith; Licensor is agreeable to license the use of certain of its trademarks with respect to the manufacturing, marketing, distribution and sale of the Goods by Licensee in the Territory, subject to the terms and conditions of this Agreement. In consideration of the foregoing premises and the mutual agreements contained herein, the following is agreed to: 1. DEFINITIONS 1.1 "Affiliate" means a person or entity who directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a specified person or entity. 1.2 "Confidential Information" means any and all information, data, specifications, customer lists, products and services information, sales and marketing information, vendor data, and information regarding either Licensor, Licensee or their respective Affiliates (collectively, the "Information") except: (a) Information which at the time of disclosure is in the public domain; (b) Information which, after disclosure, through no fault of the party receiving same, is published or otherwise becomes part of the public domain; (c) Information which the receiving party can document as having been in its possession prior to the time of disclosure to it by the other party; (d) Information which the receiving party can document as having been received by it on a non-confidential basis from a third party; or (e) Data, specifications, customer lists, products and services information and vendor data which the receiving party created on its own or through independent third parties without use of the Information. 1.3 "Goods" means those first quality new "A" stock consumer electronics and other goods as specifically set forth on EXHIBIT A, which Exhibit may be amended from time to time by mutual agreement to reflect additions to or the obsolescence of one or more of the Goods. 1.4 "Sale" means sale, lease, rental, transfer, exchange or other disposition of the Goods by Licensee. A Sale will be deemed to have occurred when the Goods are shipped or are invoiced, whichever occurs first. 1.5 "Trademarks" means the Emerson and G-Clef design in the form set forth on EXHIBIT C and all future form(s) of same adopted by Licensor. 1.6 "Licensor" means Emerson Radio Corp. 1.7 "Licensee" means World Wide One Ltd. 2. GRANT 2.1 Subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee a non-exclusive, non-transferable license to utilize the Trademarks solely upon and in connection with the manufacturing, sale, marketing and distribution of the Goods for sale exclusively to Makro International Far East Ltd. ("Makro") in the Territory. All other sales of the Goods, including any additional products, or store openings by Makro outside of the Territory, to be included in this Agreement are subject to Licensor's prior written approval. 2.2 Licensee shall not use the Trademarks, or purport to give consent to the use of the Trademarks, in any manner or on any product, items or services, except as specifically set forth in this Agreement. 2.3 Licensee agrees that the Goods bearing the Trademarks shall not, directly or indirectly, be distributed, sold, or otherwise transferred or disposed of outside of the Territory by the Licensee and that Licensee shall not sell, transfer or distribute the Goods to any store, distributor, retailer or customer other than Makro without Licensor's prior written approval in its sole discretion. Licensee shall inform its customers and distributors that the Goods cannot be distributed, sold or otherwise disposed of outside of the Territory, or to any party other than Makro. Licensee agrees that it shall not sell the Goods to any customer or distributor that may distribute, sell or otherwise dispose of the Goods outside of the Territory, or to any party other than Makro. Notwithstanding the above and Licensor's right to terminate this Agreement as set forth in Section 9, if Goods are sold or otherwise disposed outside of the Territory or to any party other than Makro, Royalty Fees (as hereafter defined) shall be due on any and all such sales of Goods. 3. TERM Subject to the earlier termination or expiration of this Agreement as provided in SECTION 9 or otherwise herein, this Agreement shall be effective as of the Effective Date and expire as of the close of business following eighteen (18) months after the Effective Date (the "Term"). The parties agree that the first six months of the Term shall be a promotional trial period ("the Trial Period"). In the event either party desires to discontinue this Agreement at the end of the Trial Period, such party may serve written notice on the other party either within ten days before the end of the Trial Period or within ten days following the end of the Trial Period, of such party's desire to discontinue this Agreement. In the event either party serves such notice, this Agreement shall expire effective as of the end of the Trial Period and Licensee shall be liable solely for the advance royalty payment set forth in Section 5.1, and any Royalty Fees due pursuant to Section 5.2 for Goods sold during the Trial Period. If no such notice is served by either party, this Agreement shall continue for the full Term. 4. GOODS 4.1 Licensee shall maintain and comply with the quality standards for the Goods as set forth in EXHIBIT D. It is understood that Licensee shall utilize the services of Licensor or an affiliate of Licensor for sourcing and inspection of at least fifty percent (50%) of the dollar value of Licensee's purchase requirements. All purchase orders for product covered by this Agreement shall be processed through Licensor's affiliate, Emerson Radio (Hong Kong) Ltd. and Acceptable Quality Levels (AQL) shall be stated on the purchase orders. 4.2 To assure Licensor that the provisions of this Agreement are being observed, Licensee shall allow Licensor either itself or, if Licensor elects in its sole discretion, by a third party, to take any and all action necessary for the purpose of inspecting or otherwise ensuring the quality of the Goods. If said quality standards are not being maintained at any time during the Term, then upon written notice from Licensor, Licensee shall immediately discontinue the sale and distribution of the Goods that do not meet said quality standards. Any Goods which are defective or dangerous and fall below the quality standards shall immediately be removed from sale and if already sold, recalled. Goods, in inventory or elsewhere, not meeting quality standards shall not be distributed or sold. Licensee shall take the above actions at its own expense. It is understood and agreed to by the parties, however, that Licensor shall be responsible for the expense of any recall which is necessary, solely for those Goods which are sourced and inspected by Licensor. Since monetary damages would not be sufficient to remedy a breach of this covenant, Licensor shall be entitled to an immediate temporary restraining order and/or preliminary injunction, without bond or security, to prevent Licensee from violating the terms hereof. Licensee shall promptly reimburse Licensor for the costs of such legal action, including costs and attorneys' fees. 4.3 Licensee shall ensure that the manner of sale, distribution and/or exploitation by Licensee shall in no manner reflect adversely upon the good name or value of Licensor or any of the Trademarks. 4.4 Licensee shall comply with all applicable laws and regulations relating to the manufacture, use, sale and distribution of the Goods throughout the Territory (and, if applicable, where the Goods are manufactured), whether foreign, federal, state, domestic or local, as required. Such requirements shall include, but not be limited to, obtaining all necessary regulatory and/or governmental approvals, as well as any registrations, permits or licenses that may be required. Upon request, Licensee shall provide Licensor with copies of all such approvals, registrations, permits or licenses. In any license, registration or request for government or regulatory approval, Licensor shall be identified as the owner of the Trademarks. It is understood, however, that Licensor shall be responsible for obtaining the necessary approvals required under this section for those Goods which it develops or carries as a part of its basic line at the Effective Date. 4.5 Licensee shall, promptly after its initial commercial production of the Goods (or earlier, if available, but in no event later than sixty (60) days prior to Licensee's first sale of any of the Goods) deliver to Licensor (without cost to Licensor) at its facilities in Parsippany, New Jersey, U.S.A., or such other location designated by Licensor, three (3) representative samples of each of the Goods or particular Goods bearing the Trademarks as well as the related packaging, advertising, labels, promotional or any other printed material used in conjunction with the sale of the Goods. Licensor, at its sole discretion, may disapprove of the use of any of the Goods, the quality of which is not consistent with the quality standards set forth in this SECTION 4 or Goods which fail to comply with proper usage of the Trademarks as defined herein. Licensor's approval shall be deemed given if Licensor does not notify Licensee of Licensor's disapproval of any Goods within 15 days after receipt of same. 4.6 All of the Goods, and all advertising, promotion, packaging or any written material distributed by or through Licensee will, unless otherwise specifically agreed to in writing by Licensor, bear the following legend: "EMERSON AND THE G-CLEF LOGO ARE REGISTERED TRADEMARKS OF EMERSON RADIO CORP., PARSIPPANY, NEW JERSEY, U.S.A." 4.7 In all cases where Licensee desires artwork involving Goods to be prepared, the cost of such artwork and the time for the production thereof shall be borne by Licensee. All artwork and designs involving the Trademarks, or any reproduction thereof, shall be and remain the property of Licensor. 5. ROYALTIES TO LICENSOR 5.1 Licensee shall pay to Licensor, as an advance royalty payment, the amount of $50,000. Licensee shall pay the advance royalty payment either by immediately available funds within five (5) days following the Effective Date or by opening an irrevocable standby letter of credit in favor of Licensor on the Effective Date, with a bank reasonably satisfactory to Licensor and that maintains a confirmation relationship with Licensor's bank, in the amount of $50,000, payable within five (5) days. The advance royalty payment shall be non- refundable and shall be credited against the Minimum Royalty Fee as set forth herein so that no Royalty Fees as defined herein shall be payable by Licensee until Licensee's advance royalty credit is reduced to zero. 5.2 (a) Licensee shall also pay to Licensor a fee ("Royalty Fee") equal to the percentage rate for the particular category of Goods on EXHIBIT E hereto multiplied by the amount over ex-factory cost of the Goods directly or indirectly sold by Licensee for each particular category of Goods. The term "ex- factory cost" shall mean the manufacturer's actual invoiced price prior to any discounts, rebates or allowances. Licensee shall be required to pay a Minimum Royalty Fee for the Term of $200,000, which is calculated by taking the product of the minimum gross sales required for the Term as set forth herein, and four percent (4%). If the Royalty Fees paid to Licensor for the Term do not equal or exceed the Minimum Royalty Fee, Licensee shall promptly pay to Licensor the difference between the Royalty Fees actually paid and the Minimum Royalty Fee. (b) Payment of all Royalty Fees shall be by transferable sight letter of credit issued directly by Makro to Emerson Radio (Hong Kong) Ltd., or a designated affiliate, no later than any applicable lead time advised by Emerson Radio (Hong Kong) Ltd., for all purchase orders. No credit shall be permitted or applied to Licensee for returns. Emerson Radio (Hong Kong) Ltd. shall reimburse Licensee the difference between the letter of credit amount and the agreed-upon Royalty Fees for each transaction. Payment shall be within five (5) days after settlement of the letter of credit in each instance with a complete reconciliation of all transactions on a monthly basis. Issuance of the requisite letter of credit by Makro shall be a prerequisite to any transaction or sale of Goods under this Agreement. (c) All costs and expenses incurred in the manufacture, sale, distribution or exploitation of the Goods, or otherwise incurred by Licensee, and all taxes, duties, levies and assessments, including sales, value added and use taxes, pertaining to the sale of the Goods, except for taxes on the net income realized by Licensor under this Agreement, shall be paid by Licensee. No such costs, expenses or taxes shall be deducted from, or diminish in any way, or result in the reduction of, any Royalty Fees payable to Licensor. Licensee shall be responsible for completing in a timely manner all documentation necessary to (i) permit Licensor to refrain from collecting taxes or assessments it would otherwise be obligated to collect in the Territory or (ii) assist Licensor in deriving duty drawbacks. Licensee shall pay any such taxes and file any reports, forms or tax returns required under the income or value added tax laws of the jurisdictions or countries within the Territory in a timely manner. Licensee shall provide Licensor with copies of all duly executed reports, forms or tax returns, and proof of payment of any such taxes, within 45 days after such reports, forms or tax returns are due. 6. LIMITATION OF USE AND AUTHORITY 6.1 This Agreement does not grant Licensee any right of ownership, title or interest in the Trademarks, nor does this Agreement authorize Licensee to use the Trademarks except for the purpose of manufacturing, marketing, selling and distributing in accordance with this Agreement the Goods in the Territory and for advertising and promotional purposes as described herein. The Trademarks, all rights therein and the goodwill pertaining thereto, whether developed by the Licensor or the Licensee, shall inure to the benefit of and be the exclusive property of Licensor. Licensee shall not register or attempt to register the Trademarks in its own name or the name of any third party. If applicable, Licensee shall assign to Licensor all the Trademarks and incidental rights created by its use, together with the goodwill relating to that part of the business in connection with which the Trademarks are used. Licensee shall execute and deliver to Licensor such documents as Licensor requires to register Licensee as a registered or permitted user thereof, in accordance with any applicable laws, rules, requirements or regulations of any of the jurisdictions in the Territory. 6.2 Neither Licensee nor any of its Affiliates will directly or indirectly sell, manufacture or distribute any goods whatsoever under a mark similar to the Trademark. Licensee will not register or attempt to register in its name or that of any other person or entity affiliated with it any name or mark, corporate name or any designation of any kind, in any language, which is the same as, similar to or a derivative of, or otherwise utilizing any portion of the trademarks or trade names of Licensor or any of its Affiliates. Licensee acknowledges that it does not have and has not acquired any rights in or to the Trademark, product names, likenesses or any derivations of the foregoing. Licensee shall not incorporate or form any corporation or use any name which is the same as, or which is likely to cause confusion or mistake with, any corporate name of Licensor or of any of its Affiliates or subsidiaries. The Trademark shall be displayed by Licensee, without alteration, on all Goods sold by Licensee and all use of such Trademark shall inure directly to the benefit of Licensor. Licensee shall not re-label any of the Goods. Any copyright which may be created in any article, design, label or the like, bearing any Trademark shall be subject to the prior approval before use, and be the property of Licensor. Licensee shall not use any trademark, brand or trade dress which is the same as, or which is likely to cause confusion or mistake with any trademark, brand or trade dress of Licensor. 6.3 Licensee shall provide Licensor with the date of the first use of the Trademarks on the Goods in commerce in each jurisdiction of the Territory and provide Licensor with all necessary documents or information which Licensor may request for the purpose of perfecting Licensor's title to any Trademark registrations. 7. TRADEMARK INFRINGEMENT; INDEPENDENT CONTRACTOR 7.1 Licensee will notify Licensor promptly of any of the following that may come to Licensee's knowledge: (a) Any alleged infringement by Licensor or Licensee of the rights of any third parties arising out of the activities undertaken in connection with this Agreement; (b) Any alleged infringement of any of the Trademarks of Licensor; or (c) Any other factors or events which reasonably may be expected to have a material adverse effect on the promotion of the Goods under any of the Trademarks or on Licensor's rights and interests in any of the Trademarks. 7.2 If any third party files a lawsuit, claim or any other type of proceeding against Licensee claiming that the use by Licensee of the Trademarks infringes upon a valid intellectual property right belonging to such third party, Licensor shall defend such actions at its own expense and hold Licensee harmless against the valid claims of any such third party. Licensor may choose to settle such lawsuit, claim or other proceeding and Licensee shall cooperate to effect any such settlement provided that such settlement does not materially affect Licensee's rights hereunder. Should any of the Goods covered by this Agreement become or in Licensor's opinion be likely to become the subject of such a claim, Licensor may, at its option, either procure for Licensee the right to continue selling or using such product, or replace or modify the product so that it becomes non-infringing. Notwithstanding the foregoing, Licensor shall have no right to admit any liability on behalf of Licensee or to create any kind of duty, obligation or promise concerning the future sale of the product on behalf of Licensee without Licensee's prior written consent, which shall not be unreasonably withheld or delayed. However, to the extent that any settlement, judgment or decree prohibits or restricts Licensor's right to sell the goods covered hereby, it shall be released and discharged from any duty to Licensee to supply the same. Notwithstanding the foregoing, Licensee shall be responsible for costs and expenses associated with any such lawsuit, claim or proceeding. 7.3 If, in the reasonable opinion of Licensor, it becomes desirable to enforce any of the Trademarks against a third party, Licensor shall use reasonable efforts to do so, at its expense. 7.4 Licensee shall furnish all reasonable assistance, at Licensor's request or direction, to enable Licensor to assert and prosecute any claims or defend against any action arising in connection with or related to the Trademarks and the matters described in SECTIONS 7.1 through 7.3 above. Such assistance shall include, but not be limited to: monitoring and reporting to Licensor any improper or unauthorized use of the Trademarks, signing documents, giving testimony, joining such action and asserting claims with respect to the licensed Trademarks against third parties. 7.5 Licensee shall not use the name or credit of Licensor in any manner whatsoever, nor incur any obligation in Licensor's name. Nothing herein contained shall be construed to constitute the parties joint venturers, nor shall any similar relationship be deemed to exist between them. Nothing herein contained shall be construed as constituting Licensee as Licensor's agent or as authorizing Licensee to incur financial or other obligations in Licensor's name without Licensor's specific authorization in writing. Under no circumstances shall any power be granted, or be deemed to be granted to Licensee, be deemed to be a power coupled with an interest. The rights and powers retained by Licensor to supervise or otherwise intervene in Licensee's activities, all as hereinabove provided, are retained because of the necessity of protecting Licensor's copyrights, trademarks, properties and property rights generally, and specifically to conserve the goodwill and good name of Licensor and of the Trademarks. 8. GOODWILL Licensee recognizes the great value of the goodwill associated with the Trademarks and that the Trademarks have a secondary meaning in the mind of the public. Licensee acknowledges and agrees that a breach by Licensee of any of its covenants, agreements or undertakings hereunder will cause Licensor irreparable damage, which cannot be readily remedied in damages in an action at law, and may, in addition, constitute an infringement of Licensor's copyrights or trademarks, and agrees that, as a result, Licensor shall be entitled to equitable remedies, costs and attorneys' fees. 9. TERMINATION 9.1 If Licensee: (i) without prior written consent of Licensor sells, or permits or has reason to believe a party to whom it sells Goods shall sell, any Goods outside the Territory or to any third party other than Makro, bearing the Trademarks; (ii) has intentionally or negligently rendered or renders an incorrect, material representation or report in connection with the rights granted to Licensee hereunder; (iii) commits intentional or negligent material damage or omits or fails to take steps within its power to prevent such damage to Licensor's business, reputation, vendor relationships, customers or client base, distribution channels or assets or the value of any of Licensor's tradenames, trademarks, service marks, symbols, signs, or other distinctive marks, or the goodwill associated therewith; (iv) fails to pay any Royalty Fees set forth in SECTION 5 when due; (v) registers or attempts to register in its own name or the name of a third party a Trademark or any other trademark owned by the Licensor or similar to such a trademark, or any name or mark, corporate name or any designation of any kind which is the same as, similar to or a derivative of, or otherwise utilizing any portion of the Trademark or trade names of Licensor or any of its Affiliates; (vi) assigns or transfers this Agreement, including by operation of law, without the prior written consent of Licensor; or (vii) breaches any of its obligations hereunder, then, in addition to the rights available under law or in equity, Licensor may notify Licensee in writing that Licensee is in default under the terms of the Agreement. If such default is not remedied within 15 days after the delivery of such notice, Licensor shall have the right to terminate this Agreement effective upon delivery to Licensee of notice that the Agreement is terminated. 9.2 Upon termination or expiration of this Agreement, Licensor shall have the right to retain all moneys paid hereunder to date, to receive all moneys to which it is entitled and to avail itself of any legal or other remedy or relief available to it including, but not limited to, equitable relief to enjoin the use of the Trademarks and the manufacture, sale and distribution of Goods utilizing the Trademarks. Licensee shall be responsible for all costs of such enforcement. All remedies available to Licensor hereunder are cumulative, and Licensor may exercise any one or more remedies or rights available to it cumulatively. The termination of this Agreement shall be without prejudice to Licensor's rights and remedies with respect to any obligation incurred or breach committed prior to such termination, including the right to recover for damages caused by Licensee's breach. 9.3 Upon termination or expiration of this Agreement, Licensee shall promptly deliver to Licensor any and all property of the Licensor in the possession, custody or control of Licensee, including all promotional material, original artwork, product manuals and any other material bearing the Trademarks in the possession of Licensee. 9.4 Within ten (10) days of the termination or expiration of this Agreement, Licensee shall deliver to Licensor a statement showing the number and description of Goods on hand or in process. Licensor shall have the right to take a physical inventory to ascertain or verify such statement. 9.5 In the event of termination or expiration of this Agreement, Licensee, its receivers, representatives, trustees, agents, administrators and successors shall have no further right to sell, exploit or in any way deal in or with any advertising matter, packing material, boxes, cartons or other documentation relating thereto bearing the Trademarks, without the express written consent of Licensor. 10. DISTRIBUTION OF GOODS 10.1 Licensee shall be required to achieve the minimum gross sales for the Term set forth on Exhibit F. Licensee shall, during the Term, diligently and continuously market, manufacture (or cause to be manufactured), distribute and sell the Goods and shall make and maintain adequate arrangements for their distribution to Makro throughout the Territory. 10.2 Licensee acknowledges that its failure to cease (or cause to cease) the marketing, manufacture, assembly and packaging, sale or distribution of Goods or any class or category thereof using the Trademark at the termination or expiration of this Agreement will result in immediate and irreparable damage to Licensor and to the rights of any subsequent licensee. Licensee acknowledges and admits that there is no adequate remedy at law for such failure and that, in the event of such failure, Licensor shall be entitled to equitable relief by way of temporary and permanent injunctions and such other further relief as any court with jurisdiction may deem just and proper and Licensee shall be responsible for all costs thereof. 11. SUBCONTRACTORS The Licensee shall obtain satisfactory written evidence from any subcontractor that is retained by Licensee that such subcontractor will not use the Trademarks in any manner not permitted under this Agreement, in the form set forth on SCHEDULE 11, in those instances where the subcontractor furnishes Goods or packaging for the Goods bearing the Trademarks. Licensee shall use its best efforts to assist and cooperate with Licensor with respect to any action by Licensor to enforce its rights to the Trademarks against any one or more of Licensee's subcontractors. 12. SERVICE AND SPARE PARTS Licensee shall take such steps as are necessary to ensure that any purchasers of Goods covered by this Agreement, including Makro, shall establish, or have already established, such service centers or agents as may be necessary for service of the Goods. Licensee shall monitor such independent service agents and centers in the Territory as may be necessary to service the Goods and shall ensure that Makro shall, during the Term and subsequent to the expiration or termination of this Agreement, provide for any after sales warranty service for the Goods for the respective periods required by applicable federal or local law or Licensee's warranty in the particular countries or regions throughout the Territory. 13. REPRESENTATIONS AND WARRANTIES OF LICENSOR Licensor hereby represents and warrants to Licensee that: (a) Licensor is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. (b) Licensor has the full power and authority to execute and deliver this Agreement and to perform all of its obligations hereunder. (c) The execution and delivery of this Agreement has been duly authorized by all necessary corporate action of Licensor and constitutes the valid and legally binding obligation of Licensor enforceable against Licensor in accordance with it terms. (d) This Agreement shall be binding on the successors, assigns and legal representatives of Licensor. 14. REPRESENTATIONS AND WARRANTIES OF LICENSEE Licensee hereby represents and warrants to Licensor that: (a) Licensee is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. (b) Licensee has the full power and authority to execute and deliver this Agreement and to perform all of its obligations hereunder and entry into this Agreement and the performance of its obligations hereunder do not and shall not contravene, conflict with or result in a breach of its certificate of incorporation, by-laws, or any other agreement to which Licensee is a party. (c) The execution and delivery of this Agreement has been duly authorized by all necessary action of Licensee and constitutes the valid and legally binding obligation of Licensee enforceable against Licensee in accordance with its terms. (d) This Agreement shall be binding on the successors, assigns and legal representatives of Licensee, if any. 15. DISCLAIMER AND INDEMNIFICATION 15.1 Licensee shall not and does not grant any warranty or guaranty binding Licensor or creating any liability for Licensor. Licensee will make no statements or representations whatsoever to any third parties which, expressly or impliedly, states or suggests that Licensor is making any warranties with respect to the Goods. Licensor expressly disclaims any implied warranties, including the implied warranties of merchantability and fitness for a particular purpose. 15.2 Licensor shall have no liability or responsibility to Licensee or any other person and/or entity arising out of or relating to the rights granted to Licensee pursuant to this Agreement. Licensee shall defend, indemnify and hold harmless Licensor, its employees, officers, directors, stockholders, licensees, representatives, successors and assigns from and against any and all claims, demands, judgments, liabilities, damages, losses, costs and expenses of any nature (including attorneys' fees and expenses), including without limitation, death, personal injury, bodily injury, sickness, disease, property damage, loss of use of property or product liability arising from or related to any (i) claim, action or omission of Licensee, its agents, employees or their families, affiliates, distributors or subcontractors arising under this Agreement, (ii) Licensee's failure to comply with its obligations set forth herein, (iii) Licensee's misrepresentation of any warranties or representations, or (iv) any action or omission arising out of the operation of Licensee's business. 16. CONFIDENTIALITY 16.1 Each party will use the Confidential Information received by the other party solely for the purpose of carrying out this Agreement. Neither party will disclose the Confidential Information to third parties without the express written consent of an officer of the other party, unless compelled by law, required by applicable securities rules or regulations or, in the written opinion of counsel such disclosure is required by law. In such event, each party shall inform the other party as far in advance as possible prior to making any such disclosure. Notwithstanding the foregoing, Licensor shall not be required to inform or obtain the consent of Licensee for the issuance of any press release which utilizes, refers to or discloses sales or royalty information relating to this Agreement. 16.2 Each party shall cause each of their respective officers, directors, agents or employees to whom a disclosure of Confidential Information is made or any subcontractor, including the manufacturer(s) of the Goods, to adhere to the terms and conditions of this SECTION 16 as if, and to the same extent as if, he or she were a party to this Agreement. 16.3 Upon expiration or termination of this Agreement, each party shall return to the other party all copies of the Confidential Information of the other party in its possession or control, except that Licensor shall not be required to return Confidential Information provided by Licensee which has become a part of Licensor's books and records and which pertains to historical sales and royalty information. 17. FORCE MAJEURE 17.1 Neither party will have any liability to the other by reason of any failure or delay in performance of any provision of this Agreement, if and to the extent that such failure or delay is due to any occurrence (other than financial) beyond the reasonable control of the party failing or delaying to perform. "Beyond reasonable control" shall mean acts of God, civil disturbances, fires, floods, explosions, or riots, war, rebellion or sabotage. The provisions of this paragraph shall not apply to payment obligations under this Agreement. 17.2 A party seeking relief pursuant to this SECTION 17 shall, as soon as practicable after the impediment and its effect on such party's ability to perform become known, give written notice to the other party. Written notice shall also be given when the impediment ceases. 18. LICENSOR'S LINE OF BUSINESS Licensee acknowledges that Licensor is presently in the business of selling consumer electronic products, microwave ovens and other consumer products and is seeking alliances, joint venture partners and/or licensees with the goal of distributing other consumer products throughout the world. Licensee acknowledges that marketing and distribution of the foregoing (as well as any other products which Licensor may distribute) with the Trademarks shall not constitute a breach of this Agreement. 19. ASSIGNMENT AND SUBLICENSING 19.1 The license herein granted is personal to Licensee and may not be assigned, transferred, sub-licensed, pledged, mortgaged or otherwise encumbered by Licensee in whole or in part without Licensor's prior written consent. For the purposes of this SECTION 19.1, the term "assigned" shall include without limitation, transfers of (i) control, whether by merger, consolidation, reorganization or change of management and (ii) ownership of fifty percent (50%) or more of the outstanding securities of Licensee that occurs from the Effective Date, either cumulatively or in a single transaction, and shall include the effect of newly issued securities. 19.2 Notwithstanding the restriction set forth in SECTION 19.1 above, Licensee shall notify Licensor in writing prior to any proposed change in control or transfer of ownership of fifty percent (50%) or more of the outstanding securities of Licensee. If Licensee is interested in continuing the terms of this Agreement, Licensor shall have fifteen (15) business days from the date of receipt of all due diligence materials required by Licensor concerning the proposed transfer of control or ownership to determine whether Licensor will approve, in its sole discretion, such change of ownership or control. Such materials shall be provided by Licensee and include without limitation (i) the proposed transferee's organizational documents, (ii) audited financial statements for the preceding three fiscal years, (iii) proposed transferee's interim financial statements for the period subsequent to the date of the latest annual financial statement, (iv) recent public filings, if applicable, for the preceding three years, (v) tax returns for the preceding three years, and (vi) such other materials as Licensor may reasonably request. Any proposed transferee must be financially sound, knowledgeable of the type of business of Licensee, not a competitor of Licensor, committed to quality and positioned to grow the business. Upon Licensor's approval in its sole discretion, control may be transferred. If Licensor does not approve such proposed change in control or transfer of ownership, and the proposed change in control or transfer of ownership occurs, this Agreement may terminate upon a date established at Licensor's sole discretion. 20. MISCELLANEOUS 20.1 No provision of this Agreement may be changed, amended or waived, except in a writing signed by both parties. 20.2 Any waiver on the part of any party of any right or interest hereunder shall not imply the waiver of any subsequent breach or the waiver of any other rights. No waiver by either party of a breach hereof or a default hereunder shall be deemed a waiver by such party of a subsequent breach or default of like or similar nature. 20.3 Should any provision of this Agreement prove to be invalid or unenforceable under existing or future law, the remaining provisions of the Agreement will remain in force in all other respects. 20.4 All notices will be in writing and in English and will be served personally or by registered or certified mail, return receipt requested, or by overnight courier or by facsimile transmission to each other party at its address herein set forth, or at such other address as each party may provide to the other in writing from time to time: (a) If to Licensor: Emerson Radio Corp. Nine Entin Road Parsippany, NJ 07054 Attention: Legal Department [Facsimile No. (201) 428-2022] (b) If to Licensee: World Wide One Ltd. Room 2, 4th Fl., Albion Plaza 2-6 Granville Road, T.S.T. Kowloon, Hong Kong Attention: Gregory P. Glass Title: Chairman [Facsimile No. 852-2721-2248] Any such notice will be effective upon actual receipt or three (3) days after it is deposited in the mail, postage prepaid, properly addressed and certified, whichever occurs first. 20.5 This Agreement is the entire and sole agreement and understanding of both parties and supersedes all other agreements, understandings and communications, whether oral or written, regarding the subject matter hereof. 20.6 This Agreement may be executed in any number of counterparts or by facsimile, but all counterparts and facsimiles hereof will together constitute but one agreement. In proving this Agreement, it will not be necessary to produce or account for more than one counterpart executed by both parties. 20.7 All disputes between the parties concerning this Agreement will be resolved under the laws of the State of New Jersey, U.S.A., excluding the conflicts of laws provisions thereof, and the parties agree that the courts of Hong Kong will have jurisdiction over the parties in any such dispute. However, it is expressly understood that this Section shall not preclude Licensor's right to make application for, and seek enforcement of, injunctive or other relief in any court having jurisdiction. 20.8 Licensee shall strictly and fully comply with all export controls imposed by the United States or any country or organization of nations within whose jurisdiction Licensee operates or does business. 20.9 The respective indemnities, agreements, representations, warranties and other statements of each of the parties hereto and the undertakings set forth in or made pursuant to this Agreement will remain in full force and effect, and will survive the expiration or termination of this Agreement. 20.10 Licensee shall not disseminate any press release or other announcement relating to the transaction contemplated by this Agreement without Licensor's prior written consent as to the contents thereof. 20.11 Unless otherwise set forth herein, all payments shall be made directly by Licensee to Licensor and shall be in U.S. Dollars. 20.12 The parties have requested that this Agreement be drawn up and interpreted in the English language. IN WITNESS WHEREOF, this Agreement has been executed by the duly authorized representative of each party effective as of the date set forth above. EMERSON RADIO CORP. A Delaware Corporation By: /s/ Eugene I. Davis Eugene I. Davis Vice Chairman World Wide One Ltd. For and on behalf of A Hong Kong Corporation WORLD WIDE ONE LIMITED By: /s/ Gregory P. Glass Authorized Signature(s) Gregory P. Glass Chairman EX-6 7 July 2, 1997 Mr. Brince Luo President Hi Quality International (U.S.A.) Inc. 602 Rockefeller Avenue Ontario, CA 91761 SALE OF EMERSON RADIO-BRANDED "AS IS" PRODUCTS Dear Mr. Luo: This letter will confirm the agreement, effective as of the date of this letter agreement, between Emerson Radio Corp. ("Emerson") and Hi Quality International (U.S.A.) Inc. ("Purchaser"), whereby Emerson, directly or through an affiliate, shall sell "AS IS" products exclusively to Purchaser, for refurbishment and re- sale by Purchaser in accordance with the terms of this letter agreement. Emerson agrees to offer for sale, and Purchaser agrees to purchase "AS IS" Emerson Radio branded consumer electronics products from Emerson, which products are returned to Emerson by its customers in the United States and are available for re-sale "AS IS" ("the merchandise"). Purchaser agrees that it shall refurbish or repair such merchandise in accordance with the terms and conditions set forth on Exhibit A annexed hereto, which terms and conditions are incorporated herein as if fully set forth. Emerson agrees that Purchaser shall have the right to re- sell such refurbished Emerson Radio branded products in accordance with the terms of this letter agreement. Pricing and Payment Terms. Purchaser agrees that it shall purchase the merchandise F.O.B. Emerson's warehouse. Purchaser shall pay cash in advance for all merchandise, and issue a purchase order to Emerson within five (5) days of notification and presentation of available inventory. Purchaser shall provide Emerson with a commercial master revolving letter of credit in the amount of US$500,000, which permits drawdowns upon shipments of merchandise, with a bank that maintains a correspondent relationship with Emerson's bank. Such letter of credit shall contain "Evergreen Provisions" which provide that if payment does not occur or upon a default under this agreement, Emerson shall have the right to draw upon the letter of credit. Upon request by Emerson, Purchaser agrees to supply Emerson with any and all documents required for drawdowns against the letter of credit in the form and within the time period required by Emerson. Term and Termination. The term of this agreement shall be for a period of one year from the date of this agreement. Either party shall have the right to terminate this agreement effective upon thirty (30) days written notice that the agreement is terminated. Independent Contractor. Nothing herein contained shall be construed as constituting Purchaser as Emerson's agent or as authorizing Purchaser to incur financial or other obligations in Emerson's name. Representations. Purchaser hereby represents and warrants that it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, that it has the full power and authority to execute and deliver this agreement and to perform all of its obligations hereunder. Disclaimer. Emerson expressly disclaims any implied warranties, including the implied warranties of merchantability and fitness for a particular purpose. Emerson shall have no liability or responsibility to Purchaser or any other person and/or entity arising out of or relating to the rights granted to Purchaser pursuant to this agreement. Confidential Information. Each party will use any confidential non-public information received by the other party solely for the purpose of carrying out this agreement. Neither party will disclose any confidential information to third parties without the express written consent of an officer of the other party, unless compelled by law, required by applicable securities rules or regulations or, in the written opinion of counsel such disclosure is required by law. In such event, each party shall inform the other party as far in advance as possible prior to making any such disclosure. Each party shall cause each of their respective officers, directors, agents or employees to whom a disclosure of confidential information is made or any subcontractor, to adhere to the terms and conditions of this section as if, and to the same extent as if, he or she were a party to this agreement. Upon expiration or termination of this agreement, each party shall return to the other party all copies of any confidential information of the other party in its possession or control. No Assignment. This agreement is personal to Purchaser and may not be assigned, transferred, sub-licensed, pledged, mortgaged or otherwise encumbered by Purchaser in whole or in part without Emerson's prior written consent. No Amendment. No provision of this agreement may be changed, amended or waived, except in a writing signed by both parties. No Waiver. Any waiver on the part of any party of any right or interest hereunder shall not imply the waiver of any subsequent breach or the waiver of any other rights. No waiver by either party of a breach hereof or a default hereunder shall be deemed a waiver by such party of a subsequent breach or default of like or similar nature. Severability. Should any provision of this agreement prove to be invalid or unenforceable under existing or future law, the remaining provisions of the agreement will remain in force in all other respects. Entire Agreement. This agreement is the entire and sole agreement and understanding of both parties and supersedes all other agreements, understandings and communications, whether oral or written, regarding the subject matter hereof. Governing Law. All disputes between the parties concerning this agreement will be resolved under the laws of the State of New Jersey, U.S.A., excluding the conflicts of laws provisions thereof, and the courts of the State of New Jersey shall have sole and exclusive jurisdiction over the parties, and venue shall lie exclusively in Morris County. Survival. The respective representations, indemnities, warranties, agreements, covenants and other statements of the parties will remain in full force and effect and shall survive any termination of this agreement. Execution. This agreement may be executed in any number of counterparts or by facsimile, but all counterparts and facsimiles hereof will together constitute but one agreement. In proving this agreement, it will not be necessary to produce or account for more than one counterpart executed by both parties. IN WITNESS WHEREOF, this letter agreement has been executed by the duly authorized representative of each party effective as of the date first set forth above. EMERSON RADIO CORP. HI QUALITY INTERNATIONAL (U.S.A.) INC. BY:/s/ Marino Andriani BY:/s/ Brince Luo Name Marino Andriani Name Title President Title President Emerson Radio Consumer Products Corporation BY: /s/ Elizabeth J. Calianese V.P. Elizabeth J. Calianese Vice President Emerson Radio Corp. EX-27 8
5 0000032621 EMERSON RADIO CORP. 1,000 YEAR MAR-31-1997 MAR-31-1997 2,640 0 18,453 6,001 13,329 34,918 5,651 3,521 58,768 21,660 20,856 0 9,000 403 6,626 58,768 173,668 178,708 174,184 174,184 22,275 2,558 3,429 (23,738) 230 (23,968) 0 0 0 (23,968) (0.61) (0.61)
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