-----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, MMQlx6H5Ak9cGB+A189a1OJFD/8LeneNomEBYtfA1/C22OenwfNc4Ay5J7dpgF8B IS5OkqIebx84ThWV0/q2yg== 0000032621-98-000009.txt : 19980703 0000032621-98-000009.hdr.sgml : 19980703 ACCESSION NUMBER: 0000032621-98-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980403 FILED AS OF DATE: 19980702 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: SEC FILE NUMBER: 001-07731 FILM NUMBER: 98660243 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 For the fiscal year ended April 3, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-25226 EMERSON RADIO CORP. (Exact name of registrant as specified in its charter) Delaware 22-3285224 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) Nine Entin Road, Parsippany, NJ 07054 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (973) 884-5800 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $.01 American Stock Exchange per share Securities registered pursuant to Section 12(g) of the Act: Series A Preferred Stock and Warrants. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirement for the past 90 days. [X] YES [ ] NO. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock of the registrant held by non- affiliates of the registrant at June 24, 1998 (computed by reference to the last reported sale price of the Common Stock on the American Stock Exchange on such date): $10,461,520. Indicate by check mark whether the registrant has filed all documents and reports to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [X] YES [ ] NO. Number of Common Shares outstanding at June 24, 1998: 51,118,915 DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for the 1998 Annual Meeting of Stockholders: Part III PART I Item 1. BUSINESS GENERAL Emerson Radio Corp. ("Emerson" or the "Company"), a consumer electronics distributor, directly and through subsidiaries, designs, sources, imports and markets a variety of televisions and other video products, microwave ovens, audio, home theater, specialty and other consumer electronic products. The Company also licenses the Emerson and G-Clef trademark for a variety of television, video, telephone, and other products domestically and internationally to certain non-affiliated entities (See "Business-Licensing and Related Activities" for further discussion). The Company distributes its products primarily through mass merchants and discount retailers leveraging the strength of its Emerson and G-Clef trademark, a nationally recognized trade name in the consumer electronics industry. The trade name "Emerson Radio" dates back to 1912 and is one of the oldest and most well respected names in the consumer electronics industry. The Company believes it possesses an advantage over its competitors due to the combination of (i) the Emerson and G-Clef brand recognition, (ii) its distribution base and established relations with customers in the mass merchant and discount retail channels, (iii) its sourcing expertise and established vendor relations, and (iv) an infrastructure with personnel experienced in servicing and providing logistical support to the domestic mass merchant distribution channel. Emerson intends to continue to leverage its core competencies to offer a broad variety of current and new consumer products to retail customers. In addition, the Company has in the past and intends in the future to form joint ventures and enter into licensing and distributor agreements which will take advantage of the Company's trademarks and utilize the Company's logistical and sourcing advantages for products which are more efficiently marketed with the assistance of these partners. The Company's core business consists of the distribution and sale of various low to moderately priced product categories, including black and white and color televisions, video cassette recorders ("VCRs"), video cassette players ("VCPs"), TV/VCR combination units, home stereo and portable audio products, home theater products and microwave ovens. The majority of the Company's marketing efforts and sales of these products is concentrated in the United States and, to a lesser extent, certain other international regions. Emerson's major competition in these markets are foreign-based manufacturers and distributors. See "Business - Competition." The Company was originally formed in the State of New York in 1956 under the name Major Electronics Corp. In 1977, the Company reincorporated in the State of New Jersey and changed its name to Emerson Radio Corp. On March 31, 1994, the Company successfully reorganized under Chapter 11 of the Federal Bankruptcy Code. On April 4, 1994, the Company was reincorporated in Delaware by merger of its predecessor into its wholly-owned Delaware subsidiary formed for such purpose. References to "Emerson" or the "Company" refer to Emerson Radio Corp. and its predecessor and subsidiaries, unless the context otherwise indicates. The Company's principal executive offices are located at Nine Entin Road, Parsippany, New Jersey 07054-0430. The Company's telephone number in Parsippany, New Jersey, is (973) 884-5800. PRODUCTS The Company directly and through subsidiaries designs, sources, imports and markets a variety of television and other video products, microwave ovens, audio, home theater, specialty and other consumer electronic products, primarily on the strength of its Emerson and G-Clef trademark, a nationally recognized symbol in the consumer electronics industry. The Company's current product categories consist of the following core products: Video Products Audio Products Other Color televisions Shelf systems Home theater Black and white specialty televisions CD stereo systems Microwave ovens Color specialty televisions Portable audio, Color TV/VCR combination units cassette & CD Video cassette recorders systems Specialty video cassette players Personal audio, cassette & CD systems Digital clock radios Specialty clock radios
All of the Company's products offer various features. Color television units range in screen size from 5 inches to 25 inches and specialty color televisions are offered in 5 inch and 9 inch units. Combination units range in screen size from 9 inches to 25 inches. Portable audio systems incorporate AM/FM radios and/or cassette and/or CD players in a variety of models. Microwave ovens range in size from 0.6 cubic feet to 1.2 cubic feet containing features such as turntables, key pad touch controls, auto defrost and multi- power levels. Industry sales of units of home theater speakers increased 60% ($126 million) in 1997 and are expected to increase another 20% ($70 million) in 1998. During the fiscal year ending April 3, 1998 ("Fiscal 1998") Emerson introduced its CinemaSurround(R) product line, a new concept in Home Theater Technology which uses a patented technology to deliver dynamic 3-dimensional sound from any stereo source, without the need for any decoding electronics. GROWTH STRATEGY The Company's strategic focus is to: (i) develop and expand its distribution of consumer electronics products in the domestic marketplace to existing and new customers; (ii) develop and sell new products, such as home theater; (iii) capitalize on opportunities to license the Emerson and G-Clef trademark; (iv) leverage and exploit its sourcing capabilities, buying power and logistics expertise in the Far East either internally or on behalf of third parties; (v) expand international sales and distribution channels; and (vi) expand through strategic mergers and acquisitions of, or controlling interests in, other companies. See Note 3 to the consolidated financial statements included in Item 8 "Financial Statements and Supplementary Data" regarding Emerson's investment in Sport Supply Group ("SSG") as part of its strategic plan to expand. The Company believes that the Emerson and G-Clef trademark is recognized in many countries. A principal component of the Company's growth strategy is to utilize this global brand name recognition together with the Company's reputation for quality and cost competitive products to aggressively promote its product lines within the United States and targeted geographic areas on an international basis. The Company's management believes the Company will be able to compete more effectively in the highly competitive consumer electronics and microwave oven industries, domestically and internationally, by combining innovative approaches to the Company's current product line and augmenting its product line with complimentary products. The Company intends to pursue such plans either on its own, or by forging new relationships, including through license arrangements, distributorship agreements and joint ventures. See "Business-Licensing and Related Activities." SALES AND DISTRIBUTION The Company makes available to its customers a direct import program, pursuant to which products bearing the Emerson trademark are imported directly by the Company's customers. In Fiscal 1998 and Fiscal 1997, products representing approximately 77% and 46% of net revenues, respectively, were imported directly from manufacturers to the Company's customers. If the Company experiences a decline in sales effected through direct imports and a corresponding increase in domestic sales, the Company will require increased working capital in order to purchase inventory to make such sales. This increase in working capital may affect the liquidity of the Company. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Forward-looking Information". The Company has an integrated system to coordinate the purchasing, sales and distribution aspects of its operations. The Company receives orders from its major accounts electronically or by the conventional modes of facsimile, telephone or mail. The Company does not have long-term contracts with any of its customers, but rather receives orders on an ongoing basis. Products imported by the Company (generally from the Far East and Mexico) are shipped by ocean and/or inland freight and then stored in contracted public warehouse facilities for shipment to customers. This also includes the use of an Affiliate's warehouse pursuant to a Management Services Agreement between the Company and the Affiliate. (See Note 3 to the Consolidated Financial Statements included in Item 8). All merchandise received by Emerson is automatically input into the Company's on-line inventory system. As a purchase order is received and filled, warehoused product is labeled and prepared for outbound shipment to Company customers by common, contract or small package carriers for sales made from the Company's inventory. DOMESTIC MARKETING In the United States, the Company markets its products primarily through mass merchandisers and discount retailers. Wal-Mart Stores accounted for approximately 58% and 36%, and Target Stores accounted for approximately 16% and 13% of the Company's net revenues in Fiscal 1998 and Fiscal 1997, respectively. No other customer accounted for more than 10% of the Company's net revenues in either period. Management believes that any loss or reduction in sales from these customers may have a material impact on the Company's operating income. Approximately 34% and 43% of the Company's sales in Fiscal 1998 and Fiscal 1997, respectively, were made through sales representative organizations that receive sales commissions and work closely with the Company's sales personnel. The sales representative organizations sell, in addition to the Company's products, similar, but generally non-competitive, products. In most instances, either party may terminate a sales representative relationship on 30 days' prior notice in accordance with customary industry practice. The Company utilizes approximately 30 sales representative organizations, including one through which approximately 13% of the Company's net revenues were made in 1997. No other sales representative organization accounted for more than 10% of the Company's net revenues in either year. The remainder of the Company's sales are made to retail customers serviced by the Company's sales personnel. FOREIGN MARKETING While the major portion of the Company's marketing efforts are made in the United States, approximately 2% and 8% of the Company's net revenues in Fiscal 1998 and Fiscal 1997, respectively, were derived from customers based in foreign countries. See Note 14 of notes to consolidated financial statements included in Item 8 "Financial Statements and Supplementary Data" and "Management's Discussion and Analysis of Results of Operations and Financial Condition." LICENSING AND RELATED ACTIVITIES The Company has several license agreements in place, which allow licensees the use of the Emerson and G-Clef trademark for the manufacture and/or the sale of consumer electronics and other products. The license agreements cover various countries throughout the world and are subject to renewal at the expiration of the agreements. Additionally, the Company has entered into several sourcing and inspection agreements that require the Company to provide these services in exchange for a fee. License revenues recognized in Fiscal years 1998, 1997 and 1996 were $5,597,000, $5,040,000 and $4,493,000, respectively. The Company records a majority of licensing revenues as they are earned over the term of the related agreements. In February 1995, the Company and one of its largest Suppliers and certain of the Supplier's affiliates (collectively, the "Supplier") entered into two mutually contingent agreements (the "Agreements"). Effective March 31, 1995, the Company granted a license of certain trademarks to the Supplier for a three- year term. The license permitted the Supplier to manufacture and sell certain video products under the Emerson and G-Clef trademark to one of the Company's largest customer (the "Customer") in the U.S. and Canada, and precluded the Supplier from supplying product to the Customer other than under the Emerson and G-Clef trademark or the Supplier's other trademarks. Further, the Agreements provided that the Supplier would supply the Company with certain video products for sale to other customers at preferred prices for a three-year term. Under the terms of the Agreements, the Company received non-refundable minimum annual royalties from the Supplier to be credited against royalties earned from sales of video cassette recorders and players, television/video cassette recorder and player combinations, and color televisions to the Customer. In addition, effective August 1, 1995, the Supplier assumed responsibility for returns and after-sale and warranty services on all video products manufactured by the Supplier and sold to the Customer, including similar video products sold by the Company prior to April 1, 1995. Royalty income recognized by the Company pursuant to the Agreements were $4,000,000, $4,000,000 and $4,442,000 in Fiscal 1998, 1997 and 1996, respectively, and are included in the balances provided above. The agreement expired on March 31, 1998. In anticipation of the expiration of the Agreements, Emerson executed a four-year agreement ("Daewoo Agreement") with Daewoo Electronics Co. Ltd., ("Daewoo") in April 1997. This agreement provides that Daewoo will manufacture and sell television and video products bearing the Emerson and G-Clef trademark to customers in the U.S. market. Daewoo is responsible for and assumes all risks associated with, order processing, shipping, credit and collections, inventory, returns and after-sale service. The Company will arrange sales and provide marketing services and in return receive a commission for such services. This agreement can be terminated without cause by either party upon 90 days notice. The Daewoo Agreement may result in commission revenues that will be less than, equal to or exceed those earned from the Supplier Agreement. The agreement with Daewoo does not contain minimum annual commissions and is entirely dependent on the volume of sales made by the Company that are subject to the Daewoo Agreement. Should the Company not generate commission revenues that are at levels substantially equal to the revenues generated from the Supplier Agreement, the Company's results of operations will be effected adversely. In February 1997, the Company executed five-year license/supply agreements with Cargil International Corp. ("Cargil"), covering the Caribbean and Central and South American markets. The agreements provide for the license of the Emerson and G-Clef trademark for certain consumer electronics and other products and require Emerson to source and inspect product for Cargil. Under the terms of the agreements, the Company will receive minimum annual royalties and a separate fee for the provision of sourcing and inspection services. Cargil assumes all costs and expenses associated with the purchasing, marketing and after-sales support of such products. In October 1994, the Company entered into a license agreement with Jasco Products Co., Inc., ("Jasco"), as amended, whereby the Company granted a license of certain trademarks to Jasco for use on consumer electronics accessories. Under the terms of the agreement as amended in April 1997, the Company will receive minimum annual royalties through the life of the agreement, which expires on December 31, 1998. In June 1997, the Company entered into an eighteen month non-exclusive license agreement with World Wide One, Ltd., a Hong Kong corporation for use of the Emerson and G-Clef trademark in connection with the sale of certain consumer electronics products and other products to Makro International Far East Ltd. for sales of these products in China, Indonesia, Malaysia, Philippines, South Korea, Taiwan and Thailand. The Company will provide sourcing and inspection services for at least 50% of the licensee's purchase requirement. The licensee is required to meet certain minimum sales requirements as well as to ensure the establishment of adequate service centers or agents for after-sales warranty services. In March 1998, the Company executed three-year license and supply agreements with WW Mexicana, S. A. de C. V. ("WW Mexicana"), a distributor located in Mexico covering the Mexico market. The agreements provide for the license of the Emerson and G-Clef trademark for use on certain consumer products to be sold in Mexico and sourcing and inspection services. Under the terms of these agreements, the Company will receive minimum annual royalties through the life of the agreement and will receive a separate fee for sourcing and inspection services. In March 1998 the Company executed a three-year license agreement with Tel- Sound Electronics, Inc. ("Tel-Sound"), covering the United States and Canada markets. The agreement provides for the license of the Emerson and G-Clef trademark for use with telephones, answering machines and caller ID products. Under the terms of this agreement, the Company will receive minimum annual royalties through the life of the agreement. The Company intends to pursue additional licensing opportunities and believes that such licensing activities have had and will continue to have a positive impact on operating results by generating royalty and sourcing income with minimal incremental costs, if any, and without the necessity of utilizing working capital. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Forward-Looking Information." DESIGN AND MANUFACTURING The majority of the Company's products are manufactured by original equipment manufacturers in accordance with the Company's specifications. These manufacturers are primarily located in Hong Kong, South Korea, China, Malaysia, Thailand and Mexico. The Company's design team is responsible for product development and works closely with its suppliers. Company engineers determine the detailed cosmetic, electronic and other features for new products, which typically incorporate commercially available electronic parts to be assembled according to its design. Accordingly, the exterior designs and operating features of the Company's products reflect the Company's judgment of current styles and consumer preferences. The Company's designs are tailored to meet the consumer preferences of the local market, particularly in the case of the Company's international markets. During Fiscal 1998 and Fiscal 1997, 100% of the Company's purchases consisted of imported finished goods. The following summarizes the Company's purchases from its major suppliers. FISCAL YEAR SUPPLIER 1998 1997 Daewoo 42% 22% Tonic Electronics 20% * Orient Power * 21% Imarflex * 16% * Less than 10%.
No other supplier accounted for more than 10% of the Company's total purchases in Fiscal 1998 or Fiscal 1997. The Company considers its relationships with its suppliers to be satisfactory and believes that, barring any unusual shortages or economic conditions (See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Forward-Looking Information" regarding the economic crisis in Asia) the Company could develop, as it already has developed, alternative sources for the products it currently purchases. Except for the agreement with Daewoo described above (See "Licensing and Related Activities"), the Company does not have a contractual agreement with any of its suppliers for product purchases. No assurance can be given that certain shortages of product would not result if the Company was required to seek alternative sources of supply without adequate notice by a supplier or a reasonable opportunity to seek alternate production facilities and component parts. WARRANTIES On sales the Company makes to customers within the United States, the Company offers limited warranties comparable to those offered to consumers by its competitors. RETURNED PRODUCTS Customers return product to the Company for a variety of reasons, including liberal retailer return policies with their customers, damage to goods in transit and occasional cosmetic imperfections and mechanical failures. The Company has executed an agreement with Hi Quality International (U.S.A.) Inc. ("Hi Quality") as an outlet for the Company's returned products pursuant to which Hi Quality has agreed to purchase from the Company all returned consumer electronics products in the United States that are not subject to the return-to-vendor agreements discussed below. Hi Quality will refurbish them, if feasible, and sell them as either refurbished or "As-Is" product. To further reduce the costs associated with product returns, the Company has entered into return-to-vendor agreements with the majority of its suppliers. For a fee, the Company returns defective returned product to the supplier and in exchange receives a replacement unit. The agreements cover certain microwave oven, home theater, audio and video products. The Company has realized and expects to continue to realize significant cost savings from such agreements. BACKLOG From time-to-time, the Company has substantial orders from customers on hand. Management believes, however, that backlog is not a significant factor in its operations. The ability of management to correctly anticipate and provide for inventory requirements is essential to the successful operation of the Company's business. TRADEMARKS The Company owns the Emerson and G-Clef , "H.H. Scott" and "Scott" trademarks for certain of its home entertainment and consumer electronic products in the United States, Canada, Mexico and various other countries. Of the trademarks owned by the Company, those registered in the United States must be renewed at various times through 2008 and those registered in Canada must be renewed at various times through 2011. The Company's trademarks are also registered on a worldwide basis in various countries, which registrations must be renewed at various times. The Company intends to renew all such trademarks. The Company considers the Emerson and G-Clef trademark to be of material importance to its business. The Company owns several other trademarks, none of which is currently considered by the Company to be of material importance to its business. The Company has licensed certain applications of the Emerson and G- Clef trademark to Tel-Sound, WW Mexicana, Cargil, Daewoo, World Wide One, Jasco and the Franklin Mint on a limited basis and for a definitive period of time. See " Licensing and Related Activities." COMPETITION The market segment of the consumer electronics industry in which the Company competes generates approximately $18 billion of factory sales annually and is highly fragmented, cyclical and very competitive, supporting major American, Japanese and Korean companies, as well as numerous small importers. The industry is characterized by the short life cycle of products which requires continuous design and development efforts. Market entry is comparatively easy because of low initial capital requirements. The Company primarily competes in the low to medium-priced sector of the consumer electronics market. Management estimates that the Company has several dozen competitors that are manufacturers and/or distributors, many of which are much larger and have greater financial resources than the Company. The Company competes primarily on the basis of its products' reliability, quality, price, design, consumer acceptance of the Emerson and G-Clef trademark and quality service to retailers and their customers. The Company's products also compete at the retail level for shelf space and promotional displays, all of which have an impact on the Company's established and proposed distribution channels. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." SEASONALITY The Company generally experiences stronger demand from its customers for its products in the fiscal quarters ending September 30 and December 31. Accordingly, to accommodate such increased demand, the Company generally is required to place higher orders with its vendors during the quarters ending June 30 and September 30, thereby increasing the Company's need for working capital during such periods. On a corresponding basis, the Company also is subject to increased returns during the quarters ending March 31 and June 30, which adversely affects the Company's collection activities and liquidity during such periods. Operating results may fluctuate due to other factors such as the timing of the introduction of new products, price changes by the Company and its competitors, demand for the Company's products, product mix, delay, available inventory levels, fluctuation in foreign currency exchange rates relative to the United States dollar, seasonal cost increases, and general economic conditions. GOVERNMENT REGULATION Pursuant to the Tariff Act of 1930, as amended, the Trade Act of 1974 and regulations promulgated thereunder, the United States government charges tariff duties, excess charges, assessments and penalties on many imports. These regulations are subject to constant change and revision by government agencies and by action by the United States Trade Representative and may have the effect of increasing the cost of goods purchased by the Company or limiting quantities of goods available to the Company from its overseas suppliers. A number of states have adopted statutes regulating the manner of determining the amount of payments to independent service centers performing warranty service on products such as those sold by the Company. Additional Federal legislation and regulations regarding the importation of consumer electronics products, including the products marketed by the Company, have been proposed from time-to-time and, if enacted into law, could adversely affect the Company's results of operations. EMPLOYEES As of June 24, 1998, the Company had approximately 108 employees. The Company considers its labor relations to be generally satisfactory. The Company has no union employees. Item 2. PROPERTIES The Company leases warehouse and office space in New Jersey, Texas, Canada and Hong Kong under leases expiring at various times. Lease agreements for 10,132 square feet of office space in Hong Kong expire July 31, 2000. Renewal for reduced square footage for office space at its Corporate offices in New Jersey for 19,216 square feet was entered into on May 15, 1998 for commencement as of August 1, 1998 and expires on July 31, 2003. There is also 5,400 square feet of warehouse and office space rented from an Affiliate pursuant to a Management Services Agreement which can be terminated by either party upon 60 days notice. In the past several years, the Company has closed substantially all of its leased or owned warehouse facilities in favor of public warehouse space as part of the Company's effort to convert fixed costs to variable costs. Such public warehouse commitments are evidenced by contracts with terms of up to one year. The cost for the public warehouse space is primarily based on a fixed percentage of the Company's sales from each respective location. The Company does not presently own any real property. In addition, a portion of its New Jersey corporate headquarters has been subleased through July 1998. Item 3. LEGAL PROCEEDINGS CERTAIN OUTSTANDING COMMON STOCK Pursuant to the Company's bankruptcy restructuring plans on March 31, 1994, 30 million shares of the Company's Common Stock were issued to GSE Multimedia Technologies Corporation ("GSE"), Fidenas International Limited, L.L.C. ("FIN") and Elision International, Inc. ("Elision"). GSE, FIN and Elision (the "Affiliated Entities") are all affiliates of Geoffrey P. Jurick, the Company's Chairman of the Board, Chief Executive Officer and President. On June 11, 1996, a Stipulation of Settlement and Order (the "Settlement Agreement") was executed in proceedings before the United States District Court for the District of New Jersey, which settles various legal proceedings in Switzerland, the Bahamas and the United States. The Settlement Agreement provides for, among other things, the payment by Mr. Jurick and his Affiliated Entities of $49.5 million to various claimants of Mr. Jurick and the Affiliated Entities (the "Creditors"), to be paid from the proceeds of the sale of certain of the 29.2 million shares of Emerson common stock (the "Settlement Shares") owned by the Affiliated Entities. In addition, Mr. Jurick is to be paid the sum of $3.5 million from the sale of the Settlement Shares. The Settlement Shares are to be sold over an indeterminate period of time by a financial advisor, TM Capital (the "Advisor") pursuant to marketing plan taking into consideration (i) the interests of Emerson's minority stockholders, and (ii) the goal of generating sufficient proceeds to pay the Creditors and Mr. Jurick as quickly as possible. The Settlement Shares have been divided into two pools. The Pool A Shares currently consist of 15.3 million shares of Emerson's common stock. The Pool B Shares currently consist of the number of Emerson shares with respect to which Mr. Jurick must retain beneficial ownership of voting power to avoid an event of default arising out of a change of control pursuant to the terms of the Company's Loan and Security agreement with a U.S. financial institution (the "Lender") and/or the Indenture governing the Company's 8-1/2% Senior Subordinated Convertible Debentures Due 2002 (the "Debentures"). Sales of the Settlement Shares may be made pursuant to a registered offering if the sales price is not less than 90% of the average of the three most recent closing prices (the "Average Closing Price"), or, other than in a registered offering, of up to 1% per quarter of the Emerson common stock outstanding, if the sales price is not less than 90% of the Average Closing Price. Any other attempted sales are subject to the consent of the Company, Mr. Jurick, the Creditors, and, if necessary, the United States District Court in Newark, New Jersey. All of the Settlement Shares secure payment of the $49.5 million owed to the Creditors on a first priority basis. Any Creditor may apply to the Court for an order to terminate the Settlement Agreement if certain events occur. Such events include, without limitation, delisting of the Settlement Shares from a national securities exchange or a determination that there is no reasonable prospect that the goals contemplated by the Settlement Agreement can be achieved. In November 1997, Petra Stelling and Barclays Bank filed a motion with the Court for an order (i) terminating the Settlement Agreement on the ground that there is no reasonable prospect that the goals contemplated by the Settlement Agreement can be accomplished, and (ii) granting the Creditors authorization to exercise all the rights and remedies provided by the Settlement and Pledge Agreements in the event of termination including authorizing the Collateral Agent to sell the Emerson Shares to fund payment of the Settlement Amount and to vote the Emerson Shares pending such sale, directing the entry and release of the Consent Judgments, authorizing Petra Stelling to enforce the Swiss Judgment and for such other relief as the Court deems appropriate. The Company and Mr. Jurick responded, the Creditors replied and a hearing on the motion was held in April 1998 at which time it was adjourned. The hearing is currently scheduled to resume on July 9, 1998. If the Court enters an order terminating the Settlement Agreement, the Creditors may take any action permitted by law to execute the Consent Judgments given to them in connection with the Settlement Agreement to collect the unpaid balance (including, without limitation, foreclosing on the Settlement Shares). If the Creditors foreclose on the Settlement Shares and such foreclosure results in a change of control (as defined in the Senior Secured Credit Facility), such foreclosure will be deemed an event of default under the Company's Senior Secured Credit Facility entitling the holders to accelerate payment of such indebtedness. In addition, if a change of control (as defined in the Indenture governing the Debentures) occurs, each of the holders of the Debentures, subject to the right of the Senior Secured Creditors to impose a 120 day payment block, has the right to require the Company to repurchase its Debentures at the par value thereof plus accrued but unpaid interest. Such repurchases may have a material adverse effect on the Company's future business activities. In 1994, Petra and Donald Stelling ("the Stellings"), two of the Creditors filed a complaint with the Swiss Authorities alleging that Messrs. Jurick and Jerome H. Farnum ("Farnum"), directors of the Company, had conducted banking operations in Switzerland without appropriate licenses and that Messrs. Jurick, Farnum, and Peter G. Bunger ("Bunger"), also a director of the Company, engaged in improper activities in the financing of the Plan of Reorganization. Although, as part of the settlement discussed herein, the Stellings and other affected parties requested the discontinuance of the criminal investigations of these individuals, the matter is presently pending before a Swiss Court with a trial, if any, to be held no earlier than 1999. The Federal Banking Commission of Switzerland previously issued a decree purporting to determine that certain entities affiliated with Messrs. Jurick and Farnum were subject to Swiss banking laws and had engaged in banking activities without a license. OTAKE On December 20, 1995, the Company filed suit in the United States District Court for the District of New Jersey against Orion Sales, Inc., Otake Trading Co. Ltd., Technos Development Limited, Shigemasa Otake, and John Richard Bond, Jr., (collectively, the "Otake Defendants") seeking damages and alleging breach of contract, breach of covenant of good faith and fair dealing, unfair competition, interference with prospective economic gain, and conspiracy in connection with certain activities of the Otake Defendants under certain agreements between the Company and the Otake Defendants. On December 21, 1995, Orion Sales, Inc. and Orion Electric (America), Inc. filed suit against the Company in the United States District Court, Southern District of Indiana, Evansville Division, subsequently amended, alleging various breaches of certain agreements by the Company, including breaches of the confidentiality provisions, certain payment breaches, breaches of provisions relating to product returns, and other alleged breaches of those agreements, and seeking declaratory and injunctive relief and damages in the amount of $3.2 million, together with interest thereon, attorneys' fees, and certain other costs. The Company is presently owed the sum of $5 million from Orion representing royalty payments past due and owing pursuant to a certain License Agreement dated February 22, 1995 by and between the Company and Orion. In the context of the action Orion Sales, Inc. v. Emerson Radio Corp., pending in the United States District Court for the Southern District of Indiana (the "District Court"), Orion has executed a pre-judgment garnishment of these funds and deposited them with the Clerk of the District Court pursuant to an Order of the District Court. Orion has not contested the Company's entitlement to these royalty payments. Orion has also posted a bond with the District Court sufficient to compensate Emerson for any and all damages that may result from the pre-judgment garnishment. The Company has withheld payment of the sum of $3.2 million for certain consumer electronic products that Orion and its affiliates sold and delivered to Emerson pursuant to a certain Agreement dated February 22, 1995 by and between Emerson on the one hand and Orion, Otake Trading Co., Inc. and Technos Development Limited on the other (the "Supply Agreement"). Emerson has vigorously contested Orion and its affiliates' entitlement to the $3.2 million payment. Both the Company and Orion have asserted claims for interest accruing on the unpaid principal balances respectively due them, which are presently pending before the District Court. The Company's management believes that it will receive the $5 million due pursuant to the license agreement and has meritorious defenses to Orion's claim for the $3.2 million payment, and, also, the interest allegedly accrued thereon. In any event, the Company believes the results of that litigation should not have a material adverse effect on the financial condition of the Company or on its operations. BANKRUPTCY CLAIMS The Company is presently engaged in litigation regarding several bankruptcy claims which have not been resolved since the restructuring of the Company's debt in March 31, 1994. The largest claim was filed on or about July 25, 1994, with the United States Bankruptcy Court for the District of New Jersey, in connection with the rejection of certain executory contracts with two Brazilian entities, Cineral Electronica de Amazonia Ltda. and Cineral Magazine Ltda. (collectively, "Cineral"). The amount currently claimed is for $93.6 million, of which $86.8 million represents a claim for lost profits. The claim will be satisfied, to the extent the claim is allowed by the Bankruptcy Court, in the manner other allowed unsecured claims were satisfied. The Company has objected to the claim and intends to vigorously contest such claim and believes it has meritorious defenses to the highly speculative portion of the claim for lost profits and the portion of the claim for actual damages for expenses incurred prior to the execution of the contracts. An adverse final ruling on the Cineral claim could have a material adverse effect on the Company, even though it would be limited to 18.3% of the final claim determined by a court of competent jurisdiction; however, with respect to the claim for lost profits, the Company believes the chances for recovery for lost profits are remote. There has been no activity regarding this litigation during the current fiscal year. TAX CLAIM A wholly owned subsidiary of the Company, Emerson Radio (Hong Kong) Ltd. was assessed $858,000 by the Hong Kong Inland Revenue Department (the "IRD") in May 1998. The assessment relates to the 1992/1993 to 1997/1998 tax years and asserts that certain revenues reported as non taxable by Emerson Radio (Hong Kong) Ltd. are subject to a profits tax. Emerson Radio (Hong Kong) Ltd. is also in litigation with the IRD regarding a separate assessment of $489,000 pertaining to the deduction of certain expenses that relate to the taxable years 1991/1992 to 1997/1998. The outcome of both actions is uncertain at this time. However, the Company believes that it will prevail in both cases. During June 1998 the Company received a favorable ruling in regards to the assessment of $489,000, which is subject to appeal. GRACE BROTHERS The Company has filed legal proceedings on May 15, 1998 in the United States District Court for the District of New Jersey against Grace Brothers seeking damages and injunctive relief arising from its claims that Grace violated sections of the Exchange Act and Securities and Exchange Act as a result of its dealings with the Company's Series A Convertible Preferred Stock. EISENBACH On January 19, 1998, the Company was served with a lawsuit filed in June 1997 in the German Regional Court Frankfurt Am Main, filed by Professor Gerhard Eisenbach against the Company, Geoffrey P. Jurick, the Company's Chairman, Chief Executive Officer and President, Fidenas International Ltd. LLC, an affiliate of Mr. Jurick, and Eugene I. Davis, a former executive officer of the Company, jointly and severally, alleging breach of contractual duty, tort and investment fraud arising from Eisenbach's $1,000,000 investment in the Company, on or about March 31, 1994, in conjunction with the Company's reorganization in the Bankruptcy Court. While the outcome of this action is not certain at this time, the Company believes it has meritorious defenses to the claims made and intends to vigorously defend this action. EUGENE DAVIS On September 24, 1997, pursuant to the terms of his Employment Agreement, as amended, Mr. Davis was requested to resign as a director. On September 25, 1997 the Company terminated Mr. Davis' employment for cause. The circumstances surrounding such termination of employment are the subject of two proceedings filed on September 30, 1997 and October 2, 1997, respectively, in the Superior Court of the State of New Jersey ("Superior Court") seeking injunctive relief and money damages, respectively, in which the Company, the Affiliate and Mr. Davis are parties. While the outcome of these actions is not certain at this time, the Company believes the results of the litigation should not have a material adverse effect on the financial condition of the Company or on its results of operations. The Company is involved in other legal proceedings and claims of various types in the ordinary course of business. While any such litigation to which the Company is a party contains an element of uncertainty, management presently believes that the outcome of each such proceeding or claim which is pending or known to be threatened, or all of them combined, will not have a material adverse effect on the Company's consolidated financial position. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of the Company's shareholders was held on January 6, 1998, at which time the shareholders elected the following slate of nominees to remain on the Board of Directors: Peter G. Bunger, Robert H. Brown, Jr., Jerome H. Farnum, Geoffrey P. Jurick and Raymond L. Steele. Election of the Board of Directors was the only matter submitted for shareholder vote. There were 45,739,099 shares of outstanding capital stock of the Company entitled to vote at the record date for this meeting and there were present at such meeting, in person or by proxy, stockholders holding 42,861,567 shares of the Company's Common Stock which represented 93.7% of the total capital stock outstanding and entitled to vote. There were 42,861,567 shares voted on the matter of the election of directors. The result of the votes cast regarding each nominee for office was: Nominee for Director Votes For Votes Withheld Robert H. Brown, Jr. 42,213,563 648,004 Peter G. Bunger 42,215,336 646,231 Jerome H. Farnum 42,215,336 646,231 Geoffrey P. Jurick 42,196,331 665,236 Raymond L. Steele 42,215,836 645,731
PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information The Company's Common Stock has traded on the American Stock Exchange since December 22, 1994 under the symbol MSN. The following table sets forth the range of high and low sales prices for the Company's Common Stock as reported by the American Stock Exchange during the last two fiscal years. Fiscal 1997 Fiscal 1998 High Low High Low First Quarter $3 $2 $1-1/16 $1/2 Second Quarter 3 2 3/ 4 7/16 Third Quarter 2-1/4 1-1/8 3/ 4 3/ 8 Fourth Quarter 1-7/8 7/8 9/16 3/ 8
There is no established trading market for the Company's Common Stock Purchase Warrants. (b) Holders At June 24, 1998, there were approximately 511 stockholders of record of the Company's Common Stock, and 11 holders of the Warrants. (c) Dividends The Company's policy has been to retain all available earnings, if any, for the development and growth of its business. The Company has never paid cash dividends on its Common Stock. In deciding whether to pay dividends on the Common Stock in the future, the Company's Board of Directors will consider factors it deems relevant, including the Company's earnings and financial condition and its working capital and anticipated capital expenditures. The Company's United States credit facility and the Indenture contain certain dividend payment restrictions on the Company's Common Stock. Additionally, the Company's Certificate of Incorporation, defining the rights of the Series A Preferred Stock, prohibits Common Stock dividends unless the Series A Preferred Stock dividends are paid or put aside. The Series A Preferred Stock accrues dividends, payable on a quarterly basis, at a 7% dividend rate through March 31, 1997, then declining by a 1.4% dividend rate each succeeding year until March 31, 2001 when no further dividends are payable. The Company is currently in arrears on $727,000 of dividends of the Company's Series A Preferred Stock. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." (d) Unregistered Securities The Company issued 10 million shares of Series A Convertible Preferred Stock ("Series A Preferred Stock") in conjunction with the Company's Plan of Reorganization completed March 31, 1994. The Series A Preferred Stock is convertible into shares of the Company's common stock at any time during the period beginning on March 31, 1997 and ending on March 31, 2002. The conversion rate is equal to 80% times the average of the daily market prices of a share of the Company's common stock for the 60 consecutive days immediately preceding the conversion date. During the three months ended April 3, 1998, the Company issued a total of 1,818,201 shares of the common stock, upon conversion of 650 shares of Series A Preferred Stock. No consideration was received by the Company for the issuance of the shares of common stock. The shares of common stock were issued by the Company to certain of its existing holders of Series A Preferred Stock where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange. The shares of common stock were issued pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended. Item 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company for the five years ended April 3, 1998. For the year ended April 3, 1998, the Company changed its financial reporting year to a 52/53 week year ending on the Friday closest to March 31. Accordingly, the current fiscal year ended on April 3, 1998. The selected consolidated financial data should be read in conjunction with the Company's consolidated financial statements, including the notes thereto, and "Management's Discussion and Analysis of Results of Operations and Financial Condition" set forth elsewhere in this Form 10-K. Year Ended April 3, March 31, March 31, March 31, March 31, 1998 1997 1996 1995 1994 (In thousands, except per share data) Summary of Operations: Net Revenues (1) $162,730 $178,708 $245,667 $654,671 $487,390 Net Earnings (Loss) (2): Before Extraordinary Gain $(1,430) $(23,968) $(13,389) $ 7,375 $(73,654) Extraordinary Gain -- -- -- -- 129,155 $(1,430) $(23,968) $(13,389) $ 7,375 $ 55,501 Balance Sheet Data at Period End: Total Assets $51,920 $58,768 $ 96,576 $113,969 $ 119,021 Current Liabilities 17,043 21,660 35,008 59,782 76,083 Long-Term Debt 20,929 21,079 20,886 214 227 Shareholders'Equity 13,948 16,029 40,382 53,651 42,617 Working Capital 11,164 13,258 48,434 42,598 32,248 Current Ratio 1.7 to 1 1.6 to 1 2.4 to 1 1.7 to 1 1.4 to 1 Per Common Share: (2) (3) Earnings (Loss) Per Common Share: Basic Income (Loss) Before Extraordinary Gain $ (.04) $ (0.61) $(0.35) $ 0.25 $ (1.95) Extraordinary Gain -- -- -- -- 3.38 Net Income (Loss) Per Common Share $ (.04) $ (0.61) $(0.35) $ 0.25 $ 1.43 Earnings (Loss) Per Common Share: Diluted Income (Loss) Before Extraordinary Gain $ (.04) $ (0.61) $(0.35) $ 0.19 $ (1.95) Extraordinary Gain -- -- -- -- 3.38 Net Income (Loss) Per Common Share $ (.04) $ (0.61) $(0.35) $ 0.19 $ 1.43 Weighted Average Shares Outstanding: Basic 45,167 40,292 40,253 36,530 38,191 Diluted 45,167 40,292 40,253 47,900 38,191 Common Shareholders' Equity per Common Share (4) $ 0.18 $ 0.15 $ 0.75 $ 1.08 $ 0.98
(1) The decline in net direct revenues for Fiscal 1995 through 1998 was due primarily to the implementation of the Agreement signed with the Supplier effective March 31, 1995. Net Revenues for Fiscal 1995 included $340,465,000 of sales of video products covered by the arrangement with the Supplier which expired on March 31, 1998. See "Business-Licensing and Related Activities". (2) Net earnings for Fiscal 1994 includes an extraordinary gain of $129,155,000, or $3.38 per common share, on the extinguishment of debt settled in the Plan of Reorganization. Accordingly, the Company recorded reorganization expenses of $17,385,000 relating primarily to the writedown of assets transferred to creditors under the Plan of Reorganization and professional fees and other related expenses incurred during the bankruptcy proceedings. (3) Earnings (loss) per common share for Fiscal 1994 are based on the weighted average number of old common shares outstanding . Earnings per common share for Fiscal 1995 is based on the weighted average number of shares of new Common Stock and related potentially dilutive securities outstanding during the year. Potentially dilutive securities include 4,664,000 shares assuming conversion of $10 million of Series A Preferred Stock at a price equal to 80% of the weighted average market value of a share of Common Stock, determined as of March 31, 1995. Since the Series A Preferred Stock was not convertible into Common Stock until March 31, 1997, the number of shares issuable upon conversion may have been significantly different. Loss per common share for Fiscal 1996, Fiscal 1997 and Fiscal 1998 are based on the net loss and deduction of preferred stock dividend requirements (resulting in additional loss attributable to common stockholders) and the weighted average of new Common Stock outstanding during each fiscal year. Loss per share does not include potentially dilutive securities assumed outstanding since they are anti-dilutive. (4) Calculated based on common shareholders' equity divided by actual shares of Common Stock outstanding. Common shareholders' equity at April 3, 1998, is equal to total shareholders' equity less $5,713,000 for the liquidation preference of the Series A Preferred Stock. Common shareholders' equity at March 31, 1997, 1996, 1995 and 1994 is equal to total shareholders' equity less $10 million for the liquidation preference of the Series A Preferred Stock. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL The Company reported a decline in its net sales for Fiscal 1998, 1997 and 1996 as compared to Fiscal 1995 primarily due to the licensing of video sales. However, the Company's sales of video products to other customers in the United States also declined during these periods due to increased price competition, higher retail stock levels, weak consumer demand, a soft retail market and the extremely high level of sales achieved in Fiscal 1995. The Company expects its sales in the United States for the first two quarters of Fiscal 1999 to be higher than the first two quarters of Fiscal 1998 due to an improved retail climate, improved sales of microwave products, and that licensing and commission revenues will increase in future years. RESULTS OF OPERATIONS - FISCAL 1998 COMPARED WITH FISCAL 1997 NET REVENUES Consolidated net revenues for Fiscal 1998 decreased $16.0 million (9%) as compared to Fiscal 1997. The decrease in net revenues resulted primarily from decreases in unit sales of video cassette recorders, televisions and television/video cassette recorder combination units due to the Company's licensing agreement with Daewoo and The Supplier. The decrease also resulted from decreases in unit sales of (i) home theater products, due to a reduction in the variety of products offered, and (ii) car audio products, which were discontinued in Fiscal 1998, and the transfer of the Company's Canadian sales to a local distributor. The reduced revenues were partially offset by increased sales of microwave ovens attributable to a broader product line, by the introduction of the Company's CinemaSurround(R) product, and by the sales of home audio products into foreign markets as well as the U.S. market. Revenues recognized from the licensing of the Emerson and G-Clef trademark were $5.6 million in Fiscal 1998 as compared to $5.0 million for Fiscal 1997. The Company reports royalty and commission revenues earned from its licensing arrangements, covering various products and territories, in lieu of reporting the full dollar value of such sales and associated costs. (See "Business-Licensing and Related Activities"). The Company expects its U.S. gross sales on its Core Products to improve and its margins on such sales to also improve due to the change in product mix to higher margin products. Cost of Sales Cost of Sales, as a percentage of consolidated revenues, was 87% in Fiscal 1998 as compared to 97% in Fiscal 1997. In absolute dollars, cost of sales decreased by $31.8 million (18%) for Fiscal 1998 as compared to Fiscal 1997. Cost of sales in Fiscal 1998 were significantly improved as a percent of sales and in absolute dollars due to the change in the product mix to higher margin products and the reduction of inventory overhead costs due to the Company's successful efforts to shift a higher proportion of its sales to a direct import basis. For Fiscal 1998, products representing approximately 77% of net revenues were directly imported from manufacturers to the Company's customers as compared to 46% for Fiscal 1997. The Company's gross profit margins continue to be subject to competitive pressures arising from pricing strategies associated with the category of the consumer electronics market in which the Company competes. The Company's products are generally placed in the low-to-medium priced category of the market which tend to be the most competitive and generate the lowest profits. The Company believes that the combination of the (i) arrangement with Daewoo, (ii) license agreements with Cargil, W. W. Mexicana and Tel-Sound; (iii) introduction of its new home theater product, CinemaSurround(R), and (iv) distributor agreements in Canada, Europe and parts of Asia will all have a favorable impact on the Company's gross profit. The Company continues to promote its direct import programs to reduce its inventory levels and working capital risks thereby reducing its inventory overhead costs. In addition, the Company continues to focus on its higher margin products and is reviewing new products which can generate higher margins than its current business, either through license arrangements, acquisitions and joint ventures or on its own. OTHER OPERATING COSTS AND EXPENSES Other operating costs and expenses increased $1.3 million in Fiscal 1998 as compared to Fiscal 1997, primarily as a result of the Company's implementation of its return to vendor program. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("S,G&A") S,G&A, as a percentage of net revenues, were 9.5% in Fiscal 1998 as compared to 10.5% in Fiscal 1997. In absolute terms, S,G&A decreased by $3.2 million in Fiscal 1998 as compared to Fiscal 1997. The decrease in S,G&A as a percentage of net revenues and in absolute terms was primarily attributable to the following: (i) a decrease in salary expense associated with the Company's reduced staffing levels; (ii) a decrease in professional fees; and (iii) a decrease in depreciation expense. RESTRUCTURING AND OTHER NONRECURRING CHARGES The Company did not record any restructuring charges in Fiscal 1998, compared to charges of $3.0 million in Fiscal 1997. The charges recorded in Fiscal 1997 includes charges for the closure of the Company's local Canadian office; employee severance; asset write- downs; and $1.9 million of nonrecurring charges relating to the proposed but unsuccessful acquisition of International Jensen Incorporated. EQUITY IN EARNINGS OF AFFILIATE The Company's 28% share in the earnings of an Affiliate amounted to $1.5 million for Fiscal 1998 as compared to a loss of $66,000 for Fiscal 1997. During Fiscal 1998, fourteen months of earnings were included in the Consolidated Statement of Operations, compared to Fiscal 1997 when only two months of operations were included in the Statement of Operations due to the acquisition of the Affiliates stock on December 10, 1996 and a change in the Affiliate's Fiscal year. INTEREST EXPENSE Interest expense decreased by $919,000 in Fiscal 1998 as compared to Fiscal 1997. The decrease was attributable to a significant reduction in borrowings on the U.S. revolving line of credit facility primarily due to the reduction in trade accounts receivable and inventory. NET LOSS As a result of the foregoing factors, the Company generated a net loss of $1.4 million for Fiscal 1998 as compared to a net loss of approximately $24.0 million for Fiscal 1997. RESULTS OF OPERATIONS - FISCAL 1997 COMPARED WITH FISCAL 1996 NET REVENUES Consolidated net revenues for Fiscal 1997 decreased $66.9 million (27%) as compared to Fiscal 1996. The decrease in revenues resulted primarily from decreases in unit sales of video cassette recorders, televisions and television/video cassette recorder combination units due to higher retail stock levels, increased price competition in these product categories, weak consumer demand, a soft retail market and closure of Emerson's Canadian office in December 1996. The reduced revenues were partially offset by increased sales of microwave ovens attributable to a broader product line; the introduction of the Company's new home theater product, CinemaSurround(TM); and car audio products which were not introduced until the second and third quarters of Fiscal 1996. Revenues recognized from the licensing of theEmerson and G-Clef trademark were $5.0 million in Fiscal 1997 as compared to $4.4 million for Fiscal 1996. The Company reports royalty and commission revenues earned from its licensing arrangements, covering various products and territories, in lieu of reporting the full dollar value of such sales and associated costs. COST OF SALES Cost of sales, as a percentage of consolidated revenues, was 97% in Fiscal 1997 as compared to 94% in Fiscal 1996. In absolute dollars, cost of sales decreased by $57.3 million (25%) for Fiscal 1997 as compared to Fiscal 1996. Cost of sales margins in Fiscal 1997 were unfavorably impacted by lower sales prices, a higher proportion of closeout sales, the allocation of reduced fixed costs over a lower revenue base, and the recognition of income relating to reduced reserve requirements for sales returns in Fiscal 1996. These increases in cost of sales were partially offset by the introduction of higher margin products_home theater and car audio products_and by a reduction in the costs associated with product returns. OTHER OPERATING COSTS AND EXPENSES Other operating costs and expenses declined $1.7 million in Fiscal 1997 as compared to Fiscal 1996, primarily as a result of (i) reduced sales levels and reduced customer returns and (ii) a decrease in compensation and other expenses incurred to perform after-sale services as a result of the Company's downsizing program. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("S,G&A") S,G&A, as a percentage of net revenues, were 10.5% in Fiscal 1997 as compared to 8% in Fiscal 1996. In absolute terms, S,G&A decreased by $781,000 in Fiscal 1997 as compared to Fiscal 1996. The increase in S,G&A as a percentage of net revenues was primarily attributable to the allocation of S,G&A costs over a lower sales base. In absolute terms the decrease in S,G&A was primarily attributable to a reduction in fixed costs and compensation expense relating to the Company's continuing cost reduction program in both the U.S. and its foreign offices and lower selling expenses attributable to lower sales, partially offset by the reversal of accounts receivable reserves in the prior year and foreign currency exchange losses. RESTRUCTURING AND OTHER NONRECURRING CHARGES The Company recorded charges of approximately $3.0 million in Fiscal 1997. Of this total, $1.1 million related to restructuring charges for the closure of the Company's local Canadian office and distribution operations in favor of utilizing an independent distributor and the downsizing of the Company's U.S. operations. The charges include costs for employee severance, asset write-downs, and facility and equipment lease costs. The remaining portion of the $3 million charge included $1.9 million of nonrecurring charges relating to the proposed but unsuccessful acquisition of International Jensen Incorporated. These costs primarily include investment banking, loan commitment, and professional fees, including litigation costs, relating to the proposed acquisition. EQUITY IN EARNINGS OF AFFILIATE The Company's 28% share in the loss of the Affiliate amounted to $66,000 for Fiscal 1997. During Fiscal 1997 the Company included two months of the Affiliate's operation in the Company's consolidated statement of operations following the December 10, 1996 purchase of the Affiliate's shares. INTEREST EXPENSE Interest expense increased by $154,000 in Fiscal 1997 as compared to Fiscal 1996. The increase was attributable to interest incurred on the debentures issued in August 1995 partially offset by lower average borrowings at lower average interest rates on the U.S. revolving line of credit facility. NET LOSS As a result of the foregoing factors, the Company generated a net loss of $24.0 million for Fiscal 1997 as compared to a net loss of $13.4 million for Fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $6,091,000 for Fiscal 1998. Cash was primarily provided by the reduction in accounts receivables and inventories partially offset by an increase in prepaid expenses. The decrease in accounts receivable is due primarily to the change in the nature of the Company's sales to a direct shipment basis and the decrease in inventory is primarily due to a more conservative purchasing strategy focusing on reducing inventory levels combined with a majority of the Company's sales being made on a direct basis. Net cash used by financing activities was $6,096,000. Cash was used primarily to reduce the Company's borrowings under its U.S. line of credit facility. On March 31, 1998, the Company amended its Loan and Security Agreement which includes a senior secured credit facility. The facility provides for revolving loans and letters of credit, subject to certain limits which, in the aggregate, cannot exceed the lesser of $10 million or a "Borrowing Base" amount based on specified percentages of eligible accounts receivable and inventories. The Company is required to maintain certain working capital and net worth levels, and is in compliance with these requirements. At April 3, 1998, there were no outstanding borrowings under the facility, and no outstanding letters of credit issued for inventory purchases. The Company's Hong Kong subsidiary currently maintains various credit facilities, as amended, aggregating $28.5 million with a bank in Hong Kong consisting of the following: (i) a $3.5 million credit facility which is generally used for letters of credit for a foreign subsidiary's direct import business and affiliates' inventory purchases and (ii) a $25 million credit facility, for the benefit of a foreign subsidiary, which is for the establishment of back-to-back letters of credit. At April 3, 1998, the Company's Hong Kong subsidiary pledged $1 million in certificates of deposit to this bank to assure the availability of these credit facilities. At April 3, 1998, there were $1,958,000 and $23,700,000 respectively, of letters of credit outstanding under these credit facilities. The Company successfully concluded licensing agreements for existing core business products and new products, and intends to pursue additional licensing opportunities. The Company believes that such licensing activities will have a positive impact on net operating results by generating royalty income with minimal costs, if any, and without the necessity of utilizing working capital or accepting customer returns. (See "Business-Licensing and Related Activities"). SHORT-TERM LIQUIDITY. At present, management believes that future cash flow from operations and the institutional financing noted above will be sufficient to fund all of the Company's cash requirements for the next fiscal year. However, the adequacy of future cash flow from operations is dependent upon the Company achieving its operating plan. During Fiscal 1998, the Company reduced inventory levels approximately 15%, accounts receivable by 58% and executed cost-reduction programs. The Company intends to maintain these reduced inventory levels and to continue the sale of its products on a direct basis. In Fiscal 1998, products representing approximately 77% of net revenues were directly imported from manufacturers to the Company's customers. The direct import program implemented by the Company is critical in providing sufficient working capital to meet its liquidity objectives. If the Company is unable maintain its existing level of direct sales volume, it may not have sufficient working capital to finance its operating plan. The Company is currently in arrears on $727,000 of dividends on the Company's Series A Preferred Stock. The preferred stock is convertible into common stock until March 31, 2002 at a price per share of common stock equal to 80% of the defined average market value of a share of common stock on the date of conversion. The preferred stock dividend rate for Fiscal 1999 is 4.2%. The Company's liquidity is impacted by the seasonality of its business. The Company records the majority of its annual sales in the quarters ending September 30 and December 31. This requires the Company to open higher amounts of letters of credit during the quarters ending June 30 and September 30, therefore increasing the Company's working capital needs during these periods. Additionally, the Company receives the largest percentage of customer returns in the quarters ending March 31 and June 30. The higher level of returns during these periods adversely impacts the Company's collection activity, and therefore its liquidity. The Company believes that the agreements with Cargil, Daewoo, WW Mexicana, Tel-Sound and other licensees, as discussed above, and the arrangements it has implemented concerning returned merchandise, should favorably impact the Company's cash flow over their respective terms. LONG-TERM LIQUIDITY. The Company has discontinued certain lower margin lines of products and believes that this, together with the agreements covering its North American video business and the introduction of CinemaSurround(TM), can reverse the negative trends of net losses reported in Fiscal 1998 and Fiscal 1997. The senior secured credit facility with the Lender was amended in March 1998 and extended to March 31, 2001 and imposes financial covenants on the Company which could materially affect its liquidity in the future. Management believes that its direct import program and the anticipated cash flow from operations and the financing noted above will provide sufficient liquidity to meet the Company's operating and debt service cash requirements on a long-term basis. As of April 3, 1998 the Company had no material commitments for Capital expenditures. INFLATION AND FOREIGN CURRENCY Neither inflation nor currency fluctuations had a significant effect on the Company's results of operations during Fiscal 1998. The Company's exposure to currency fluctuations has been minimized by the use of U.S. dollar denominated purchase orders, and by sourcing production in more than one country. The Company purchases virtually all of its products from manufacturers located in various Asian countries. The economic crises in these countries and its related impact on their financial markets has not impacted the Company's ability to purchase product. Should these crises continue, they could have a material adverse effect on the Company by inhibiting its relationship with its suppliers and its ability to acquire products for resale. YEAR 2000 The Company has developed and is in the process of implementing a plan to modify its management information system to be year 2000 compliant. The Company currently expects to be substantially complete with this conversion by mid-1999. The incremental cost of conversion is estimated to be less than $300,000. The Company does not expect the conversion to have a significant effect on operations or the Company's financial results. In addition, the year 2000 problem may impact other entities with which the Company transacts business, and the Company cannot predict the effect of the year 2000 problem on such entities. RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD Recent pronouncements of the Financial Accounting Standards Board ("FASB") which are not required to be adopted at April 3, 1998, include the following Statements of Financial Accounting Standards ("SFAS"): SFAS no. 129, "Disclosure of Information about Capital Structure," which will be effective for the Company for the fiscal year ending March 31, 1999, consolidates existing disclosure requirements. This new standard requires the Company to report its capital structure and relevant information in summary format. The Company voluntarily adopted SFAS No. 129 in the 1998 fiscal year. SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income (all changes in equity during a period except those resulting from investments by and distributions to owners) and its components in the financial statements. This new standard, which will be effective for the Company for the fiscal year ending March 31, 1999, is not currently anticipated to have a significant impact on the Company's financial statements based on the current financial structure and operations of the Company. SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which will be effective for the Company for the fiscal year ending March 31, 1999, establishes standards for reporting information about operating segments in the annual financial statements, selected information about operating segments in interim financial reports and disclosures about products and services, geographic areas and major customers. This new standard requires the Company to report financial information on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments, which may result in more detailed information in the notes to the Company's financial statements than is currently required and provided. The Company has not yet determined the effects, if any, of implementing SFAS No. 131 on its reporting of financial information. FORWARD-LOOKING INFORMATION This report contains various forward looking statements under the Private Securities Litigation Reform Act of 1995 (the "Reform Act') and information that are based on Management's beliefs as well as assumptions made by and information currently available to Management. When used in this report, the words "anticipate", "estimate", "expect", "predict", "project", and similar expressions are intended to identify forward looking statements. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected or projected. Among the key factors that could cause actual results to differ materially are as follows: (i) the ability of the Company to continue selling products to its largest customers whose net revenues represented 58% and 16% of Fiscal 1998 net revenues; (ii) competitive factors such as competitive pricing strategies utilized by retailers in the domestic marketplace which negatively impacts product gross margins; (iii) the ability of the Company to maintain its suppliers, primarily all of whom are located in the Far East; (iv) the Company's ability to replace the licensing income from the Supplier with commission revenues from Daewoo; (v) the outcome of the litigation. (See "Legal Proceedings"); (vi) the availability of sufficient capital to finance the Company's operating plans; (vii) the ability of the Company to comply with the restrictions imposed upon it by its outstanding indebtedness; and (viii) general economic conditions. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 14(a) below. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. Directors And Executive Officers The information required is incorporated herein by reference to the Company's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders. Item 11. Executive Compensation The information required is incorporated herein by reference to the Company's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required is incorporated herein by reference to the Company's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders. Item 13. Certain Relationships and Related Transactions The information required is incorporated herein by reference to the Company's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS, STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) Financial Statements and Schedule: Report of Independent Auditors F- 1 Consolidated Statements of Operations for the years ended April 3, 1998, March 31, 1997 and 1996 F- 2 Consolidated Balance Sheets at April 3, 1998 and March 31,1997 F- 3 Consolidated Statements of Changes in Shareholders' Equity for the years ended April 3, 1998, March 31, 1997 and 1996 F- 4 Consolidated Statements of Cash Flows for the years ended April 3, 1998, March 31, 1997 and 1996 F- 5 Notes to Consolidated Financial Statements F- 6 Schedule VII Valuation and Qualifying Accounts and Reserves F- 27 ALL OTHER SCHEDULES ARE OMITTED BECAUSE THEY ARE NOT APPLICABLE OR THE REQUIRED INFORMATION IS SHOWN IN THE FINANCIAL STATEMENTS OR NOTES THERETO. (b) No reports on Form 8-K were filed by the Company during the last quarter of the fiscal year ended April 3, 1998. (c) Exhibits (2) Confirmation Order and Fourth Amended Joint Plan of Reorganization of Emerson Radio Corp. ("Old Emerson") and certain subsidiaries under Chapter 11 of the United States Bankruptcy Code, dated March 31, 1994 (incorporated by reference to Exhibit (2) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the Securities and Exchange Commission ("SEC") on August 9, 1994). (3) (a) Certificate of Incorporation of Emerson (incorporated by reference to Exhibit (3) (a) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (3) (b) Certificate of Designation for Series A Preferred Stock (incorporated by reference to Exhibit (3) (b) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (3) (c) Plan of Reorganization and Agreement of Merger by and between Old Emerson and Emerson Radio (Delaware) Corp. (incorporated by reference to Exhibit (3) (c) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (3) (d) Certificate of Merger of Old Emerson with and into Emerson Radio (Delaware) Corp. (incorporated by reference to Exhibit (3) (d) of Emerson's Registration Statement on Form S-1, Registration No. 33- 53621, declared effective by the SEC on August 9, 1994). (3) (e) Amendment dated February 14, 1996 to the Certificate of Incorporation of Emerson (incorporated by reference to Exhibit (3) (a) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995). (3) (f) By-Laws of Emerson adopted March 1994 (incorporated by reference to Exhibit (3) (e) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (3) (g) Amendment dated November 28, 1995 to the By-Laws of Emerson adopted March 1994 (incorporated by reference to Exhibit (3) (b) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995). (4) (a) Warrant Agreement to Purchase 750,000 shares of Common Stock, dated as of March 31, 1994 (incorporated by reference to Exhibit (4) (a) of Emerson's Registration Statement on Form S-1, Registration No. 33- 53621, declared effective by the SEC on August 9, 1994). (4) (b) Indenture, dated as of August 17, 1995 between Emerson and Bank One, Columbus, NA, as Trustee (incorporated by reference to Exhibit (1) of Emerson's Current Report on Form 8-K filed with the SEC on September 8, 1995). (4) (c) Common Stock Purchase Warrant Agreement to purchase 50,000 shares of Common Stock, dated as of December 8, 1995 between Emerson and Michael Metter (incorporated by reference to Exhibit (10) (e) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995). (4) (d) Common Stock Purchase Warrant Agreement to purchase 200,000 shares of Common Stock, dated as of December 8, 1995 between Emerson and Kenneth A. Orr (incorporated by reference to Exhibit (10) (f) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995). (10) (a) Form of Promissory Note issued to certain Pre-Petition Creditors (incorporated by reference to Exhibit (10) (e) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (b) Loan and Security Agreement, dated March 31, 1994, by and among Emerson, Majexco Imports, Inc. and Congress Financial Corporation ("Congress") (incorporated by reference to Exhibit (10) (f) of Emerson's Registration Statement on Form S-1, Registration No. 33- 53621, declared effective by the SEC on August 9, 1994). (10) (c) Amendment No. 1 to Financing Agreements, dated as of August 24, 1995, among Emerson, Majexco Imports, Inc. and Congress (incorporated by reference to Exhibit (2) of Emerson's Current Report on Form 8-K filed with the SEC on September 8, 1995). (10) (d) Amendment No. 2 to Financing Agreements, dated as of February 13, 1996 (incorporated by reference to Exhibit (10) (c) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995). (10) (e) Amendment No. 3 to Financing Agreements, dated as of August 20, 1996 (incorporated by reference to Exhibit (10) (b) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995). (10) (f) Amendment No. 4 to Financing Agreements, dated as of November 14, 1996 (incorporated by reference to Exhibit (10) (c) of Emerson's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). (10) (g) Amendment No. 5 to Financing Agreements, dated as of February 18, 1997 (incorporated by reference to Exhibit (10) (e) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996). (10) (h) Stipulation of Settlement and Order dated June 11, 1996 by and among the Official Liquidator of Fidenas International Bank Limited, Petra Stelling, Barclays Bank PLC, the Official Liquidator of Fidenas Investment Limited, Geoffrey P. Jurick, Fidenas International Limited, L.L.C., Elision International, Inc., GSE Multimedia Technologies Corporation and Emerson. (10) (i) Pledge Agreement dated as of February 4, 1997 by Fidenas International Limited, L.L.C. ("FIN") in favor of TM Capital Corp. (incorporated by reference to Exhibit (10) (a) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996). (10) (j) Registration Rights Agreement dated as of February 4, 1997 by and among Emerson, FIN, the Creditors, FIL and TM Capital Corp. (incorporated by reference to Exhibit (10) (b) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996). (10) (k) License and Exclusive Distribution Agreement with Cargil International Corp. dated as of February 12, 1997 (incorporated by reference to Exhibit (10) (c) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996). (10) (l) Agreement dated April 10, 1997 between Emerson and Daewoo Electronics Co., Ltd. (10) (m) Securities Purchase Agreement dated as of November 27, 1996, by and between Sport Supply Group, Inc. ("SSG") and Emerson (incorporated by reference to Exhibit (2)(a) of Emerson's Current Report on Form 8-K dated November 27, 1996). (10) (n) Form of Warrant Agreement by and between SSG and Emerson (incorporated by reference to Exhibit (4)(a) of Emerson's Current Report on Form 8-K dated November 27, 1996). (10) (o) Form of Registration Rights Agreement by and between SSG and Emerson (incorporated by reference to Exhibit (4)(b) of Emerson's Current Report on Form 8-K dated November 27, 1996). (10) (p) Consent No. 1 to Financing Agreements among Emerson, certain of its subsidiaries, and Congress (incorporated by reference to Exhibit (10)(b) of Emerson's Current Report on Form 8-K dated November 27, 1996). (10) (q) Form of Termination of Employment Agreement between Emerson and John Walker dated as of January 15, 1998.* (10) (r) License Agreement dated as of March 30, 1998 by and between Tel-Sound Electronics, Inc. and Emerson. * (10) (s) License Agreement dated as of March 31, 1998 by and between WW Mexicana, S. A. de C. V. and Emerson. * (10) (t) Amendment No. 7 to Financing Agreements, dated as of March 31, 1998. * (10) (u) Amendment No. 1 to Pledge and Security Agreement dated as of March 31, 1998.* (10) (v) Second Lease Modification dated as of May 15, 1998 between Hartz Mountain, Parsippany and Emerson. * (12) Computation of Ratio of Earnings (Loss) to Combined Fixed Charges and Preferred Stock Dividends. * (21) Subsidiaries of the Company as of April 3, 1998.* (23) Consent of Independent Auditors* (27) Financial Data Schedule for year ended April 3, 1998.* * Filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EMERSON RADIO CORP. By: /s/ Geoffrey P. Jurick Geoffrey P. Jurick Chairman of the Board Dated: July 1, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Geoffrey P. Jurick Chairman of the Board, July 1, 1998 Geoffrey P. Jurick Chief Executive Officer and President /s/ John P. Walker Executive Vice President July 1, 1998 John P. Walker Chief Financial Officer /s/ Robert H. Brown, Jr. Director July 1, 1998 Robert H. Brown, Jr. /s/ Peter G. Bunger Director July 1, 1998 Peter G. Bunger /s/ Jerome H. Farnum Director July 1, 1998 Jerome H. Farnum /s/ Raymond L. Steele Director July 1, 1998 Raymond L. Steele REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Emerson Radio Corp. We have audited the accompanying consolidated balance sheets of Emerson Radio Corp. and Subsidiaries as of April 3, 1998 and March 31, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended April 3, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Emerson Radio Corp. and Subsidiaries at April 3, 1998 and March 31, 1997, and the consolidated results of its operations and cash flows for each of the three years in the period ended April 3, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP New York, New York July 1, 1998 EMERSON RADIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For The Years Ended April 3, 1998, March 31, 1997 and 1996 (In thousands, except per share data)
1998 1997 1996 Net revenues $ 162,730 $ 178,708 $ 245,667 Cost of sales 142,372 174,184 231,455 Other operating costs and expenses 4,351 3,079 4,803 Selling, general and administrative expenses 15,483 18,716 19,497 Restructuring and other nonrecurring charges -- 2,972 -- 162,206 198,951 255,755 Operating income (loss) 524 (20,243) (10,088) Equity in earnings (loss) of Affiliate 1,524 (66) -- Write-down of investment in and advances to Joint Venture (714) -- -- Interest expense, net (2,510) (3,429) (3,275) Loss before income taxes (1,176) (23,738) (13,363) Provision for income taxes 254 230 26 Net loss $ (1,430) $(23,968) $(13,389) Net loss per common share $ (.04) $ (.61) $ (.35) Weighted average shares outstanding Basic 45,167 40,292 40,253 Diluted 45,167 40,292 40,253
The accompanying notes are an integral part of the consolidated financial statements. EMERSON RADIO CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of April 3, 1998 and March 31, 1997 (In thousands, except share data)
1998 1997 ASSETS Current Assets: Cash and cash equivalents $ 2,608 $ 2,640 Accounts receivable (less allowances of $4,884 and $6,001, respectively) 5,247 12,452 Other receivables 6,474 2,117 Inventories 11,375 13,329 Prepaid expenses and other current assets 2,503 4,380 Total current assets 28,207 34,918 Property and equipment (net of accumulated depreciation of $3,152 and 1,381 2,130 $3,521, respectively) Investment in Affiliates and Joint Venture 17,522 16,033 Other assets 4,810 5,687 Total Assets $51,920 $58,768 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable $ -- $ 5,689 Current maturities of long-term debt 85 85 Accounts payable and other current liabilities 12,256 13,053 Accrued sales returns 4,511 2,730 Income taxes payable 191 103 Total current liabilities 17,043 21,660 Long-term debt, less current maturities 20,750 20,856 Other non-current liabilities 179 223 Shareholders' Equity: Preferred shares -- 10,000,000 shares authorized; 5,237 and 10,000 shares issued and outstanding, respectively 4,713 9,000 Common shares -- $.01 par value, 75,000,000 shares authorized; 51,044,730 and 40,335,642 shares issued and outstanding, respectively 510 403 Capital in excess of par value 113,201 109,278 Accumulated deficit (104,673) (102,843) Cumulative translation adjustment 197 191 Total shareholders' equity 13,948 16,029 Total Liabilities and Shareholders' Equity $51,920 $ 58,768
The accompanying notes are an integral part of the consolidated financial statements. EMERSON RADIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For The Years Ended April 3, 1998, March 31, 1997 and 1996 (In thousands, except share data)
Common Shares Issued Cap- ital Cumula- in tive Excess Trans- Prefer- Number of Accum- lation red of Par Par ulated Adjust- Stock Shares Value Value Deficit ment Balance-March 31, 1995 $9,000 40,252,772 $ 403 $107,969 $(64,086) $ 365 Issuance of common stock warrants 1,065 Preferred stock dividends (700) Other (43) (202) Net loss (13,389) Balance-March 31, 1996 9,000 40,252,772 403 108,991 (78,175) 163 Issuance of common stock warrants 257 Exercise of stock options and warrants 82,870 40 Preferred stock dividends (700) Other (10) 28 Net loss (23,968) Balance-March 31, 1997 9,000 40,335,642 403 109,278 (102,843) 191 Issuance of common stock upon conversion of preferred stock (4,287) 10,709,088 107 4,180 Cancellation of common stock warrants (257) Preferred stock dividends (400) Other 6 Net loss (1,430) Balance-April 3, 1998 $4,713 $51,044,730 $510 $ 113,201 $(104,673) $ 197
The accompanying notes are an integral part of the consolidated financial statements. EMERSON RADIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended April 3, 1998, March 31, 1997 and 1996 (In thousands)
1998 1997 1996 Cash Flows from Operating Activities: Net loss $ (1,430) $ (23,968) $ (13,389) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 1,759 2,844 3,664 Equity in earnings of affiliate (1,524) 66 -- Restructuring and other nonrecurring charges -- 2,782 -- Asset valuation and loss reserves (2,378) ( 752) (14,209) Other (251) 1,048 298 Changes in assets and liabilities: Accounts receivable 9,151 11,230 17,391 Other receivables (4,357) (2,117) -- Inventories 3,418 20,871 (437) Prepaid expenses and other current assets 845 3,884 3,231 Other assets ( 71) (896) (601) Accounts payable and other current liabilities 841 1,827 (9,092) Income taxes payable 88 (98) (53) Net cash provided (used) by operations 6,091 16,721 (13,197) Cash Flows from Investing Activities: Investment in affiliates -- (14,513) 1,840 Additions to property and equipment (27) (255) (1,666) Redemption of certificates of deposit -- 100 945 Other -- 12 (477) Net cash provided (used) by investing activities (27) (14,656) 642 Cash Flows from Financing Activities: Net repayments under line of credit facility (5,689) (15,462) (6,145) Net proceeds from issuance of senior subordinated convertible debentures -- -- 19,208 Retirement of long-term debt (106) (118) (298) Payment of preferred stock dividends (257) (231) (700) Payment of debt costs -- -- (237) Other (44) 253 (160) Net cash provided (used) by financing activities (6,096) (15,558) 11,668 Net decrease in cash and cash equivalents (32) (13,493) (887) Cash and cash equivalents at beginning of year 2,640 16,133 17,020 Cash and cash equivalents at end of year $2,608 $ 2,640 $16,133
The accompanying notes are an integral part of the consolidated financial statements. EMERSON RADIO CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 3, 1998 Note 1 -- Significant Accounting Policies: BASIS OF PRESENTATION The consolidated financial statements include the accounts of Emerson Radio Corp. and its majority-owned subsidiaries (the "Company"). All significant intercompany transactions and balances have been eliminated. A 28% owned investment in an Affiliate and a 50% ownership of a domestic joint venture are accounted for by the equity method (see Notes 3 and 15). EARNINGS (LOSS) PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those estimates. CASH AND CASH EQUIVALENTS Short-term investments with original maturities of three months or less at the time of purchase are considered to be cash equivalents. The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value. FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments have been determined by the Company using available market information, including current interest rates, and the following valuation methodologies: Cash and cash equivalent and accounts receivable -- the carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values because of the short maturity of these instruments. The carrying amount of accounts receivable approximate their fair value. Other receivables -- the fair value is estimated on the basis of discounted cash flow analyses, using appropriate interest rates for similar instruments. Notes payable and long-term debt -- the fair value is estimated on the basis of rates available to the Company for debt of similar maturities. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. CONCENTRATIONS OF CREDIT RISK Certain financial instruments potentially subject the Company to concentrations of credit risk. Accounts receivable represent sales to retailers and distributors of consumer electronics throughout the United States and Canada. The Company periodically performs credit evaluations of its customers but generally does not require collateral. DEPRECIATION AND AMORTIZATION AND VALUATION OF INTANGIBLES Property and equipment, stated at cost, are being depreciated by the straight-line method over their estimated useful lives. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. Goodwill (resulting from its investment in an Affiliate) and trademarks are amortized using the straight-line method, principally over 40 years. Management periodically evaluates the recoverability of goodwill and trademarks. The carrying value of goodwill and trademarks would be reduced if it is probable that management's best estimate of future operating income before amortization of goodwill and trademarks will be less than the carrying value over the remaining amortization period. FOREIGN CURRENCY The assets and liabilities of foreign subsidiaries have been translated at current exchange rates, and related revenues and expenses have been translated at average rates of exchange in effect during the year. Related translation adjustments are reported as a separate component of shareholders' equity. Gains and losses resulting from foreign currency transactions are included in the Consolidated Statements of Operations and amounted to a gain (loss) of ($39,000), ($79,000), and $475,000 for the years ended April 3, 1998, March 31, 1997 and 1996, respectively. The Company does not enter into foreign currency exchange contracts to hedge its exposures related to foreign currency fluctuations. RECLASSIFICATION Certain amounts in the prior period's consolidated financial statements have been reclassified to conform to current periods presentation. CHANGE IN ACCOUNTING PERIOD Beginning in Fiscal 1998, the Company changed its financial reporting year to a 52/53 week year ending on the Friday closest to March 31. Accordingly, the current fiscal year ended on April 3, 1998. Note 2 -- Inventories: Inventories are comprised primarily of finished goods. Spare parts inventories, net of reserves, aggregating $384,000 and $1,469,000 at April 3, 1998 and March 31, 1997, respectively, are included in "Prepaid expenses and other current assets." Note 3 -- Investment in Unconsolidated Affiliate On December 10, 1996, the Company purchased from Sport Supply Group, Inc. ("Affiliate") 1,600,000 shares of newly issued common stock, $.01 par value per share (the "SSG Stock"), for aggregate consideration of $11.5 million, or approximately $7.19 per share. In addition, the Company purchased, for an aggregate consideration of $500,000, five-year warrants expiring 2001 (the "SSG Warrants") to acquire an additional 1,000,000 shares of SSG common stock at an exercise price of $7.50 per share, subject to standard anti-dilution adjustments, pursuant to a Warrant Agreement. Prior to such purchase, the Company beneficially owned approximately 9.9% of the outstanding shares of SSG Stock which it had purchased for $4,228,000 in open market transactions. Based upon the purchase of the SSG Stock, as set forth above, the Company owns approximately 28% of the outstanding SSG common shares. If the Company exercises all of the SSG Warrants, it will beneficially own approximately 36% of the SSG common shares. In July 1997, the Company entered into a Management Services Agreement with SSG, whereby SSG would provide various managerial and administrative services to the Company. The investment in and results of operations of SSG are accounted for by the equity method. In January 1997, SSG changed its financial reporting year end from October 31 to September 30. This change in accounting period resulted in the Company now recording its share of SSG earnings on a concurrent basis. Previously, the Company recorded its share of SSG's earnings on a two month delay. The Company's investment in SSG includes goodwill of $3,973,000 and is being amortized on a straight line basis over 40 years. At April 3, 1998, the aggregate market value quoted on the New York Stock Exchange of Emerson's shares of SSG common shares was approximately $21 million. Summarized financial information derived from SSG's financial reports to the Securities and Exchange Commission was as follows (in thousands): (Unaudited) April 3, 1998 January 31, 1997 Current assets $ 37,282 $ 39,850 Property, plant and equipment and other assets 19,878 36,748 Current liabilities 8,395 39,011 Long-term debt 7,498 324
(Unaudited) For the 14 For the 3 Months Ended Months Ended April 3, 1998 January 31, 1997 Net sales $ 111,214 $ 14,580 Gross profit 43,275 5,905 Earnings (loss) from continuing operations 5,903 (1,356) Loss from discontinued operations -- (2,574) Net (loss) income 5,903 (3,930)
Note 4 -- Property and Equipment: As of April 3, 1998 and March 31, 1997, property and equipment is comprised of the following: 1998 1997 (In thousands) Furniture and fixtures. . . . . . $3,745 $4,021 Machinery and equipment . . . . . 532 891 Leasehold improvements. . . . . . 256 739 4,533 5,651 Less accumulated depreciation and amortization . . . . . . . . . 3,152 3,521 $1,381 $2,130
Depreciation and amortization of property and equipment amounted to $776,000, $1,631,000 and $2,800,00 for the years ended April 3, 1998, March 31, 1997 and 1996, respectively. Note 5 -- Credit Facility: On March 31, 1998, the Company amended its existing Loan and Security Agreement (the "Loan and Security Agreement") which includes a senior secured credit facility with a U.S. financial institution. The amendment to the facility reduced the facility to $10 million from $35 million, and amended certain financial covenants as defined below. The facility provides for revolving loans and letters of credit, subject to individual maximums which, in the aggregate, cannot exceed the lesser of $10 million or a "Borrowing Base" amount based on specified percentages of eligible accounts receivable and inventories. Amounts outstanding under the senior credit facility are secured by substantially all of the Company's U.S. and Canadian assets except for trademarks, which are subject to a negative pledge covenant and a majority of its investment in an unconsolidated Affiliate. At April 3, 1998 and March 31, 1997, the weighted average interest rate on the outstanding borrowings was 9.75% and 9.5%, respectively, which is the prime rate of interest plus 1.25%. Interest paid totaled $316,000, $1,494,000 and $2,429,000 respectively, for the years ended April 3, 1998, March 31, 1997 and 1996. Pursuant to the Loan and Security Agreement, the Company is restricted from, among other things, paying cash dividends (other than on the Series A Preferred Stock), redeeming stock, and entering into certain transactions and is required to maintain certain working capital and equity levels. An event of default under the credit facility may trigger a default under the Company's 8-1/2% Senior Subordinated Convertible Debentures Due 2002. At March 31, 1998, there were no outstanding borrowings under the facility, and no outstanding letters of credit issued for inventory purchases. At March 31, 1997, there was $5,689,000 outstanding borrowing and $444,000 outstanding letters of credit. Note 6 -- Long-Term Debt: As of April 3, 1998 and March 31, 1997, long-term debt consisted of the following: 1998 1997 (in thousands) 8-1/2% Senior Subordinated Convertible Debentures Due 2002. . . $20,750 $20,750 Notes payable to unsecured creditors . . . . . . . . . . . . . -- 3 Equipment notes and other . . . . . . . 85 188 20,835 20,941 Less current obligations. . . . . . . . 85 85 Long term debt $20,750 $20,856
The Senior Subordinated Convertible Debentures Due 2002 ("Debentures") were issued in August 1995. The Debentures bear interest at the rate of 8-1/2% per annum, payable quarterly, and mature on August 15, 2002. The Debentures are convertible into shares of the Company's common stock at any time prior to redemption or maturity at an initial conversion price of $3.9875 per share, subject to adjustment under certain circumstances. Beginning August 15, 1998, at the option of the Company, the Debentures are redeemable in whole or in part at an initial redemption price of 104% of principal, decreasing by 1% per year until maturity. The Debentures are subordinated to all existing and future senior indebtedness (as defined in the Indenture governing the Debentures). The Debentures restrict, among other things, the amount of senior indebtedness and other indebtedness that the Company, and, in certain instances, its subsidiaries, may incur. Each holder of Debentures has the right to cause the Company to redeem the Debentures if certain designated events (as defined) should occur. The Debentures are subject to certain restrictions on transfer, although the Company has registered the offer and sale of the Debentures and the underlying common stock. Note 7 -- Income Taxes: The income tax provision for the years ended April 3, 1998, March 31, 1997 and 1996 consisted of the following: 1998 1997 1996 (In thousands) Current: Federal $ 13 $ -- $ (39) Foreign, state and other 241 230 65 $ 254 $ 230 $ 26
The difference between the effective rate reflected in the provision for income taxes and the amounts determined by applying the statutory U.S. rate of 34% to earnings (loss) before income taxes for the years ended April 3, 1998, March 31, 1997 and 1996 are analyzed below: 1998 1997 1996 (In thousands) Statutory provision benefit) $ (400) $ (8,071) $ (4,543) U. S. and foreign net operating losses without tax benefit (930) 8,098 4,493 Expiration of state net operating losses 1,384 -- -- Rate differential on foreign income 223 248 96 Other, net (23) (45) (20) Total income tax provision $ 254 $ 230 $ 26
As of April 3, 1998 and March 31, 1997 the significant components of the Company's deferred tax assets and liabilities are as follows: 1998 1997 (In thousands) Deferred tax assets: Accounts receivable reserves $ 5,003 $ 4,255 Inventory reserves 2,332 2,880 Federal operating loss carryforwards 15,469 15,682 State net operating loss carryforwards 6,759 8,161 Other 1,050 322 Total deferred tax assets 30,613 31,300 Valuation allowance for deferred tax assets (29,844) (31,091) Net deferred tax assets 769 209 Deferred tax liabilities (769) (209) Net deferred taxes $ -- $ --
Total deferred tax assets of the Company at April 3, 1998 and March 31, 1997 represent the tax-effected net operating loss carryforwards subject to annual limitations (as discussed below), and tax-effected deductible temporary differences. The Company has established a valuation reserve against any expected future benefits. Cash paid for income taxes was $152,000, $125,000 and $151,000 for the years ended April 3, 1998, March 31, 1997 and 1996, respectively. Income (loss) of foreign subsidiaries before taxes was $3,065,000, ($2,512,000) and ($6,233,000) for the years ended April 3, 1998, March 31, 1997 and 1996, respectively. Provision is made for federal income taxes which may be payable on earnings of foreign subsidiaries to the extent that the Company anticipates they will be remitted. It is the policy of the Company to permanently reinvest all the earnings from its foreign subsidiaries. As of March 31, 1997, the Company has a federal net operating loss carryforward of approximately $132,265,000, of which $29,160,000, $13,385,000, $50,193,000, $20,575,000, and $18,952,000 will expire in 2006, 2007, 2009, 2011 and 2013, respectively. The utilization of these net operating losses are limited based on the effects of a Plan of Reorganization consummated on March 31, 1994. Pursuant to the Plan, an ownership change occurred with respect to the Company and subjected the Company's net operating loss and foreign tax credit carryforwards to limitations provided in Sections 382 and 383, respectively, of the Internal Revenue Code. Subject to special rules regarding increases in the annual limitation for the recognition of net unrealized built-in gains, the Company's annual limitation is approximately $2.2 million. Note 8 -- Commitments and Contingencies: Leases: The Company leases warehouse and office space at minimum aggregate rentals net of sublease income as follows: Fiscal Years Amount 1999 $1,225 2000 963 2001 577 2002 384 2003 384 Later years 128
Rent expense, net of rental income, aggregated $1,570,000, $1,790,000 and $1,705,000 for the years ended March 31, 1998, 1997 and 1996, respectively. Rental income from the sublease of warehouse and office space aggregated $238,000, $256,000 and $278,000 in the years ended April 3, 1998, March 31, 1997 and 1996, respectively. Letters of Credit: There were no letters of credit outstanding under the Loan and Security Agreement (See Note 5) at April 3, 1998 and $444,000 of Letters of Credit were outstanding at March 31, 1997. The Company's Hong Kong subsidiary also currently maintains various credit facilities aggregating $28.5 million with a bank in Hong Kong subject to annual review consisting of the following: (i) a $3.5 million credit facility which is generally used for letters of credit for a foreign subsidiary's direct import business and an affiliates' inventory purchases, and (ii) a $25 million credit facility, for the benefit of a foreign subsidiary, which is for the establishment of back-to-back letters of credit with the Company's largest customer. At April 3, 1998, the Company's Hong Kong subsidiary had pledged $1 million in certificates of deposit to this bank to assure the availability of these credit facilities. At April 3, 1998, there were $1,958,000 and $23,700,000 of letters of credit outstanding under these credit facilities, respectively. Tax Assessments: A wholly owned subsidiary of the Company, Emerson Radio (Hong Kong) Ltd. was assessed $858,000 by the Hong Kong Inland Revenue Department (the "IRD") in May 1998. The assessment relates to the 1992/1993 to 1997/1998 tax years and asserts that certain revenues reported as non taxable by Emerson Radio (Hong Kong) Ltd. are subject to a profits tax. Emerson Radio Hong Kong Ltd. is also in litigation with the IRD regarding a separate assessment of $489,000 pertaining to the deduction of certain expenses that relate to the taxable years 1991/1992 to 1997/1998. The outcome of both actions is uncertain at this time. However, the Company believes that it will prevail in both cases. During June 1998 the Company received a favorable ruling in regards to the assessment of $489,000, which is subject to appeal. Note 9-- Shareholders' Equity: In July 1994, the Company adopted a Stock Compensation Program ("Program") intended to secure for the Company and its stockholders the benefits arising from ownership of the Company's common stock by those selected directors, officers, other key employees, advisors and consultants of the Company who are most responsible for the Company's success and future growth. The maximum aggregate number of shares of common stock available pursuant to the Program is 2,000,000 shares and the Program is comprised of 4 parts-the Incentive Stock Option Plan, the Supplemental Stock Option Plan, the Stock Appreciation Rights Plan and the Stock Bonus Plan. A summary of transactions during the last three years is as follows: Number of Price Aggregate Shares Per Share Price Outstanding-March 31, 1995 1,830,000 $1.00 - $1.10 $1,890,000 Granted 125,000 $2.63 - $2.88 341,000 Canceled (287,000) $1.00 (287,000) Outstanding-March 31, 1996 1,668,000 $1.00 - $2.88 1,944,000 Granted 50,000 $2.25 - $2.56 119,000 Exercised (69,000) $1.00 (69,000) Canceled (59,000) $1.00 - $2.56 (67,000) Outstanding-March 31, 1997 1,590,000 $1.00 - $2.88 1,927,000 Granted 207,000 $1.00 207,000 Canceled (790,000) $1.00 - $2.88 (1,067,000) Outstanding-April 3, 1998 1,007,000 $1.00 - $1.10 $1,067,000
The term of each option is ten years, except for options issued to any person who owns more than 10% of the voting power of all classes of capital stock, for which the term is five years. Options may not be exercised during the first year after the date of the grant. Thereafter each option becomes exercisable on a pro rata basis on each of the first through third anniversaries of the date of the grant. The exercise price of options granted must be at least equal to the fair market value of the shares on the date of the grant, except that the option price with respect to an option granted to any person who owns more than 10% of the voting power of all classes of capital stock shall not be less than 110% of the fair market value of the shares on the date of the grant. The Company has elected to follow APB25 and related interpretations for stock-based compensation and accordingly has recognized no compensation expense. Had compensation cost been determined based upon the fair value at grant date for awards consistent with the methodology prescribed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), the Company's net loss would have increased approximately $21,000, $45,000 and $81,000 for the years ended April 3, 1998, March 31, 1997 and 1996, respectively. The fair value of these options, and all other options and warrants of the Company, was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for the years ended April 3, 1998 and March 31, 1997 and 1996; risk-free interest rate of 5%, an expected life of 10 years and a dividend yield of zero. For the years ended April 3, 1998 and March 31, 1997 and 1996, volatility was 56%, 73% and 85%, respectively. The effects of applying FAS 123 and the results obtained are not likely to be representative of the effects on future pro-forma income. In October 1994, the Company's Board of Directors adopted, and the stockholders subsequently approved, the 1994 Non-Employee Director Stock Option Plan. The maximum number of shares of common stock available under such plan is 300,000 shares. A summary of transactions since inception of the plan is as follows: Number of Price Aggregate Shares Per Share Price Outstanding-March 31, 1995 175,000 $1.00 $175,000 Canceled (25,000) $1.00 (25,000) Outstanding_March 31, 1996, March 31, 1997, April 3, 1998 150,000 $1.00 $150,000
The provisions for exercise price, term and vesting schedule are the same as noted above for the Stock Compensation Program. On September 29, 1993, the Company and five of its U.S. subsidiaries filed voluntary petitions for relief under the reorganization provisions of Chapter 11 of the United States Bankruptcy Code and operated as debtors-in-possession under the supervision of the Bankruptcy Court while their reorganization cases were pending. The precipitating factor for these filings was the Company's severe liquidity problems relating to its high level of indebtedness and a significant decline in sales from the prior year. Effective March 31, 1994, the Bankruptcy Court entered into an order confirming the Plan of Reorganization. The Plan of Reorganization provided for the implementation of a recapitalization of the Company. Pursuant to the Plan of Reorganization, on March 31, 1994, the Company issued Series A Preferred Stock, $.01 par value, with a face value of $10 million and an estimated fair market value of approximately $9 million. The preferred stock is convertible into Common Stock at any time during the period beginning on March 31, 1997 and ending on March 31, 2002; the preferred stock is convertible into common stock at a price per share of common stock equal to 80% of the defined average market value of a share of common stock on the date of conversion. The preferred stock bears dividends on a cumulative basis currently at 5.6% and declines by 1.4% each June 30th until no dividends are payable. The preferred stock is non-voting. However, the terms of the preferred stock provide that holders shall have the right to appoint two directors to the Company's Board of Directors if the preferred stock dividends are in default for six consecutive quarters. At April 3, 1998, the Company was in arrears on $727,000 of dividends. Pursuant to the Plan of Reorganization the Noteholders received warrants for the purchase of 750,000 shares of common stock. The warrants are exercisable for a period of seven years from March 31, 1994 and provide for an exercise price of $1.00 per share for the first three years, escalating by $.10 per share per annum thereafter until expiration of the warrants. In connection with the Debentures offering, the Company in August 1995, issued to the placement agent and its authorized dealers warrants for the purchase of 500,000 shares of common stock. The warrants are exercisable for a period of four years from August 24, 1996 and provide for an exercise price of $3.9875 per share, subject to adjustment under certain circumstances. In connection with a consulting agreement, the Company in December 1995, issued warrants for the purchase of 250,000 shares of common stock at an exercise price of $4.00 per share. The warrants may be exercised until December 8, 2000, when such warrants shall expire. In November 1995, the Company filed a shelf registration statement covering 5,000,000 shares of common stock owned by FIN to finance a settlement of the Litigation Regarding Certain Outstanding Common Stock. The shares covered by the shelf registration are subject to certain contractual restrictions and may be offered for sale or sold only by means of an effective prospectus following registration under the Securities Act of 1933, as amended. In November 1995, the Company's Board of Directors approved a plan to repurchase up to two million of its common shares, from time to time in the open market. In May 1998, the plan was modified to approve the repurchase of $2 million of common shares. Although there are 51,044,730 shares outstanding, approximately 29.2 million shares are held directly or indirectly by affiliated entities of Geoffrey Jurick, Chairman, Chief Executive Officer and President of the Company. The Company has agreed with Mr. Jurick that such shares will not be subject to repurchase under the Plan approved in 1995. The stock repurchase program is subject to consent of certain of the Company's lenders, certain court imposed restrictions, price and availability of shares, compliance with securities laws and alternative capital spending programs, including new acquisitions. The repurchase of common shares is intended to be funded by working capital. Note 10 -- Capital Structure: In February 1997 the Financial Accounting Standards Board issued Statement No. 129 "Disclosure of Information About Capital Structure" which requires companies to adopt a method for reporting an entity's capital structure and relevant information in summary format. The following disclosure sets forth the required information. The outstanding capital stock of the Company at April 3, 1998 consisted of common stock and Series A convertible preferred stock. The preferred shares are convertible to common shares at any time beginning March 31, 1997 until March 31, 2002. During the year ended April 3, 1998, 4,763 shares of Series A Preferred Stock were converted into 10.7 million shares of common stock. If all existing outstanding Preferred shares were converted at April 3, 1998, an estimated 14.7 million additional common shares would be issuable. Dividends for the Preferred Stock accrue and are payable quarterly at 7% up to March 31, 1997 then decline by 1.4% each succeeding year until March 31, 2001 when no further dividends are payable. The dividend rate at April 3, 1998 was 5.6% and as of April 3, 1998, $727,000 of dividends were in arrears. Preferred shareholders have liquidation rights subordinated to the Company's Senior Secured Lender and 8-1/2% Senior Subordinated Convertible Debentures. The Company has outstanding approximately 1.0 million options with exercise prices ranging from $1.00 to $1.10. If the options were exercised, the holders would have rights similar to common shareholders. Outstanding warrants total approximately 670,000 common shares and have conversion prices ranging from $1.10 to $4.00. If the warrants were exercised, the holders would have rights similar to common shareholders. The Company has outstanding $20.8 million of Senior Subordinated Convertible Debentures due in 2002 and pay interest quarterly. The Debentures are redeemable, in whole or in part, at the Company's option at the following redemption prices beginning August 15, 1998 of 104% and declining by 1% per year until maturity. Holders may redeem the Debentures at any time at a conversion price of $3.9875 per share of common stock, subject to certain adjustments which would result in 5.2 million additional common shares being issued. The Debentures are subordinated to all existing and future senior indebtedness. Note 11 --Net Earnings (Loss) per Share: The following table sets forth the computation of basic and diluted loss per share for the years ended April 3, 1998, March 31, 1997 and 1996: (In thousands, except per share amount) 1998 1997 1996 Loss $(1,430) $(23,968) $(13,389) Less: Preferred Stock Dividends 400 700 700 Loss available to Common Stockholders (numerator) (1,830) (24,668) (14,089) Weighted average shares (denominator) 45,167 40,292 40,253 Loss per share $ (.04) $ (.61) $ (.35)
Options and warrants to purchase 1,826,000, 2,410,000, and 2,510,000 of common stock were not included in computing diluted earnings per share for 1998, 1997 and 1996, respectively, because the effect would be antidilutive. Preferred stock convertible into 14,700,000, 9,000,000 and 5,400,000 shares of common stock were not included in computing diluted earnings per share for 1998, 1997 and 1996, respectively, because the effect would be antidilutive. Senior subordinated debentures convertible into 5,204,000 shares of common stock if converted were not included in computing diluted earnings per share for 1998, 1997 and 1996, respectively, because the effect would be antidilutive. Note 12 -- License Agreements: The Company has several license agreements in place, which allow licensees the use of the Emerson and G-Clef trademark for the manufacture and/or the sale of consumer electronics and other products. The license agreements cover various countries throughout the world and are subject to renewal at the expiration of the agreements. Additionally, the Company has entered into several sourcing and inspection agreements that require the Company to provide these services in exchange for a fee. License revenues recognized in Fiscal years 1998 and 1997 were $5,597,000 and $5,040,000 respectively. The Company records a majority of licensing revenues as it is earned over the term of the related agreement. In Fiscal 1998 and Fiscal 1997, $908,000 and $1,074,000 of license revenues recognized represented the discounted value of the minimum royalties due under the term of the agreements. This will reduce the revenue recognized related to such agreements in future years. In February 1995, the Company and one of its largest Suppliers and certain of the Supplier's affiliates (collectively, the "Supplier") entered into two mutually contingent agreements (the "Agreements"). Effective March 31, 1995, the Company granted a license of certain trademarks to the Supplier for a three- year term. The license permitted the Supplier to manufacture and sell certain video products under the Emerson and G-Clef trademark to one of the Company's largest customers (the "Customer") in the U.S. and Canada, and precluded the Supplier from supplying product to the Customer other than under the Emerson and G-Clef trademark or the Supplier's other trademarks. Further, the Agreements provided that the Supplier would supply the Company with certain video products for sale to other customers at preferred prices for a three-year term. Under the terms of the Agreements, the Company received non-refundable minimum annual royalties from the Supplier to be credited against royalties earned from sales of video cassette recorders and players, television/video cassette recorder and player combinations, and color televisions to the Customer. In addition, effective August 1, 1995, the Supplier assumed responsibility for returns and after-sale and warranty services on all video products manufactured by the Supplier and sold to the Customer, including similar video products sold by the Company prior to April 1, 1995. Royalty income recognized by the Company pursuant to the Agreements was $4,000,000, $4,000,000 and $4,442,000 in Fiscal 1998, 1997 and 1996, respectively. The agreement expired on March 31, 1998. In anticipation of the expiration of the Agreements, Emerson executed a four-year agreement ("Daewoo Agreement") with Daewoo Electronics Co. Ltd., ("Daewoo") in April 1997. This agreement provides that Daewoo will manufacture and sell television and video products bearing the Emerson and G-Clef trademark to customers in the U.S. market. Daewoo is responsible for and assumes all risks associated with, order processing, shipping, credit and collections, inventory, returns and after-sale service. The Company will arrange sales and provide marketing services and in return receive a commission for such services. This agreement can be terminated without cause by either party upon 90 days notice. The Daewoo Agreement may result in commission revenues that will be less than, equal to or exceed those earned from the Supplier Agreement. The agreement with Daewoo does not contain minimum annual commissions and is entirely dependent on the volume of sales made by the Company that are subject to the Daewoo Agreement. Should the Company not generate commission revenues that are at levels substantially equal to the revenues generated from the Supplier Agreement the Company's results of operations will be effected adversely. In February 1997, the Company executed five-year license/supply agreements with Cargil International Corp. ("Cargil"), covering the Caribbean and Central and South American markets. The agreements provide for the license of the Emerson and G-Clef trademark for certain consumer electronics and other products and require Emerson to source and inspect product for Cargil. Under the terms of the agreements, the Company will receive minimum annual royalties and a separate fee for the provision of sourcing and inspection service. Cargil assumes all costs and expenses associated with the purchasing, marketing and after-sales support of such products. In October 1994, the Company entered into a license agreement with Jasco Products Co., Inc., ("Jasco"), as amended, whereby the Company granted a license of certain trademarks to Jasco for use on consumer electronics accessories. Under the terms of the agreement, as amended in April 1997, the Company will receive minimum annual royalties through the life of the agreement, which expires on December 31, 1998. In June 1997, the Company entered into an eighteen month license agreement with World Wide One, Ltd., a Hong Kong corporation for use of the Emerson and G-Clef trademark in connection with the sale of certain consumer electronics products and other products to Makro International Far East Ltd. for sales of these products in China, Indonesia, Malaysia, Philippines, South Korea, Taiwan and Thailand. The Company will provide sourcing and inspection services for at least 50% of the licensee's purchase requirement. The licensee is required to meet certain minimum sales requirements as well as to ensure the establishment of adequate service centers or agents for after-sales warranty services. In March 1998, the Company executed three-year license and supply agreements with WW Mexicana, S. A. de C. V. ("WW Mexicana"), a distributor located in Mexico covering the Mexico market. The agreements provide for the license of the Emerson and G-Clef trademark for use on certain consumer products to be sold in Mexico and sourcing and inspection services. Under the terms of these agreements, the Company will receive minimum annual royalties through the life of the agreement and will receive a separate fee for sourcing and inspection services. In March 1998 the Company executed a three-year license agreement with Tel- Sound Electronics, Inc. ("Tel-Sound"), covering the United States and Canada markets. The agreement provides for the license of the Emerson and G-Clef trademark for use with telephones, answering machines and caller ID products. Under the terms of this agreement, the Company will receive minimum annual royalties through the life of the agreement. Note 13 --Legal Proceedings: CERTAIN OUTSTANDING COMMON STOCK Pursuant to the Company's bankruptcy restructuring plans on March 31, 1994, 30 million shares of the Company's Common Stock were issued to GSE Multimedia Technologies Corporation ("GSE"), Fidenas International Limited, L.L.C. ("FIN") and Elision International, Inc. ("Elision"). GSE, FIN and Elision (the "Affiliated Entities") are all affiliates of Geoffrey P. Jurick, the Company's Chairman of the Board, Chief Executive Officer and President. On June 11, 1996, a Stipulation of Settlement and Order (the "Settlement Agreement") was executed in proceedings before the United States District Court for the District of New Jersey, which settles various legal proceedings in Switzerland, the Bahamas and the United States. The Settlement Agreement provides for, among other things, the payment by Mr. Jurick and his Affiliated Entities of $49.5 million to various claimants of Mr. Jurick and the Affiliated Entities (the "Creditors"), to be paid from the proceeds of the sale of certain of the 29.2 million shares of Emerson common stock (the "Settlement Shares") owned by the Affiliated Entities. In addition, Mr. Jurick is to be paid the sum of $3.5 million from the sale of the Settlement Shares. The Settlement Shares are to be sold over an indeterminate period of time by a financial advisor, TM Capital (the "Advisor") pursuant to a marketing plan taking into consideration (i) the interests of Emerson's minority stockholders, and (ii) the goal of generating sufficient proceeds to pay the Creditors and Mr. Jurick as quickly as possible. The Settlement Shares have been divided into two pools. The Pool A Shares currently consist of 15.3 million shares of Emerson's common stock. The Pool B Shares currently consist of the number of Emerson shares with respect to which Mr. Jurick must retain beneficial ownership of voting power to avoid an event of default arising out of a change of control pursuant to the terms of the Company's Loan and Security agreement with a U.S. financial institution (the "Lender") and/or the Indenture governing the Company's 8-1/2% Senior Subordinated Convertible Debentures Due 2002 (the "Debentures"). Sales of the Settlement Shares may be made pursuant to a registered offering if the sales price is not less than 90% of the average of the three most recent closing prices (the "Average Closing Price"), or, other than in a registered offering, of up to 1% per quarter of the Emerson common stock outstanding, if the sales price is not less than 90% of the Average Closing Price. Any other attempted sales are subject to the consent of the Company, Mr. Jurick, the Creditors, and, if necessary, the United States District Court in Newark, New Jersey. All of the Settlement Shares secure payment of the $49.5 million owed to the Creditors on a first priority basis. Any Creditor may apply to the Court for an order to terminate the Settlement Agreement if certain events occur. Such events include, without limitation, delisting of the Settlement Shares from a national securities exchange or a determination that there is no reasonable prospect that the goals contemplated by the Settlement Agreement can be achieved. In November 1997, Petra Stelling and Barclays Bank filed a motion with the Court for an order (i) terminating the Settlement Agreement on the ground that there is no reasonable prospect that the goals contemplated by the Settlement Agreement can be accomplished, and (ii) granting the Creditors authorization to exercise all the rights and remedies provided by the Settlement and Pledge Agreements in the event of termination including authorizing the Collateral Agent to sell the Emerson Shares to fund payment of the Settlement Amount and to vote the Emerson Shares pending such sale, directing the entry and release of the Consent Judgments, authorizing Petra Stelling to enforce the Swiss Judgment and for such other relief as the Court deems appropriate. The Company and Mr. Jurick responded, the Creditors replied and a hearing on the motion was held in April 1998 at which time it was adjourned. The hearing is currently scheduled to resume on July 9, 1998. If the Court enters an order terminating the Settlement Agreement, the Creditors may take any action permitted by law to execute the Consent Judgments given to them in connection with the Settlement Agreement to collect the unpaid balance (including, without limitation, foreclosing on the Settlement Shares). If the Creditors foreclose on the Settlement Shares and such foreclosure results in a change of control (as defined in the Senior Secured Credit Facility), such foreclosure will be deemed an event of default under the Company's Senior Secured Credit Facility entitling the holders to accelerate payment of such indebtedness. In addition, if a change of control (as defined in the Indenture governing the Debentures) occurs, each of the holders of the Debentures, subject to the right of the Senior Secured Creditors to impose a 120 day payment block, has the right to require the Company to repurchase its Debentures at the par value hereof plus accrued by unpaid interest. Such repurchases may have a material adverse effect on the Company's future business activities. In 1994, Petra and Donald Stelling ("the Stellings"), two of the Creditors, filed a complaint with the Swiss Authorities alleging that Messrs. Jurick and Jerome H. Farnum ("Farnum"), directors of the Company, had conducted banking operations in Switzerland without appropriate licenses and that Messrs. Jurick, Farnum, and Peter G. Bunger ("Bunger"), also a director of the Company, engaged in improper activities in the financing of the Plan of Reorganization. Although, as part of the settlement discussed herein, the Stellings requested the discontinuance of the criminal investigations of these individuals, the matter is presently pending before a Swiss Court with a trial, if any, to be held no earlier than 1999. The Federal Banking Commission of Switzerland previously issued a decree purporting to determine that certain entities affiliated with Messrs. Jurick and Farnum were subject to Swiss banking laws and had engaged in banking activities without a license. OTAKE On December 20, 1995, the Company filed suit in the United States District Court for the District of New Jersey against Orion Sales, Inc., Otake Trading Co. Ltd., Technos Development Limited, Shigemasa Otake, and John Richard Bond, Jr., (collectively, the "Otake Defendants") seeking damages and alleging breach of contract, breach of covenant of good faith and fair dealing, unfair competition, interference with prospective economic gain, and conspiracy in connection with certain activities of the Otake Defendants under certain agreements between the Company and the Otake Defendants. On December 21, 1995, Orion Sales, Inc. and Orion Electric (America), Inc. filed suit against the Company in the United States District Court, Southern District of Indiana, Evansville Division, subsequently amended, alleging various breaches of certain agreements by the Company, including breaches of the confidentiality provisions, certain payment breaches, breaches of provisions relating to product returns, and other alleged breaches of those agreements, and seeking declaratory and injunctive relief and damages in the amount of $3.2 million, together with interest thereon, attorneys' fees, and certain other costs. The Company is presently owed the sum of $5 million from Orion representing royalty payments past due and owing pursuant to a certain License Agreement dated February 22, 1995 by and between the Company and Orion. In the context of the action Orion Sales, Inc. v. Emerson Radio Corp., pending in the United States District Court for the Southern District of Indiana (the "District Court"), Orion has executed a pre-judgment garnishment of these funds and deposited them with the Clerk of the District Court pursuant to an Order of the District Court. Orion has not contested the Company's entitlement to these royalty payments. Orion has also posted a bond with the District Court sufficient to compensate Emerson for any and all damages that may result from the pre-judgment garnishment. The Company has withheld payment of the sum of $3.2 million for certain consumer electronic products that Orion and its affiliates sold and delivered to Emerson pursuant to a certain Agreement dated February 22, 1995 by and between Emerson on the one hand and Orion, Otake Trading Co., Inc. and Technos Development Limited on the other (the "Supply Agreement"). Emerson has vigorously contested Orion's and its affiliates' entitlement to the $3.2 million payment. Both the Company and Orion have asserted claims for interest accruing on the unpaid principal balances respectively due them, which are presently pending before the District Court. The Company's management believes that it will receive the $5 million due pursuant to the License Agreement and has meritorious defenses to Orion's claim for the $3.2 million payment, and, also, the interest allegedly accrued thereon. In any event, the Company believes the results of that litigation should not have a material adverse effect on the financial condition of the Company or on its operations. BANKRUPTCY CLAIMS The Company is presently engaged in litigation regarding several bankruptcy claims which have not been resolved since the restructuring of the Company's debt in March 31, 1994. The largest claim was filed on or about July 25, 1994 in connection with the rejection of certain executory contracts with two Brazilian entities, Cineral Electronica de Amazonia Ltda. and Cineral Magazine Ltda. (collectively, "Cineral"). The amount currently claimed is for $93.6 million, of which $86.8 million represents a claim for lost profits. The claim will be satisfied, to the extent the claim is allowed by the Bankruptcy Court, in the manner other allowed unsecured claims were satisfied. The Company has objected to the claim and intends to vigorously contest such claim and believes it has meritorious defenses to the highly speculative portion of the claim for lost profits and the portion of the claim for actual damages for expenses incurred prior to the execution of the contracts. An adverse final ruling on the Cineral claim could have a material adverse effect on the Company, even though it would be limited to 18.3% of the final claim determined by a court of competent jurisdiction; however, with respect to the claim for lost profits, the Company believes the chances for recovery for lost profits are remote. There has been no activity regarding this litigation during the current fiscal year. The Company is involved in other legal proceedings and claims of various types in the ordinary course of business. While any such litigation to which the Company is a party contains an element of uncertainty, management presently believes that the outcome of each such proceeding or claim which is pending or known to be threatened, or all of them combined, will not have a material adverse effect on the Company's consolidated financial position. Note 14-- Business Segment Information and Major Customers: The consumer electronics business is the Company's only business segment. Operations in this business segment are summarized below by geographic area: Year Ended April 3, 1998 (In thousands) U.S. Foreign Eliminations Consolidated Sales to unaffiliated customers $159,108 $ 3,622 $ - $ 162,730 Earnings (loss) before income taxes $ (2,368) $ 938 $ - $ (1,430) Identifiable assets $ 51,008 $ 912 $ - $ 51,920
Year Ended March 31, 1997 U.S. Foreign Eliminations Consolidated Sales to unaffiliated customers $172,417 $ 6,291 $ - $ 178,708 Transfers between geographic areas 2,592 581 (3,173) - Total net revenues $175,009 $ 6,872 $ (3,173) $ 178,708 Earnings (loss) before income taxes $(20,677) $(1,791) $ - $ (22,468) Identifiable assets $ 58,382 $ 386 $ - $ 58,768 Year Ended March 31, 1996 Sales to unaffiliated customers $234,369 $11,298 $ - $ 245,667 Transfers between geographic areas 2,884 876 (3,760) - Total net revenues $237,253 $12,174 $ (3,760) $ 245,667 Earnings (loss) before income taxes $(11,324) $(2,039) $ - $ (13,363) Identifiable assets $ 90,350 $ 6,226 $ - $ 96,576
Transfers between geographic areas are accounted for on a cost basis. Identifiable assets are those assets used in operations in each geographic area. At April 3, 1998, March 31, 1997 and 1996, total assets include $9,187,000, $10,657,000 and $27,779,000, respectively, of assets located in foreign countries. The Company's net sales to one customer aggregated approximately 58%, 36% and 18% of consolidated net revenues for the years ended April 3, 1998, March 31, 1997 and 1996, respectively. This customer approximated 17% of the Company's trade accounts receivable at April 3, 1998, and has not been collateralized. The Company's net sales to another customer aggregated 16%, 13% and 16% for the years ended April 3, 1998, March 31, 1997 and 1996, respectively. Trade accounts receivable from this customer were less than 10% of total trade receivables. Note 15 - Investment in Joint Venture: The Company has a 50% investment in E & H Partners, a joint venture in liquidation that refurbishes and sells certain of the Company's product returns. The results of this joint venture were accounted for by the equity method and the Company's equity in the earnings (loss) of the joint venture was reflected as an increase or reduction of cost of sales. Summarized financial information relating to the joint venture for the years ended April 3, 1998, March 31, 1997 and 1996 is as follows: 1998 1997 1996 (In thousands) Activity between Company and E & H Partners Accounts receivable from joint venture (a) $1,438 $3,522 $13,270 Investment in joint venture - 440 1,265 Sales to joint venture - 5,792 17,629 E & H Partners Summarized Financial Information Condensed balance sheet: Current assets $1,889 $7,947 $19,326 Noncurrent assets - - 162 Total $1,899 $ 7,947 $19,488 Current liabilities $2,609 $ 7,476 $16,958 Partnership equity (720) 471 2,530 Total $1,889 $ 7,947 $19,488 Condensed income statement: Net sales (b) $1,772 $31,564 $27,712 Net loss (318) (2,058) (600)
(a) Accounts receivable are secured by a shared lien on the partnership's inventory with the other partner in the joint venture, and such lien had been assigned to the Lender as collateral for the U.S. line of credit facility. (b) Includes sales to the Company of $0, $7,058,000 and $5,964,000, respectively. Effective January 1, 1997, the partners to the E&H Partnership mutually agreed to dissolve the joint venture and wind down its operations. The partners have elected to extend such wind down in order to facilitate a more orderly liquidation of the joint venture. EMERSON RADIO CORP. AND SUBSIDIARIES SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In thousands)
Column A Column B Column C Column D Column E Balance Charged Balance at to at beginning costs Deduc- end of Decription of year expenses tions year (C) Allowance for doubtful accounts/chargebacks: Year ended: April 3, 1998 $2,686 $1,165 $ 337(A) $ 3,514 March 31, 1997 2,831 2,558 2,703 2,686 March 31, 1996 4,150 1,111 2,430 2,831 Inventory reserves: Year ended: April 3, 1998 $2,161 $1,507 $2,971(B) $ 697 March 31, 1997 1,222 4,560 3,621 2,161 March 31, 1996 470 1,087 335 1,222
(A) Accounts written off, net of recoveries. (B) Net realizable value reserve removed from account when inventory is sold. (C) Amounts do not include certain accounts receivable reserves that are disclosed as "allowances" on the Consolidated Balance Sheets since they are not valuation reserves. INDEX TO EXHIBITS PAGE NUMBER IN SEQUENTIAL NUMBERING EXHIBIT DESCRIPTION SYSTEM (2) Confirmation Order and Fourth Amended Joint Plan of Reorganization of Emerson Radio Corp. ("Old Emerson") and certain subsidiaries under Chapter 11 of the United States Bankruptcy Code, dated March 31, 1994 (incorporated by reference to Exhibit (2) of Emerson's Registration Statement on Form S-1, Registration No. 33- 53621, declared effective by the Securities and Exchange Commission ("SEC") on August 9, 1994). (3) (a) Certificate of Incorporation of Emerson (incorporated by reference to Exhibit (3) (a) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (3) (b) Certificate of Designation for Series A Preferred Stock (incorporated by reference to Exhibit (3) (b) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (3) (c) Plan of Reorganization and Agreement of Merger by and between Old Emerson and Emerson Radio (Delaware) Corp. (incorporated by reference to Exhibit (3) (c) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (3) (d) Certificate of Merger of Old Emerson with and into Emerson Radio (Delaware) Corp. (incorporated by reference to Exhibit (3) (d) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (3) (e) Amendment dated February 14, 1996 to the Certificate of Incorporation of Emerson (incorporated by reference to Exhibit (3) (a) of Emerson's Quarterly Report on Form 10- Q for the quarter ended December 31, 1995). (3) (f) By-Laws of Emerson adopted March 1994 (incorporated by reference to Exhibit (3) (e) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (3) (g) Amendment dated November 28, 1995 to the By-Laws of Emerson adopted March 1994 (incorporated by reference to Exhibit (3) (b) of Emerson's Quarterly Report on Form 10- Q for the quarter ended December 31, 1995). (4) (a) Warrant Agreement to Purchase 750,000 shares of Common Stock, dated as of March 31, 1994 (incorporated by reference to Exhibit (4) (a) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (4) (b) Indenture, dated as of August 17, 1995 between Emerson and Bank One, Columbus, NA, as Trustee (incorporated by reference to Exhibit (1) of Emerson's Current Report on Form 8-K filed with the SEC on September 8, 1995). (4) (c) Common Stock Purchase Warrant Agreement to purchase 50,000 shares of Common Stock, dated as of December 8, 1995 between Emerson and Michael Metter (incorporated by reference to Exhibit (10) (e) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995). (4) (d) Common Stock Purchase Warrant Agreement to purchase 200,000 shares of Common Stock, dated as of December 8, 1995 between Emerson and Kenneth A. Orr (incorporated by reference to Exhibit (10) (f) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995). (10) (a) Form of Promissory Note issued to certain Pre-Petition Creditors (incorporated by reference to Exhibit (10) (e) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (b) Loan and Security Agreement, dated March 31, 1994, by and among Emerson, Majexco Imports, Inc. and Congress Financial Corporation ("Congress") (incorporated by reference to Exhibit (10) (f) of Emerson's Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994). (10) (c) Amendment No. 1 to Financing Agreements, dated as of August 24, 1995, among Emerson, Majexco Imports, Inc. and Congress (incorporated by reference to Exhibit (2) of Emerson's Current Report on Form 8-K filed with the SEC on September 8, 1995). (10) (d) Amendment No. 2 to Financing Agreements, dated as of February 13, 1996 (incorporated by reference to Exhibit (10) (c) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995). (10) (e) Amendment No. 3 to Financing Agreements, dated as of August 20, 1996 (incorporated by reference to Exhibit (10) (b) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995). (10) (f) Amendment No. 4 to Financing Agreements, dated as of November 14, 1996 (incorporated by reference to Exhibit (10) (c) of Emerson's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). (10) (g) Amendment No. 5 to Financing Agreements, dated as of February 18, 1997 (incorporated by reference to Exhibit (10) (e) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996). (10) (h) Stipulation of Settlement and Order dated June 11, 1996 by and among the Official Liquidator of Fidenas International Bank Limited, Petra Stelling, Barclays Bank PLC, the Official Liquidator of Fidenas Investment Limited, Geoffrey P. Jurick, Fidenas International Limited, L.L.C., Elision International, Inc., GSE Multimedia Technologies Corporation and Emerson. (10) (i) Pledge Agreement dated as of February 4, 1997 by Fidenas International Limited, L.L.C. ("FIN") in favor of TM Capital Corp. (incorporated by reference to Exhibit (10) (a) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996). (10) (j) Registration Rights Agreement dated as of February 4, 1997 by and among Emerson, FIN, the Creditors, FIL and TM Capital Corp. (incorporated by reference to Exhibit (10) (b) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996). (10) (k) License and Exclusive Distribution Agreement with Cargil International Corp. dated as of February 12, 1997 (incorporated by reference to Exhibit (10) (c) of Emerson's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996). (10) (l) Agreement dated April 10, 1997 between Emerson and Daewoo Electronics Co., Ltd. (10) (m) Securities Purchase Agreement dated as of November 27, 1996, by and between Sport Supply Group, Inc. ("SSG") and Emerson (incorporated by reference to Exhibit (2)(a) of Emerson's Current Report on Form 8-K dated November 27, 1996). (10) (n) Form of Warrant Agreement by and between SSG and Emerson (incorporated by reference to Exhibit (4)(a) of Emerson's Current Report on Form 8-K dated November 27, 1996). (10) (o) Form of Registration Rights Agreement by and between SSG and Emerson (incorporated by reference to Exhibit (4)(b) of Emerson's Current Report on Form 8-K dated November 27, 1996). (10) (p) Consent No. 1 to Financing Agreements among Emerson, certain of its subsidiaries, and Congress (incorporated by reference to Exhibit (10)(b) of Emerson's Current Report on Form 8-K dated November 27, 1996). (10) (q) Form of Termination of Employment Agreement between Emerson and John Walker dated as of January 15, 1998.* (10) (r) License Agreement dated as of March 30, 1998 by and between Tel-Sound Electronics, Inc. and Emerson. * (10) (s) License Agreement dated as of March 31, 1998 by and between WW Mexicana, S. A. de C. V. and Emerson. * (10) (t) Amendment No. 7 to Financing Agreements, dated as of March 31, 1998. * (10) (u) Amendment No. 1 to Pledge and Security Agreement dated as of March 31, 1998. * (10) (v) Second Lease Modification dated as of May 15, 1998 between Hartz Mountain, Parsippany and Emerson. * (12) Computation of Ratio of Earnings (Loss) to Combined Fixed Charges and Preferred Stock Dividends. * (21) Subsidiaries of the Company as of April 3, 1998.* (23) Consent of Independent Auditors.* (27) Financial Data Schedule for year ended April 3, 1998.* * Filed herewith. EXHIBIT 12 EMERSON RADIO CORP. AND SUBSIDIARIES EXHIBIT TO FORM 10-K COMPUTATION OF RATIO OF EARNINGS (LOSS) TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (In thousands, except ratio data)
Historical Year Year Year Year Year Ended Ended Ended Ended Ended Apr. 3, Mar. 31, Mar. 31, Mar. 31, Mar. 31, 1998 1997 1996 1995 1994 Pretax earnings (loss) $(1,176) $(23,738) $(13,363) $ 7,642 $(73,327) Fixed charges: Interest 1,911 2,789 2,788 2,582 10,243 Amortization of debt expenses 677 640 487 300 - 2,588 3,429 3,275 2,882 10,243 Pretax earnings (loss) before fixed charges $1,412 $(20,309) $(10,088) $10,524 $(63,084) Fixed charges: Interest $1,911 $ 2,789 $ 2,788 $ 2,582 $10,243 Amortization of debt expenses 677 640 487 300 - Preferred stock dividend requirements 400 700 700 725(a) requirements $2,988 $ 4,129 $ 3,975 $3,607 $ 10,243 Ratio of earnings (loss) to combined fixed charges and preferred stock dividends .47 (4.92) (2.54) 2.92 (6.16) Coverage deficiency - $4,129 $ 3,975 - $10,243
(a) The preferred stock dividend requirements have been adjusted to reflect the pretax earnings which would be required to cover such dividend requirements. EXHIBIT 21 Emerson Radio Corp. and Subsidiaries Exhibit to Form 10-K Subsidiaries of the Registrant Jurisdiction of Percentage of Name of Subsidiary Incorporation Ownership Emerson Radio (Hong Kong) Ltd. Hong Kong 100%* Emerson Radio International Ltd. British Virgin Islands 100% Sport Supply Group, Inc. Delaware 28%
* One share is owned by a resident director pursuant to local law. EX-1 2 SUPPLY AND INSPECTION AGREEMENT This Agreement, dated effective as of March 31, 1998, is by and between EMERSON RADIO CORP., a Delaware corporation, having a place of business at Nine Entin Road, Parsippany, New Jersey 07054 (hereinafter "Emerson"), and WW MEXICANA, S.A. de C.V., a corporation duly organized under the laws of Mexico, having a place of business at Carr. Picacho Ajusco no. 238 - 7o. piso, Col. Jardines en la Montana, C.P. 14210, Mexico, D.F. (hereinafter "WW Mexicana"). Emerson, directly and through affiliates, distributes a variety of consumer electronics products and microwave oven products in various countries throughout the world. Emerson is the owner of certain valuable and well-known trademarks throughout the world and the goodwill associated therewith; WW Mexicana, directly and through affiliates, distributes consumer electronics and other products in various countries throughout the world; Emerson and WW Mexicana have entered into a License Agreement of even date herewith (the "License Agreement") providing for the specified use by WW Mexicana of the "Emerson and G-Clef" trademark in connection with the distribution in the territory of Mexico ("the Territory" as defined in the License Agreement), of televisions (color and black and white), video cassette recorders, color television/video cassette recorder combinations, camcorders, microwave ovens, boom boxes, shelf systems, clock radios, car radios, audio and video products, Dolby Surround(Registered) Home Theater speaker systems and compact refrigerators and freezers [more particularly described in the License Agreement and referred to herein as "the Goods"]. WW Mexicana desires, and the parties have agreed that WW Mexicana shall, as set forth herein, source through Emerson, for sale and distribution within the Territory, certain of the Goods which are the subject of the License Agreement, together with other products to be agreed upon in advance by the parties in writing and replacement parts for all of the foregoing (collectively referred to herein as "the Products"); Emerson and WW Mexicana desire to set forth their respective agreements to provide for, among other things, the sourcing and inspection of Products by Emerson or its affiliates, and the payment of a fee to Emerson by WW Mexicana for these services, as set forth herein; In consideration of the foregoing premises and mutual agreements set forth herein, the following is agreed to: 1. DEFINITIONS 1.1 "Affiliate" will mean 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" will mean any and all information, data, specifications, customer lists, products and services information, sales and marketing information, vendor data, and proprietary information regarding Emerson, WW Mexicana 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 "Emerson" means Emerson Radio Corp. and its Affiliates. 1.4 "Subsidiaries" will mean all direct and indirect subsidiaries of a party. 2. SUPPLY/SOURCING OF PRODUCTS BY EMERSON 2.1 Emerson, directly or through its Affiliates, shall source for WW Mexicana (subject to force majeure as defined at SECTION 13 and timely payment pursuant to SECTION 4), Products ordered by WW Mexicana, from time to time, from the date hereof until the expiration or termination of the License Agreement executed by the parties simultaneously herewith, or other termination as set forth herein, in which case Emerson shall be relieved of its obligations as set forth herein. WW Mexicana shall source through Emerson or its Affiliates not less than 75% of WW Mexicana's video, audio, car stereo and microwave oven purchase requirements under the License Agreement with Emerson or an Affiliate of Emerson. WW Mexicana shall use its best efforts to achieve the total gross sales projections for the Products covered by this Agreement, set forth on Appendix A hereto. 2.2 WW Mexicana shall submit to Emerson from time to time its written request for purchase information setting forth the details of its request for Products, including a description of the Products, the quantity of Products desired by WW Mexicana, the delivery date desired for the Products, the delivery address and such other terms as the parties shall agree upon. 2.3 Emerson shall then solicit from manufacturers, suppliers and vendors terms and conditions for the purchase by and sale to WW Mexicana of such Products. 2.4 Thereafter, Emerson shall assist WW Mexicana in establishing pricing and confirming purchase and delivery requests. Emerson shall then use its best efforts to confirm the purchase price and delivery date to WW Mexicana. 2.5 Following confirmation of the purchase price and delivery date to WW Mexicana by Emerson, WW Mexicana shall issue a purchase order directly to the manufacturer, supplier or vendor, and simultaneously provide copies of each purchase order to Emerson. Emerson shall use reasonable efforts to have such manufacturer, supplier or vendor execute and deliver to WW Mexicana a copy of WW Mexicana's General Specifications in the form to be supplied by WW Mexicana, and reviewed and approved by Emerson, annexed as Appendix B. Notwithstanding Emerson's ability to obtain the agreement to or signature on the General Specifications, WW Mexicana shall, notwithstanding any agreement entered into with a manufacturer, vendor or supplier of Products, whether oral or written, be required to make the payments to Emerson as set forth herein, and shall require such manufacturer, supplier or vendor, in any such agreement, to indemnify WW Mexicana and its agents, including Emerson expressly, for any claims made as a result of the sale of the Products to WW Mexicana. Such agreement shall include the language set forth on Appendix C. WW Mexicana shall not enter into any such agreement with a manufacturer, supplier or vendor which conflicts with the provisions of this Agreement. 2.6 The purchase price of all Products ordered by, for the benefit of, or at the direction of WW Mexicana which are sourced by Emerson from the manufacturers, vendors or suppliers, shall be paid directly by WW Mexicana to the manufacturer, vendor or supplier, and WW Mexicana shall make payment in accordance with the manufacturer's requirements, directly to the manufacturer, vendor or supplier. Emerson shall assist WW Mexicana to obtain the agreement of the manufacturer, vendor or supplier to payment by 60-day sight letter of credit and, in the event the manufacturer, vendor or supplier agrees to such payment terms, WW Mexicana shall provide a copy to Emerson of all such letters of credit. Letters of credit shall be subject to interest at the rate of 9.0% per year, or .75% per month (subject to change based upon prime rate). All other costs related to the sourcing and supply of Products, including, but not limited to, applicable freight, insurance and tax charges and expenses, shall be borne solely by WW Mexicana which shall pay such costs directly to the manufacturer, supplier or vendor. One percent (1%) free parts shall be provided with each order placed by WW Mexicana. 2.7 Short Term and Other Product Needs; Returns and Refurbished Merchandise. See attached Schedule 2.7 which is incorporated herein. 3. INSPECTION OF PRODUCTS BY EMERSON. In addition to the services to be performed by Emerson as set forth above, Emerson shall perform the following sourcing and inspection services: - supply plans for the production of Products and availability of samples - provide quality control services, including testing inspection and quality assurance audits in accordance with industry standards - provide logistical services and support for the scheduling of deliveries and transportation of the Products - assist in the cosmetic design of goods and packaging engineering - identify manufacturers - investigate manufacturer's ability to manufacture to WW Mexicana's specifications, including adequacy of manufacturer's facilities, equipment and knowledge - ensure that manufacturer has suitable testing equipment and personnel - ensure manufacturer has adequate internal quality control procedures - obtain information pertaining to the financial stability of manufacturer - investigate manufacturer's reputation and ability to ship on a timely basis - assist in production scheduling and coordinating with the manufacturer for the expedition of shipments after order placed by WW Mexicana - provide Emerson quality control inspectors to inspect product, including on manufacturer's premises (Emerson's China personnel) - provide the assistance of Emerson quality assurance group to inspect product to AQL levels (including samples and inspection by Emerson's Hong Kong and China personnel) - perform quality control life test procedures (including the performance by Emerson Hong Kong personnel) The above shall be performed by Emerson with respect to Products sourced by Emerson and to be purchased by WW Mexicana, provided, however, that in each instance WW Mexicana shall provide Emerson with all information in its possession necessary or desirable to accomplish the foregoing. It is expressly understood that WW Mexicana shall be solely responsible, at its sole cost and expense, for obtaining all governmental permits and approvals customarily obtained for sale of the Products and such permits and approvals as are required by the laws of the Territory. 4. COMPENSATION. 4.1 In consideration for the performance by Emerson of the services described herein, WW Mexicana shall pay to Emerson a sourcing fee for all Products ordered by, for the benefit of, or at the direction of, WW Mexicana, which shall be one and one-half percent (1.5%) of the Product F.O.B. price per unit. WW Mexicana shall also pay to Emerson an inspection fee equal to one-half percent (1/2%) per unit of the Product F.O.B. price for all Products ordered by, for the benefit of, or at the direction of, WW Mexicana and for which a purchase order has been issued by WW Mexicana, from the manufacturer, supplier or vendor or any agent or contractor thereof. 4.2 The fees set forth in Section 4.1 above shall be billed by Emerson and shall be payable upon net 60-day terms. No deduction shall be made for late or non-conforming shipments or returned Products and all liability shall be against the manufacturer, vendor or supplier. 5. INSURANCE. WW Mexicana shall cause to be maintained in full force and effect, at its own cost, insurance for the benefit of Emerson, in accordance with the provisions of the License Agreement executed by the parties simultaneously herewith, and furnish Emerson with certificates of insurance evidencing the requisite insurance coverage. 6. CONFIDENTIALITY. 6.1 The parties recognize that by reason of this Agreement, a party and its representatives (including the auditors of a party) may acquire Confidential Information. Each party will use the Confidential Information received from the other party solely for the purpose of carrying out this Agreement. Each party recognizes that all such Confidential Information acquired from the other party is the property of such other party and that the recipient and its representatives (including auditors) shall not, during the term of this Agreement or thereafter, directly or indirectly, use, publish, disseminate or otherwise disclose any Confidential Information obtained in connection with this Agreement without the express written consent of a duly authorized officer of the other party, unless compelled by law or required by applicable securities rules and regulations or in the written opinion of counsel is required by law to be disclosed. In such case, each party shall inform the other party as far in advance as possible prior to making any such disclosure. Notwithstanding the foregoing, Emerson shall not be required to inform or obtain the consent of WW Mexicana for the issuance of any press release which utilizes, refers to or discloses sales information relating to this Agreement, or for the reporting or filing of this Agreement in accordance with applicable securities regulations. Each party shall cause each of their respective officers, directors, agents, auditors or employees to whom a disclosure of Confidential Information is made, or any subcontractor, including the manufacturer(s), vendor(s) or supplier(s) of the Products, to adhere to the terms and conditions of this SECTION 6 as if, and to the same extent as if, he or she were a party to this Agreement. 6.2 Upon expiration or termination of this Agreement, each party shall return to the other party all copies of Confidential Information provided by the other party then in its possession or control and destroy memoranda or other documents created using Confidential Information and confirm such destruction to the other party upon such party's written request. Notwithstanding the above, Emerson shall not be required to return or destroy financial or other information relating to the sales and royalties pertaining to this Agreement or the License Agreement entered into simultaneously herewith, which has become or becomes a part of Emerson's books and records. 7. INDEPENDENT CONTRACTOR. Emerson will be considered, for all purposes, an independent contractor and it will not, directly or indirectly, act as an agent, servant or employee of WW Mexicana or make any commitments or incur any liabilities on behalf of WW Mexicana without its prior written consent other than in accordance with the terms of this Agreement. All personnel assigned by Emerson to perform the services hereunder will be employees of Emerson, which shall pay all salaries and expenses of, and all applicable payroll, withholding or other taxes relating to such employees. 8. NON-SOLICITATION. So long as Emerson is acting as supply agent under the terms hereof and for a period of two (2) years following the termination of this Agreement, WW Mexicana shall not, unless it pays to Emerson all fees described herein as if Emerson were performing as supply agent, solicit any manufacturers, suppliers or vendors which sold, manufactured or otherwise distributed the Products to, for the benefit of, or at the direction of WW Mexicana and as to which Emerson has acted as supply agent, provided such manufacturers, suppliers and vendors have not, prior to the effective date of this Agreement, done business in any way with WW Mexicana concerning the Products. 9. TERM. Subject to the provisions of Section 10, the term of this Agreement shall continue for a period of 3 years and 3 months from the effective date of this Agreement, unless otherwise renewed or terminated by Emerson in conjunction with the renewal or termination by Emerson of the License Agreement executed by the parties simultaneously herewith. 10. TERMINATION. If either party defaults in performing its material obligations under this Agreement and fails to cure that default within thirty (30) days after receiving from the first party a written notice specifying the default, the first party may terminate this Agreement upon written notice to the other. Upon termination of this Agreement WW Mexicana shall be liable for all payments due to Emerson through the date of termination in accordance with this Agreement. Notwithstanding any termination of this Agreement, WW Mexicana shall be required to fulfill its obligations pursuant to the License Agreement executed by the parties simultaneously herewith, unless such License Agreement is otherwise terminated by Emerson as set forth therein. 11. NO WARRANTY. EMERSON MAKES NO WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, CONCERNING THE PRODUCTS, OR THE MERCHANTABILITY OR FITNESS THEREOF FOR ANY PURPOSE OR USE. IN THE EVENT OF AN EPIDEMIC FAILURE OR THE PRODUCTS FAIL TO CONFORM TO WW MEXICANA'S SPECIFICATIONS, EMERSON SHALL USE ITS BEST EFFORTS TO ASSIST WW MEXICANA IN ITS EFFORTS TO RECOVER FROM THE MANUFACTURER ANY ADDITIONAL COSTS INCURRED BY WW MEXICANA AS A RESULT OF SUCH FAILURE. EMERSON SHALL ALSO PROVIDE REASONABLE ASSISTANCE IN ENFORCING THE MANUFACTURER'S WARRANTY AND WW MEXICANA'S GENERAL SPECIFICATIONS. In no event shall Emerson be liable for any incidental, consequential, special or indirect damages of any nature or kind whatsoever, or for lost profits, in connection with the transport, storage, sale or use of the Products and for any claim originating from the sale, marketing, distribution or use of the Products WW Mexicana shall go directly to the manufacturer, supplier or vendor of Products. WW Mexicana is not authorized to issue any warranty binding on Emerson. Emerson shall not be liable for any canceled orders, delayed or non- conforming shipments or any claims or damages flowing therefrom. Emerson shall have no liability for products ordered directly by WW Mexicana. 12. INDEMNIFICATION. WW Mexicana shall defend, indemnify and hold harmless Emerson, its Affiliates and the employees, agents, officers and directors of each of Emerson and its Affiliates from and against any and all claims, demands, judgments, liability, damages, losses, costs and expenses of any nature (including attorneys' fees and expenses), including, without limitation, death, personal injury, property damage or product liability arising from the manufacture, assembly, packaging and transportation of the Products sold under the terms hereof, which operations shall be performed by the manufacturer, supplier or vendor. WW Mexicana hereby represents and warrants to Emerson that the Products will not infringe upon or otherwise conflict with the intellectual property rights of any person. WW Mexicana shall, at its own expense, defend Emerson in any and all actions or suits alleging that any Product infringes another person's intellectual property rights and shall indemnify and hold Emerson harmless from all loss, damage, liability and cost and expense incurred by Emerson on account of the sale, marketing, distribution or use of the Products including any alleged infringement. WW Mexicana shall require, in its General Specifications Agreement, that the manufacturer provide such defense and indemnification to WW Mexicana and its agents, including Emerson expressly. Emerson may, at its option, elect to participate in any defense of any action in which it may be a named party. In the event WW Mexicana refuses or cannot defend any such action or suit, whether following receipt of notice from Emerson or a third party, Emerson may defend such action or suit and WW Mexicana shall indemnify Emerson for all costs and expenses related thereto. Emerson shall notify WW Mexicana promptly in writing upon receipt by Emerson of any notice of any oral or written claim or demand, or any suit, alleging infringement of any person's intellectual property right or any claim in connection with the Products and shall permit WW Mexicana to defend, and shall cooperate fully with WW Mexicana in the defense of, any such action, provided that WW Mexicana shall reimburse Emerson for its expenses of such cooperation. 13. FORCE MAJEURE. If any party is rendered wholly or partially unable by Force Majeure (other than financial) to carry out its obligations under this Agreement, and if that party gives prompt written notice and details of such Force Majeure to the other party, the notifying party shall be excused from performance of its obligations under this Agreement during the continuance of any inability so caused and for a period thereafter that is reasonably necessary, taking into account all relevant circumstances, to permit that party to recommence performance of its obligations. Such cause shall be remedied by the notifying party as far as possible with reasonable speed and effort, but neither party shall have any obligation to settle any labor dispute. For the purposes of this Agreement, "Force Majeure" shall mean acts of God, industrial disputes, acts of public enemies or terrorists, war, other military conflicts, blockades, insurrections, riots, epidemics, quarantine restrictions, landslides, lightning, earthquake, fires, storms, floods, washouts, arrests, civil disturbances, restraints by or actions of any governmental authority (including export or security restrictions on information, material, personnel, equipment or otherwise), national economic crisis (which restricts credit or makes it inaccessible with a resulting currency devaluation in excess of 20%), breakdowns of plant or machinery, inability to obtain transport or supplies, and any other acts or events whatsoever, whether or not similar to the foregoing, not within the reasonable control of the party claiming excuse from performance, which by the exercise of due diligence and best reasonable efforts said party shall not have been able to overcome or avoid without unreasonable expense. The provisions of this paragraph shall not apply to payment obligations under this Agreement. In any event, either party may cancel this Agreement, upon written notice, if the Force Majeure continues for a period of 120 consecutive days. 14. MISCELLANEOUS. 14.1 NO ASSIGNMENT. This Agreement may not be assigned by either party without the prior written consent of the other party. 14.2 GOVERNING LAW AND JURISDICTION. This Agreement will be governed by and construed in accordance with the laws of the State New York, U.S.A., notwithstanding any choice of laws rules thereof, and WW Mexicana irrevocably submits to the exclusive jurisdiction of the courts of the State of New York, and venue shall lie exclusively in New York County, New York. However, it is expressly understood that this Section shall not preclude Emerson's right to make application for, and seek enforcement of, any judgment or injunctive relief in any court having jurisdiction. 14.3 NO AMENDMENT. This Agreement may not be changed, amended or modified except by an instrument in writing executed by each of the parties. 14.4 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. 14.5 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. 14.6 SURVIVAL. All obligations of the parties set forth in paragraphs 5, 6, 7, 8, 11, 12 and 14 of this Agreement shall survive the expiration or termination of this Agreement. 14.7 NOTICE. 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 party at its address herein set forth, or at such other address as each party may provide to all parties hereto in writing from time to time: (A) If to Emerson: Emerson Radio Corp. Nine Entin Road, P.O. Box 430 Parsippany, New Jersey 07054-0430 Attn: Legal Department [Facsimile No. (973) 428-2022] (B) If to WW Mexicana: WW Mexicana, S.A. de C.V. Carr. Picacho Ajusco No. 238 - 7o. piso Col. Jardines en la Montana, C.P. 14210 Mexico, D.F. Attn.: Fernando Sanchez-Navarro M., President [Facsimile No. (52)(5) 630-0122] Any such notice will be effective upon actual receipt or three (3) days after it is deposited with the United States Postal Service, postage prepaid, properly addressed and certified, whichever occurs first. 14.8 ENTIRE AGREEMENT. Together with the License Agreement executed by the parties simultaneously herewith, all documents referenced therein, and all documents annexed thereto, this Agreement and exhibits hereto shall constitute the entire and sole agreement and understanding of all parties hereto and supersede all other agreements, understandings, and communications, whether oral or written, regarding the subject matter hereof and of the License Agreement. 14.9 EXECUTION. This Agreement may be executed in any number of counterparts, and 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 all of the parties. 14.10 PRESS RELEASES. WW Mexicana shall not disseminate any press release or other announcement relating to the transactions contemplated by this Agreement without Emerson's prior written consent as to the contents thereof. 14.11 PAYMENTS. All payments to be made pursuant to the terms of this Agreement shall be made directly by WW Mexicana to Emerson, or a designated affiliate of Emerson, and shall be made in U.S. dollars. 14.12 ENGLISH LANGUAGE. 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. WW MEXICANA, S.A. DE C.V. By: /s/ John J. Raab By: /s/ Fernando Sanchez-Navarro M. John J. Raab Fernando Sanchez-Navarro M. Senior Vice President- President International EX-2 3 as of January 15, 1998 Mr. John P. Walker c/o Emerson Radio Corp. 9 Entin Road Parsippany, New Jersey 07054 EMPLOYMENT AGREEMENT Dear Mr. Walker: This letter will confirm that you and Emerson Radio Corp. ("Emerson") have agreed to terminate the Employment Agreement between you and Emerson, dated April 1, 1994 ("Employment Agreement"), as amended by Amendment No. 1 to Employment Agreement, dated as of the 16th of April, 1997 ("Amendment No. 1")(hereinafter, collectively "Emerson Employment Agreement"). Accordingly, the Emerson Employment Agreement shall be of no further force and effect. Please indicate your agreement to the terms of this letter in the space provided below. Very truly yours, Emerson Radio Corp. By: ________________ Acknowledged and Agreed (Name) to as of the 15th day of ________________ January, 1998 (Title) ______________________ John P. Walker EX-3 4 LICENSE AGREEMENT This Agreement, dated effective as of March 30, 1998 (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 TEL-SOUND ELECTRONICS, INC., a Florida corporation, having a place of business at 2400 W. Copans Road #9, Pompano Beach, FL 33069. 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 "Contract Year" means, (i) as to the first Contract Year, the period commencing on the Effective Date of this Agreement and ending on August 31, 1999; and (ii) each immediately subsequent full year during the term of this Agreement commencing September 1, 1999. 1.4 "Contract Quarter" means each calendar quarter or part thereof within each of the Contract Years. 1.5 "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. 1.6 "Landed Cost" means the product F.O.B. price, plus duty and ocean freight, charged to Licensee, net of any discounts, allowances or rebates. 1.7 "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. 1.8 "Sales Price" means the undiscounted invoice price of the Goods without consideration for any form of allowances or discounts, whether stated on the invoice or not. 1.9 "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. 1.10 "Licensor" means Emerson Radio Corp. 1.11 "Licensee" means Tel-Sound Electronics, Inc. 2. GRANT 2.1 Subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee an exclusive (to the extent contemplated by SECTION 8) non- transferable license to utilize the Trademarks solely upon and in connection with the manufacturing, sale, marketing and distribution of the Goods in the Territory. 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 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. Licensee shall inform its customers and distributors that the Goods cannot be distributed, sold or otherwise disposed of outside of the Territory. 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. Notwithstanding the above and Licensor's right to terminate this Agreement as set forth in Section 10.2, if Goods are sold or otherwise disposed outside of the Territory, royalties shall be due on any and all such sales of Goods. 3. TERM Subject to the earlier expiration or termination of this Agreement as provided in SECTION 10 or otherwise herein, this Agreement shall be effective as of the Effective Date and expire as of the close of business on August 31, 2001 (the "Initial Term"), but shall be automatically renewed, on condition that the parties mutually agree in writing as to the minimum royalties for any Renewal Term, for successive three (3)-year periods provided (i) Licensee has paid to Licensor all royalties payable for each Contract Year as set forth herein in a timely manner and in accordance with the payment schedule, (ii) Licensee has satisfied and/or complied with all of its obligations hereunder, and (iii) Licensee has satisfactorily performed under the projected business plan of Licensee, which shall be required for the Initial Term and any Renewal Term (as hereinafter defined), and which business plan and any subsequent revisions or updates, shall be submitted within the time frame set forth by Licensor and be subject to Licensor's prior review and approval. Each successive three (3)-year period shall hereinafter be referred to as a "Renewal Term." "Initial Term" and "Renewal Term" shall collectively be referred to as the "Term." 4. GOODS 4.1 Licensee shall maintain and comply with the quality standards for the Goods as set forth in EXHIBIT D. 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 or the Termination Period (as hereinafter defined), 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. 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 or local, including but not limited to those of the FCC, Underwriters Laboratory and CSA, 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. 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 business 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 Royalties due to Licensor by Licensee for the sale of Goods shall be calculated based upon the classification of the Goods into two product categories: (1) voice activated products and (2) core products. Voice activated products shall be all Goods which are activated utilizing a voice recognition feature and do not require manual activation, and core products shall be all Goods which are not voice activated products. 5.2 Voice activated product royalties shall be calculated based upon a percentage of Licensee's Gross Profits as set forth in Exhibit E. For purposes of calculating such royalties "Gross Profits" shall mean the product Sales Price less the product's Landed Cost, as these terms are defined in Sections 1.6 and 1.8, respectively. Payment of royalties on voice activated products are due within ten (10) calendar days after the end of each month and shall be accompanied by a certified monthly royalty statement in the form attached as Schedule 5.2. Such royalty statements shall be required whether or not sales of any voice activated products have taken place during the reporting period. 5.3 Core product royalties shall be calculated based upon the royalty rates set forth in Exhibit E, multiplied by the product Sales Price, as defined in Section 1.8, of the Goods sold by Licensee. Payment of royalties due on core products shall accompany the quarterly statement set forth in this paragraph. Licensee shall furnish to Licensor a certified monthly royalty statement within ten (10) calendar days after the end of each month in the form annexed as Schedule 5.3 setting forth the sales of core products for the previous month. A certified quarterly royalty statement in the form annexed as Schedule 5.3 shall be due within thirty (30) calendar days after the end of each Contract Quarter, or if terminated, within thirty (30) days after such termination, along with payment of any royalties due in excess of the minimum royalty payments due pursuant to Exhibit F. A certified annual royalty statement in the form annexed as Schedule 5.3 shall be due within sixty (60) calendar days after the last day of each Contract Year and shall be certified by an independent certified public accounting firm. 5.4 Minimum royalty payments as set forth on Exhibit F shall be due for each of the Contract Years and shall be nonrefundable and payable in accordance with the minimum royalty payment schedule set forth on Exhibit F. The Licensee shall be required to pay Licensor on a quarterly basis the greater of the royalties actually reported in Section 5.3 for the sales of core products only, or the minimum royalty payments due. If Licensee does not pay any minimum, monthly or quarterly royalty when due, Licensor shall have the right to terminate this agreement pursuant to Section 10.2. 5.5 No costs, taxes or expenses incurred by Licensee in the manufacture, sale, distribution or exploitation of the Goods, or otherwise incurred by Licensee, shall be deducted from, or diminish in any way, or result in the reduction of, any royalties payable to Licensor. Licensee shall be responsible for completing in a timely manner all documentation necessary to assist Licensor in deriving duty drawbacks. Licensee shall be responsible for and pay any taxes and file any reports, forms or tax returns required under the income or value added tax laws of the Territory in a timely manner. Upon written request, 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. 5.6 The acceptance by Licensor of any of the statements furnished pursuant to this Agreement or of any royalties paid hereunder shall not preclude Licensor from questioning the accuracy thereof at any time during the Term or within three (3) years after the termination of this Agreement. Royalties shall be due on any sales of products made at a special price to Licensee's subsidiaries, or to any other person, firm or corporation affiliated in any manner with Licensee, its officers, directors or major stockholders, and shall be based upon the market pricing normally charged to unaffiliated parties. On an annual basis, within 60 days after the close of Licensee's fiscal year, Licensee will provide Licensor with Licensee's financial statements, audited by the regularly retained independent certified public accountants of Licensee, and prepared in accordance with generally accepted accounting principles, consistently applied. 5.7 Licensee shall keep, maintain and preserve accurate books of account and records relating to the license hereby granted, and Licensor and its duly authorized representatives shall have the unqualified right during each Contract Year to conduct two (2) examinations of all books and records of Licensee; an examination shall be permitted to take place at all reasonable hours of the day, to examine, copy and extract said books of account and records and of all other documents and materials in the possession or under the control of Licensee with respect to the subject matter and terms of this Agreement. The books of account and records shall be kept available for inspection by Licensor for six years after the annual audit of such books and records. If Licensor's duly authorized representatives shall discover a discrepancy of 5% or more pursuant to any such examination, in addition to payment of the discrepancy as set forth in Section 5.8, Licensee shall pay to Licensor the cost of such examination or audit upon presentation of documentation appropriate to evidence such discrepancy. 5.8 Royalties found to be due as a result of Licensor's examination of (a) any statement provided pursuant to this Section 5 or (b) Licensee's books of accounts and records, shall be paid immediately in good funds. Any and all late payments of royalties shall bear interest, commencing on the date originally due and payable pursuant to the terms hereof, at an annual interest rate equal to the prime rate as listed in the Wall Street Journal, plus three percent (3%). 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 authorize Licensee to use the Trademarks except for the purposes set forth in this Agreement. Licensee acknowledges that it does not have and has not acquired any rights in or to the Trademarks, product names, likenesses or any derivations of the foregoing. The Trademarks, all rights therein and use thereof, 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. 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 and 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 the Territory. The Trademark shall be displayed by Licensee, without alteration, on all Goods sold by Licensee. 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. Upon request, Licensee shall provide Licensor with all necessary documents or information for the purpose of perfecting Licensor's title to any Trademark registrations, including the date of the first use of the Trademarks on the Goods in commerce 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. - register or attempt to register the Trademarks in its own name or the name of any third party. - 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. - 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. - re-label any of the Goods. - 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. 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. 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. 7.3 If, in the opinion of Licensee, it becomes desirable to enforce any of the Trademarks against a third party, Licensor may use reasonable efforts to do so. If Licensor fails to enforce such Trademarks, Licensee may bring an action against such third party in its own name or in the name of Licensor. Any such action or other proceedings shall be at Licensee's sole expense and any monetary relief or award obtained shall be apportioned between the parties to the extent of their respective losses. Licensor, however, shall at any time have the right to take over the prosecution of any such action and, in such event, any monetary relief or award shall inure to the benefit of Licensor and Licensor shall reimburse Licensee for reasonable expenses incurred by Licensee in prosecution of such action. 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. EXCLUSIVITY Nothing in this Agreement shall be construed to prevent Licensor from using or granting any other licenses for the use of the Trademarks or from utilizing the Trademarks in any manner whatsoever, except that Licensor shall not use nor grant any other license of the Trademarks effective during the Term of this Agreement within the Territory in connection with the sale of the Goods listed in Exhibit A prior to any breach of this Agreement by Licensee or termination of this Agreement, excluding the Termination Period, as hereinafter defined. 9. 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. 10. TERMINATION 10.1 This Agreement shall immediately terminate by its own force without notice from Licensor upon the occurrence of any one or more of the following events: (i) an assignment by Licensee for the benefit of creditors; (ii) a public admission by Licensee of its insolvency; (iii) dissolution of Licensee or loss of its charter by forfeiture or otherwise; (iv) adjudication of Licensee as bankrupt or insolvent; (v) appointment of a trustee, liquidator or receiver for the Licensee or a material or substantial portion of its assets, subsidiaries or property; (vi) exercise by any court or governmental agency of jurisdiction over the property or business of the Licensee or any substantial part thereof; (vii) the commencement of any proceedings for the reorganization, dissolution, liquidation or winding up of the Licensee; (viii) the filing by Licensee of a voluntary petition in bankruptcy under any bankruptcy or insolvency law or any law providing for Licensee's reorganization, dissolution, liquidation or winding up, or (ix) consent by Licensee to the appointment of a receiver or trustee of itself or of its property or any substantial part thereof. 10.2 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 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 provide insurance substantially in accordance with the terms of SECTION 16; (v) fails to pay any royalties set forth in SECTION 5 when due; (vi) 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; (vii) assigns or transfers this Agreement, including by operation of law, without the prior written consent of Licensor; or (viii) 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. 10.3 Upon, and notwithstanding, termination 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. 10.4 Upon termination 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, subject to the provisions of Section 10.6. 10.5 Within ten (10) days of the termination 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, and refusal by Licensee to submit to such physical inventory shall forfeit Licensee's right to dispose of such inventory as provided in SECTION 10.6 hereof. 10.6 In the event of termination by Licensor by reason of any cause contained in SECTION 10.1 or 10.2, 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; provided, however, Licensee shall be entitled (subject to the obligation to timely pay all Royalties) to dispose of Goods on hand or on order at the date of termination bearing the Trademark for a period of one year from the date of termination. This one-year period shall be referred to herein as the "Termination Period". Nothing contained herein shall be deemed to permit the manufacture of any Goods for Licensee during the Termination Period, or the sale of any such improperly manufactured Goods during the Termination Period. 11. DISTRIBUTION OF GOODS 11.1 Licensee shall use its best efforts to achieve the total gross sales projections for core products set forth on Exhibit G. 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 throughout the Territory. 11.2 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 of this Agreement, other than as set forth in SECTION 10.6, 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. 12. 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 12, 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. 13. SERVICE AND SPARE PARTS Licensee shall establish and monitor such independent service agents and centers in the Territory as may be necessary to the service of Goods. Licensee shall maintain a sufficient inventory of spare parts for the Goods taking into account any order lead, requiring same, during the Term and the Termination Period. During the Term and subsequent to the expiration or termination of this Agreement, Licensee shall provide for after sales warranty service, if required, and maintain a sufficient inventory of spare parts 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. 14. REPRESENTATIONS AND WARRANTIES Each party hereby represents and warrants to the other that: (a) It is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. (b) It has the full power and authority to execute and deliver this Agreement and to perform all of its obligations hereunder, and that 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 it is a party. (c) The execution and delivery of this Agreement has been duly authorized by all necessary corporate action of the party and constitutes the valid and legally binding obligation of the party enforceable against the party in accordance with it terms. (d) This Agreement shall be binding on the successors, assigns and legal representatives of both parties. 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. INSURANCE Prior to the distribution or sale of any Goods, Licensee shall purchase and maintain or cause to be maintained, at its own cost, insurance reasonably satisfactory to Licensor of the kinds and in the amounts specified in SCHEDULE 16 or in amounts required by law, whichever is greater, and furnish Licensor with certificates of insurance as evidence thereof, in the prescribed form prior to the commencement of distribution of the Goods and annually thereafter not less than thirty (30) days prior to the expiration dates of said policies. No change shall be made in the certificate of insurance without Licensor's prior written approval. Licensor shall receive copies of all insurance policies. 17. CONFIDENTIALITY 17.1 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, or for the reporting or filing of this Agreement in accordance with applicable securities regulations. 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 17 as if, and to the same extent as if, he or she were a party to this Agreement. 17.2 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. 18. FORCE MAJEURE 18.1 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. 18.2 A party seeking relief pursuant to this SECTION 18 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. In any event, either party may cancel this Agreement, upon written notice, if the impediment continues for a period of 120 consecutive days. 19. 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. 20. ASSIGNMENT AND SUBLICENSING 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, 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. Notwithstanding these restrictions, 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 determine, following receipt of all financial or other documents or due diligence materials requested by Licensor concerning the proposed transfer of control or ownership, whether Licensor will approve, in its sole discretion, such change of ownership or control. 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. Absent Licensor's approval, any change in control or transfer of ownership which occurs shall entitle Licensor to terminate this Agreement upon a date established at Licensor's sole discretion. 21. MISCELLANEOUS 21.1 No provision of this Agreement may be changed, amended or waived, except in a writing signed by both parties. 21.2 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. 21.3 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. 21.4 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. (973) 428-2022] (b) If to Licensee: Tel-Sound Electronics, Inc. 2400 W. Copans Road #9 Pompano Beach, FL 33069 Attention: Allan Weinstein, President [Facsimile No. (954) 984-1755] 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. 21.5 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. 21.6 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. 21.7 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 federal and state courts of New Jersey will have sole and exclusive jurisdiction over the parties in any such dispute and venue shall lie exclusively in Morris County, New Jersey, or the United States District Court for the District of New Jersey. However, it is expressly understood that this Section shall not preclude Licensor's right to make application for, and seek enforcement of, injunctive relief in any court having jurisdiction. 21.8 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. 21.9 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 termination of this Agreement. 21.10 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. 21.11 All payments shall be made directly by Licensee to Licensor and shall be in U.S. Dollars. 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/ John J. Raab John J. Raab Senior Vice-President - International TEL-SOUND ELECTRONICS, INC. A Florida Corporation By: /s/ Allan Weinstein Allan Weinstein President UNCONDITIONAL AND CONTINUING GUARANTEE For good and valuable consideration, the receipt of which is hereby acknowledged, and to induce Emerson Radio Corp. to enter into the annexed License Agreement with Tel-Sound Electronics, Inc., the undersigned Guarantors, which include all of the shareholders of Licensee, jointly and severally, unconditionally guarantee the due and timely payment in full, including all interest, fees, and charges (including but not limited to costs of collection and attorneys' fees), of all royalty and other payment obligations (hereinafter "obligations") of Licensee set forth in the annexed License Agreement between Emerson Radio Corp. as Licensor ("Licensor"), and Tel-Sound Electronics, Inc. as Licensee ("Licensee"), which is being entered into simultaneously with this Guaranty. Guarantors further agree that if these obligations are not paid by Licensee, the Guarantors shall, jointly and severally, pay same unconditionally and upon demand and without set-off or counterclaim. Guarantors further understand that this is a continuing guarantee and shall cover all payment obligations of Licensee. If any of the obligations are not paid when due, Licensor shall not be required to exhaust any other remedies for recovery and collection of the guaranteed obligations, or to commence any action or obtain a judgment against Licensee, before looking to Guarantors for payment. Guarantors shall promptly pay any monies due upon receipt of notice and demand therefore from Licensor. Guarantors hereby waive notice of the acceptance of this Guaranty, notice of demand and maturity of payments to become due, notice of default in payment by the Licensee, notice of adverse changes in the Licensee's financial condition or prospects, or any fact which may increase the Guarantors' liability or risk, and all such other notices required or customarily given under like circumstances. Guarantors expressly consent that the time of payment and performance of any obligations hereby secured may be extended, waived or modified from time to time without notice to or consent from the Guarantors, and Guarantors shall not be released or discharged, either in whole or in part, notwithstanding any extension, waiver, settlement or modification, or by Licensor's failure or delay in any respect. Nothing shall discharge or satisfy the liability of Guarantor hereunder except the full performance and payment of the obligations with interest. Guarantors, for themselves, their heirs, administrators, successors and assigns, represent that they are financially interested in Licensee and agree to be held responsible for said obligations, precisely as if the same had been contracted and due and owing by the Guarantors themselves, and agree to pay the obligations on demand, for any balance that may be due and payable at any time from the Licensee to Licensor. This is a continuing Guaranty and shall extend to cover any renewals of the License Agreement, any claims, demands or other matters guaranteed under this instrument, or the extension of time of payment or performance thereof, and shall remain in full force and effect from the effective date of the License Agreement until any termination or expiration. Notwithstanding any such termination or expiration, the Guarantors shall continue to remain liable for all obligations and amounts outstanding as of such termination or expiration and all credit and forbearances extended to the Licensee, and all costs of collection and enforcement of such obligations and sums against the Licensee and Guarantors. The Guarantors represent and warrant that execution and delivery of this instrument does not violate any provision of law, restriction or provision contained in any instrument or agreement binding upon the Guarantors. This Guaranty will not render the Guarantors insolvent or unable to pay their debts as they mature, or leave them with inadequate capital. Guarantors acknowledge that entry into this guaranty agreement is a condition to Licensor's entry into the License Agreement with Licensor and agree to waive any defenses to the enforcement of this Guaranee or any rights of Licensor created hereby. This document sets forth the entire understanding between the parties with respect to its subject matter. It may not be modified, amended or superseded, and no provision hereof may be waived, except by a writing executed by Guarantors and by Licensor which, by its terms makes specific reference hereto. This document shall be construed under the laws of the State of New Jersey applicable to contracts executed and to be fully performed in such jurisdiction, without reference to any conflicts of laws provisions thereof. Guarantors consent to the personal jurisdiction and venue of the courts of the State of New Jersey, in the County of Morris, and to the personal jurisdiction and venue of the United States District Court for the District of New Jersey. Notices and process to Guarantors may be given by certified mail at the addresses set forth below. IN WITNESS WHEREOF, the Guarantors have duly executed and delivered this Guarantee, effective as of March 30, 1998. Allan Weinstein /s/ Allan Weinstein /s/ Judy Bryant (Signature) (Notary Public) (seal) Residing at 2400 W. Copan Rd. #9 Pompano Beach FL 33069 Harold Tattleman /s/ Harold Tattleman /s/ Cathleen Balka (Signature) (Notary Public) (seal) Residing at 807 Willow Hills Lane Prospect Hghts. ILL 60070 Leslie Sugar /s/ Leslie Sugar /s/ Cathleen Balka (Signature) (Notary Public) (seal) Residing at 2197 Lake Shore Cir. Arlington Hts. IL 60004 EX-4 5 LICENSE AGREEMENT This Agreement, dated effective as of March 31, 1998 (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 WW MEXICANA, S.A. de C.V., a corporation duly organized under the laws of Mexico, having a place of business at Carr. Picacho Ajusco No. 238 - 7o. piso, Col. Jardines en la Montana, C.P. 14210, Mexico, D.F. 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 region 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 "Contract Year" means, (i) as to the first Contract Year, the period commencing on the Effective Date of this Agreement and ending on June 30, 1999; and (ii) each immediately subsequent full year during the term of this Agreement commencing July 1, 1999. 1.4 "Contract Quarter" means each calendar quarter or part thereof within each of the Contract Years. 1.5 "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. 1.6 "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. 1.7 "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. 1.8 "Licensor" means Emerson Radio Corp. 1.9 "Licensee" means WW Mexicana. 2. GRANT 2.1 Subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee an exclusive (to the extent contemplated by SECTION 8) non- transferable license to utilize the Trademarks solely upon and in connection with the manufacturing, sale, marketing and distribution of the Goods in the Territory. 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 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. Licensee shall inform its customers and distributors that the Goods cannot be distributed, sold or otherwise disposed of outside of the Territory. Licensee agrees that it shall not sell the Goods to any customer or distributor if Licensee has actual knowledge that such customer or distributor may distribute, sell or otherwise dispose of the Goods outside of the Territory. Notwithstanding the above and Licensor's right to terminate this Agreement as set forth in Section 10.2, if Goods are sold or otherwise disposed outside of the Territory, Royalties (as hereafter defined) shall be due on any and all such sales of Goods which have been made in violation of the provisions of this paragraph. 3. TERM Subject to the earlier expiration or termination of this Agreement as provided in SECTION 10 or otherwise herein, this Agreement shall be effective as of the Effective Date and expire as of the close of business on June 30, 2001 (the "Initial Term"). At the end of the Initial Term, if (i) Licensee has paid to Licensor all Royalties (as hereinafter defined) payable for each Contract Year as set forth herein in a timely manner and in accordance with the payment schedule, (ii) Licensee has satisfied and/or complied with all of its obligations hereunder, (iii) Licensee is not in substantial default of the gross sales projections set forth on Exhibit G, and (iv) Licensee has satisfactorily performed under the projected business plan of Licensee, which shall be required for the Initial Term and the Renewal Term (as hereinafter defined), and which business plan and any subsequent revisions or updates, shall be submitted within the time frame set forth by Licensor and be subject to Licensor's prior review and approval, then this Agreement shall be automatically renewed for one three (3)-year period which shall hereinafter be referred to as "Renewal Term." "Initial Term" and "Renewal Term" shall collectively be referred to as the "Term." A condition precedent to such renewal shall be the mutual agreement in writing by both parties as to the minimum royalties, as defined herein, and the gross sales projections, both of which shall be required for any Renewal Term, provided, however, that the gross sales projections for the Renewal Term shall be reasonable and in accordance with the economic, marketing and other factors then prevailing in the market of the Territory in accordance with Licensee's projections and analysis of such market conditions. In the event the parties do not mutually agree upon such minimum royalties and gross sales projections for the Renewal Term prior to the expiration of the Initial Term, this Agreement shall expire at the end of the Initial Term. 4. GOODS 4.1 Licensee shall maintain and comply with the quality standards for the Goods as set forth in EXHIBIT D. 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 or the Termination Period (as hereinafter defined), 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. A breach or threatened breach of this provision may be enjoined or restrained without bond or proof of actual damages in any court having jurisdiction. and Licensee shall promptly reimburse Licensor for all costs of such legal action. 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, provincial, state 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. 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 business 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 by wire transfer, within ten (10) days after the signing of this Agreement, as an advance royalty payment, the amount of $100,000. The initial royalty payment shall be non-refundable and shall be credited solely against the first year minimum royalty payment as set forth herein. 5.2 (a) Licensee shall also pay to Licensor as royalties ("Royalties") a sum equal to the royalty rate for the particular category of Goods on EXHIBIT E hereto multiplied by the "Gross Sales Value" of the Goods directly or indirectly sold by Licensee for each particular category of Goods. The term "Gross Sales Value" shall mean the gross invoice price of the applicable Goods as translated into U.S. Dollars using an average monthly exchange rate based upon the exchange rate as listed in the Wall Street Journal. Licensee shall be required to pay certain minimum royalties for each Contract Year as set forth on Exhibit F. Such Royalties shall be non-refundable and paid in accordance with the minimum royalty payment schedule set forth on EXHIBIT F. If the Royalties payable to Licensor for any Contract Quarter pursuant to Section 5.4 exceed the Minimum Royalty for the period as set forth on EXHIBIT F, Licensee shall pay to Licensor the difference between the Royalties actually payable for the Contract Quarter and the Minimum Royalty for the period, upon delivery of the quarterly report delivered pursuant to SECTION 5.5 for the Contract Quarter of the Contract Year. If Licensee does not pay any particular minimum or other Royalty when due, Licensor shall have the right to terminate this Agreement pursuant to SECTION 10.2. (b) 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 Royalties 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) to 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 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. 5.3 If any sale of products is made at a special price to any of Licensee's subsidiaries or to any other person, firm or corporation affiliated in any manner with Licensee or its officers, directors or major stockholders, there shall be a royalty paid on such sales based upon the price generally charged the trade by Licensee. 5.4 Except for the Minimum Royalties which shall be paid in accordance with the payment schedule set forth on Exhibit F, Royalties are payable for each Contract Quarter, and shall be due on the 30th day of the month following the end of each Contract Quarter during the Term of this Agreement with the final payment due within thirty (30) days of the termination date of this Agreement. Payment of Royalties shall accompany the quarterly statements required by SECTION 5.5 below. The acceptance by Licensor of any of the statements furnished pursuant to this Agreement or of any Royalties paid hereunder shall not preclude Licensor from questioning the accuracy thereof at any time during the Term or within two (2) years after the termination of this Agreement. 5.5 Within ten (10) days after the end of each month, Licensee shall furnish to Licensor a Monthly Royalty Statement in the form attached as SCHEDULE 5.5, certified to be accurate by Licensee, providing all of the information required by such Schedule. Within thirty (30) days after each Contract Quarter, Licensee shall furnish to Licensor complete and accurate statements in the form attached as Schedule 5.5, certified to be accurate by Licensee, describing the Goods distributed and/or sold by Licensee during the preceding Contract Quarter. All of the foregoing statements shall be furnished to Licensor whether or not any of the Goods have been sold during the month or Contract Quarter in question. On an annual basis, within 60 days after the close of Licensee's fiscal year, Licensee will provide Licensor with Licensee's financial statements, audited by the regularly retained independent certified public accountants of Licensee, and prepared in accordance with generally accepted accounting principles, consistently applied. Within 60 days after the end of each Contract Year, Licensee shall furnish to Licensor an Annual Royalty Statement in the form annexed as SCHEDULE 5.5, certified to be accurate by a national independent Certified Public Accounting firm. 5.6 Licensee shall keep, maintain and preserve accurate books of account and records relating to the license hereby granted, and Licensor and its duly authorized representatives shall have the unqualified right during each Contract Year to conduct two (2) examinations of all books and records of Licensee; an examination shall be permitted to take place at all reasonable hours of the day, to examine, copy and extract said books of account and records and of all other documents and materials in the possession or under the control of Licensee with respect to the subject matter and terms of this Agreement. The books of account and records shall be kept available for inspection by Licensor for three years after the annual audit of such books and records. If Licensor's duly authorized representatives shall discover a discrepancy of 5% or more pursuant to any such examination, in addition to payment of the discrepancy as set forth in Section 5.7, Licensee shall pay to Licensor the cost of such examination or audit upon presentation of documentation appropriate to evidence such discrepancy. 5.7 Royalties found to be due as a result of Licensor's examination of (a) any statement provided pursuant to Paragraph 5.5 above or (b) Licensee's books of accounts and records, shall be paid immediately in good funds. Any and all late payments of Royalties shall bear interest, commencing on the date originally due and payable pursuant to the terms hereof, at an annual interest rate equal to the prime rate as listed in the Wall Street Journal. 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 authorize Licensee to use the Trademarks except for the purposes set forth in this Agreement. Licensee acknowledges that it does not have and has not acquired any rights in or to the Trademarks, product names, likenesses or any derivations of the foregoing. The Trademarks, all rights therein and use thereof, 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. 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 and 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 the Territory. The Trademark shall be displayed by Licensee, without alteration, on all Goods sold by Licensee. 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. Upon request, Licensee shall provide Licensor with all necessary documents or information for the purpose of perfecting Licensor's title to any Trademark registrations, including the date of the first use of the Trademarks on the Goods in commerce 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. - register or attempt to register the Trademarks in its own name or the name of any third party. - 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. - 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. - re-label any of the Goods. - 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. 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. 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. 7.3 If, in the opinion of Licensee, it becomes desirable to enforce any of the Trademarks against a third party, Licensor may use reasonable efforts to do so. If Licensor fails to enforce such Trademarks, Licensee may bring an action against such third party in its own name or in the name of Licensor. Any such action or other proceedings shall be at Licensee's sole expense and any monetary relief or award obtained shall be apportioned between the parties to the extent of their respective losses. Licensor, however, shall at any time have the right to take over the prosecution of any such action and, in such event, any monetary relief or award shall inure to the benefit of Licensor and Licensor shall reimburse Licensee for reasonable expenses incurred by Licensee in prosecution of such action. 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. EXCLUSIVITY Nothing in this Agreement shall be construed to prevent Licensor from using or granting any other licenses for the use of the Trademarks or from utilizing the Trademarks in any manner whatsoever, except that Licensor shall not use nor grant any other license of the Trademarks effective during the Term of this Agreement within the Territory in connection with the sale of the Goods listed in Exhibit A prior to any breach of this Agreement by Licensee or termination of this Agreement, excluding the Termination Period, as hereinafter defined, unless otherwise mutually agreed to by the parties. Licensor acknowledges that Licensee will incur substantial expense and effort promoting and marketing the licensed Goods in the Territory during the Term of this Agreement. Therefore, Licensor agrees that it shall not sell, distribute, or otherwise make available any of the first quality new "A" stock Goods listed on Exhibit A, either directly or indirectly, through direct sales or distribution or through sales or distribution by any other entity in the Territory during the Term of this Agreement. 9. 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. 10. TERMINATION 10.1 This Agreement shall immediately terminate by its own force without notice from Licensor upon the occurrence of any one or more of the following events: (i) an assignment by Licensee for the benefit of creditors; (ii) a public admission by Licensee of its insolvency; (iii) dissolution of Licensee or loss of its charter by forfeiture or otherwise; (iv) adjudication of Licensee as bankrupt or insolvent; (v) appointment of a trustee, liquidator or receiver for the Licensee or a material or substantial portion of its assets, subsidiaries or property; (vi) exercise by any court or governmental agency of jurisdiction over the property or business of the Licensee or any substantial part thereof; (vii) the commencement of any proceedings for the reorganization, dissolution, liquidation or winding up of the Licensee; (viii) the filing by Licensee of a voluntary petition in bankruptcy under any bankruptcy or insolvency law or any law providing for Licensee's reorganization, dissolution, liquidation or winding up, or (ix) consent by Licensee to the appointment of a receiver or trustee of itself or of its property or any substantial part thereof. 10.2 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 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 provide insurance substantially in accordance with the terms of SECTION 16; (v) fails to pay any Royalties set forth in SECTION 5 when due; (vi) 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; (vii) assigns or transfers this Agreement, including by operation of law, without the prior written consent of Licensor; or (viii) breaches any of its obligations hereunder, then, in addition to the rights available under law or in equity, Licensor shall provide written notice to Licensee that Licensee is in default under the terms of the Agreement. The written notice to Licensee shall specify with particularity the nature of the default and the actions required to be taken by Licensee to remedy such default to Licensor's satisfaction in its sole discretion. Licensee shall have thirty (30) days after the delivery of such notice to remedy such default in compliance with the requirements of Licensor. Thereafter, in the event Licensee has not remedied the default as set forth above, Licensor shall have the right to terminate this Agreement effective upon delivery to Licensee of notice that the Agreement is terminated. The parties may, by written agreement, agree to extend beyond such thirty (30)-day period, the period of time by which Licensee must remedy a default hereunder. 10.3 Upon, and notwithstanding, termination 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 and all legal, equitable or other remedies, rights or relief available to it, cumulatively, 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. 10.4 Upon termination 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, subject to the provisions of Section 10.6. 10.5 Within ten (10) days of the termination 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, and refusal by Licensee to submit to such physical inventory shall forfeit Licensee's right to dispose of such inventory as provided in SECTION 10.6 hereof. 10.6 In the event of termination by Licensor by reason of any cause contained in SECTION 10.1 or 10.2, 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; provided, however, Licensee shall be entitled (subject to the obligation to timely pay all Royalties) to dispose of Goods on hand or on order at the date of termination bearing the Trademark for a period of one year from the date of termination. This one-year period shall be referred to herein as the "Termination Period". Nothing contained herein shall be deemed to permit the manufacture of any Goods for Licensee during the Termination Period, or the sale of any such improperly manufactured Goods during the Termination Period. 11. DISTRIBUTION OF GOODS 11.1 Licensee shall use its best efforts to achieve the total gross sales projections set forth on Exhibit G. 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 throughout the Territory. 11.2 Licensee acknowledges that upon termination of this Agreement, any use of the Trademarks, other than as set forth in SECTION 10.6, will result in immediate and irreparable damage to Licensor and to the rights of any subsequent licensee. In the event of any such use of the Trademarks following termination, Licensor may seek any equitable or other relief, including enjoining such activity, in any court having jurisdiction and Licensee shall be responsible for all costs thereof. 12. SUBCONTRACTORS Licensee shall obtain the written agreement, in the form set forth on SCHEDULE 12, from any subcontractor that is retained by Licensee to furnish Goods or packaging using the Trademarks, as to the proper use of the Trademarks. If necessary, Licensee shall use its best efforts to assist and cooperate with Licensor to enforce its rights to the Trademarks against any of Licensee's subcontractors. 13. SERVICE AND SPARE PARTS Licensee shall establish and monitor such independent service agents and centers in the Territory as may be necessary to the service of Goods. Licensee shall maintain a sufficient inventory of spare parts for the Goods taking into account any order lead, requiring same, during the Term and the Termination Period. During the Term and subsequent to the expiration or termination of this Agreement, Licensee shall provide for after sales warranty service, if required, and maintain a sufficient inventory of spare parts for the Goods for the respective periods required by applicable federal or local law, or Licensee's warranty, in the Territory. 14. REPRESENTATIONS AND WARRANTIES Each party hereby represents and warrants to the other that: (a) It is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. (b) It has the full power and authority to execute and deliver this Agreement and to perform all of its obligations hereunder, and that 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 empowering document or agreement to which it is a party. (c) The execution and delivery of this Agreement has been duly authorized by all necessary corporate action of the party and constitutes the valid and legally binding obligation of the party enforceable against the party in accordance with it terms. (d) This Agreement shall be binding on the successors, assigns and legal representatives of both parties. 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. INSURANCE Licensee will, at all times during the Term of this Agreement, and where specified for the period following expiration or termination of this Agreement, maintain the following insurance: 1. COMMERCIAL GENERAL LIABILITY insurance, with Limits of Liability of at least $250,000 for Bodily Injury or Property Damage and Personal/Advertising Injury. Coverage is to be afforded for CONTRACTUAL LIABILITY (coverage will be maintained for not less than three (3) years following expiration or termination); COMPLETED OPERATIONS AND PRODUCTS LIABILITY (coverage will be maintained for not less than three (3) years following expiration or termination); and INDEPENDENT CONTRACTORS (Owner's Protective) Liability. Licensor shall be named as ADDITIONAL INSURED for all policy coverages. Coverage will be maintained by Licensee as respects all its operations, premises and products in the territory in which Licensee is authorized to operate and sell products. 2. WORKERS' COMPENSATION insurance providing statutory benefits as required by Social Security or other laws of the jurisdiction(s) in which operations will be performed, and EMPLOYER'S LIABILITY insurance as is obtainable under the Commercial General Liability insurance required herein. 3. PHYSICAL LOSS OR DAMAGE insurance, covering Stock, Merchandise, Inventory, Parts and Accessories while in transit from suppliers, manufacturers or vendors, while at warehouse, store, storage or other premises, and while in transit to Licensee's customers. 4. "EMPLOYEE DISHONESTY" (also known as "Fidelity") insurance in an amount sufficient to protect against any loss which may occur as a result of employee dishonesty, covering all officers, partners, directors and employees of Licensee. Licensee shall maintain those requirements and safeguards necessary to ensure against such losses. All insurance required herein shall provide that Licensee has waived all rights of recovery against Licensor, any subsidiaries and affiliates thereof, the stockholders or partners, directors, officers, employees, and agents of all of them. Licensee hereby agrees to hold all parties stated herein harmless and indemnify them for all costs and expenses incurred by any of them if any insurer attempts subrogation despite this agreement by Licensee. Licensor will be notified sixty (60) days in advance, by certified mail, return receipt requested, of any cancellation, material change or non-renewal of coverage evidenced by the certificate. A certificate or certificates of insurance from the insurance company(ies) signed by an authorized agent or employee of the insurance company, showing the required insurance is in force, will be provided to Licensor prior to the distribution or sale of any Goods. All certificates of insurance should be addressed to Licensor at the address set forth in Section 21.4(a) of this Agreement. 17. CONFIDENTIALITY 17.1 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, or for the reporting or filing of this Agreement in accordance with applicable securities regulations. 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 as if, and to the same extent as if, he or she were a party to this Agreement. 17.2 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. 18. FORCE MAJEURE 18.1 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, national economic crisis (which restricts credit or makes it inaccessible with a resulting currency devaluation in excess of 20%), fires, floods, explosions, or riots, war, rebellion or sabotage. The provisions of this paragraph shall not apply to payment obligations under this Agreement. 18.2 A party seeking relief pursuant to this Section 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. In any event, either party may cancel this Agreement, upon written notice, if the impediment continues for a period of 120 consecutive days. 19. LICENSOR'S LINE OF BUSINESS 19.1 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. However, notwithstanding anything to the contrary contained herein, Licensor agrees that during the Term of this Agreement, Licensor shall not seek an alliance, joint venture partner and/or licensees within the Territory with the goal of distributing the first quality new "A" stock Goods listed on Exhibit A, and Licensor shall not, either directly or indirectly, by itself or through others, distribute such Goods within the Territory without the prior written consent of Licensee. 19.2 In the event Licensor is desirous of introducing into the Territory a new category of products not previously offered to Licensee under the terms of this Agreement ("New Product(s)"), Licensor hereby grants to Licensee a right of first refusal with respect to the manufacture, sale, marketing and distribution of such New Product(s) in the Territory. In such event, Licensor shall furnish Licensee with a description of the New Product(s) and related specifications. Licensee shall have 30 days after receipt of such notice to advise Licensor in writing whether it is interested in acquiring an exclusive license for such New Product(s) for the Territory, which shall be in accordance with the terms of this Agreement, pursuant to such notice. If Licensee is interested in acquiring such a license, within 60 days after notifying Licensor of such interest, Licensee shall provide Licensor with (a) reasonable and realistic monthly sales projections for the 12 month period beginning with product availability; (b) a market study; and (c) detailed assumptions supporting the projections, all of which must be in a form acceptable to Licensor. In the event Licensor accepts the market study, related sales projections and the assumptions underlying same, Licensor shall provide Licensee with written confirmation that the New Product(s) is added to the list of Products set forth on Exhibit A and subject to the terms of this Agreement. Should Licensee (i) refuse such offer or (ii) fail to exercise its rights hereunder by providing Licensor with written notice and an acceptable market study, sales projection or underlying assumptions within the prescribed time period, then, in any such event, Licensee's rights hereunder with respect to such New Product(s) shall be waived and Licensor, in its sole discretion, shall be free to sell or grant distribution or trademark license rights with respect to such New Product(s) within the Territory, notwithstanding anything to the contrary in this Agreement. 20. ASSIGNMENT AND SUBLICENSING 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 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. Notwithstanding these restrictions, 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 determine, following receipt of all financial or other documents or due diligence materials requested by Licensor concerning the proposed transfer of control or ownership, whether Licensor will approve, in its sole discretion, such change of ownership or control. 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. Absent Licensor's approval, any change in control or transfer of ownership which occurs shall entitle Licensor to terminate this Agreement upon a date established at Licensor's sole discretion. 21. MISCELLANEOUS 21.1 No provision of this Agreement may be changed, amended or waived, except in a writing signed by both parties. 21.2 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. 21.3 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. 21.4 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. (973) 428-2022] (b) If to Licensee: WW Mexicana, S.A. de C.V. Carr. Picacho Ajusco No. 238 - 7o piso Col. Jardines en la Montana C.P. 14210, Mexico, D.F. Attention: Fernando Sanchez-Navarro M., President [Facsimile No. (52)(5) 630-0122] 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. 21.5 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. 21.6 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. 21.7 All disputes between the parties concerning this Agreement will be resolved under the laws of the State of New York, U.S.A., excluding the conflicts of laws provisions thereof, and the courts of New York will have sole and exclusive jurisdiction over the parties in any such dispute and venue shall lie exclusively in New York County, New York. However, it is expressly understood that this Section shall not preclude Licensor's right to make application for, and seek enforcement of, any judgment or any injunctive relief in any court having jurisdiction. 21.8 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. 21.9 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 termination of this Agreement. 21.10 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. 21.11 All payments shall be made directly by Licensee to Licensor and shall be in U.S. Dollars. 21.12 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/ John J. Raab John J. Raab Senior Vice President - International WW MEXICANA, S.A. DE C.V. A Mexican Corporation By: /s/ Fernando Sanchez-Navarro M. Fernando Sanchez-Navarro M. President EX-5 6 AMENDMENT NO. 7 TO FINANCING AGREEMENTS As of March 31, 1998 Emerson Radio Corp. Majexco Imports, Inc. 9 Entin Road Parsippany, New Jersey 07054 Gentlemen: Congress Financial Corporation ("Lender"), Emerson Radio Corp. ("Emerson") and Majexco Imports, Inc., ("Majexco"; and together with Emerson, individually and collectively, the "Borrower") have entered into certain financing arrangements pursuant to the Loan and Security Agreement, dated March 31, 1994, by and between Lender and Borrower, as amended by Amendment No. 1 to Financing Agreements, dated August 24, 1995, Amendment No. 2 to Financing Agreements, dated February 13, 1996, Amendment No. 3 to Financing Agreements, dated August 20, 1996, Amendment No. 4 to Financing Agreements, dated November 14, 1996, Amendment No. 5 to Financing Agreements, dated February 18, 1997, and Amendment No. 6 to Financing Agreements, dated August 14, 1997 (as amended, the "Loan Agreement"), together with various other agreements, documents and instruments at any time executed and/or delivered in connection therewith or related thereto (as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, collectively, the "Financing Agreements"). All capitalized terms used herein and not herein defined shall have the meanings given to them in the Loan Agreement. Borrower has requested that Lender agree to certain amendments to the Financing Agreements, and Lender is willing to agree to such amendments, subject to the terms and conditions set forth herein. In consideration of the foregoing, the mutual agreements and covenants contained herein and other good and valuable consideration, the parties hereto agree as follows: 1. MAXIMUM CREDIT. The reference to "$30,000,000" in Section 1.34 of the Loan Agreement, as previously amended, is hereby deleted and replaced with "$10,000,000". 2. LETTER OF CREDIT ACCOMMODATIONS. The reference to "$15,000,000" in Section 2.2(d) of the Loan Agreement, as previously amended, is hereby deleted and replaced with "$5,000,000". 3. ADJUSTED NET WORTH. (a) Section 1.2 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "1.2 "Adjusted Net Worth" shall mean as to any Person, at any time, in accordance with GAAP on a consolidated basis with such Person's subsidiaries (except as otherwise specifically set forth below), the amount equal to: (a) the difference between: (i) the aggregate net book value of all assets of such Person and its subsidiaries, calculating the book value of inventory, for this purpose on a first- in-first-out basis, after deducting from such book values all appropriate reserves in accordance with GAAP (including all reserves for doubtful receivables, obsolescence, depreciation and amortization) and (ii) the aggregate amount of the indebtedness and other liabilities of such Person and its subsidiaries (including tax and other proper accruals), plus (b) indebtedness of such Person and its subsidiaries which is subordinated in right of payment to the full and final payment of all of the Obligations on terms and conditions acceptable to Lender." (b) Section 9.14 of the Loan Agreement, as previously amended, shall be deleted in its entirety and replaced with the following, effective as of the date hereof: "9.14 ADJUSTED NET WORTH. Emerson shall, at all times, maintain, on a consolidated basis with its subsidiaries, Adjusted Net Worth of not less than $10,000,000." 4. REVOLVING LOAN FORMULAS. Section 2.1(a) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "2.1 LOANS. (a) Subject to, and upon the terms and conditions contained herein, Lender agrees to make Loans to Borrower from time to time in amounts requested by Borrower up to the amount equal to: (i) the sum of: (A) the lesser of: (1) $500,000; or (2) sixty (60%) percent of the Net Amount of Eligible Accounts of Emerson; plus (B) fifty-five (55%) percent of the Value of Eligible Inventory consisting of first quality finished goods of Emerson; plus (C) twenty (20%) percent of the Value of Eligible Inventory of Emerson consisting of finished goods returned to Emerson by its customers, that is both (a) owned by Emerson and (b) in the possession of Emerson or in public warehouses under Emerson's control; less (ii) any Availability Reserves." None of the Inventory or Accounts of the Eligible Subsidiary shall be considered Eligible Inventory or Eligible Accounts and no Loans or Letter of Credit Accommodations shall be available in respect thereof. The "Canadian Sublimit" as referred to in Section 2.1(e) of the Loan Agreement is hereby reduced to zero ($0). The last sentence of Section 2.1(c) of the Loan Agreement, as previously amended, is hereby further amended by changing the reference to "$20,000,000" contained therein to "$10,000,000". 5. UNUSED LINE FEE. Section 3.4 of the Loan Agreement, as previously amended, is hereby deleted in its entirety and replaced with the following: "3.4 UNUSED LINE FEE. Borrower shall pay to Lender monthly an unused line fee calculated at the rate of nine-tenths (.9%) percent per annum upon the amount by which $10,000,000 exceeds the average daily principal balance of the outstanding Loans and Letter of Credit Accommodations during the immediately preceding month (or part thereof) while the Agreement is in effect and for so long thereafter as any of the Obligations are outstanding, which fee shall be payable on the first day of each month, in arrears." 6. RENEWAL DATE. The reference to "the date four (4) years from the date hereof" contained in Section 12.1(a) of the Loan Agreement, as previously amended, is hereby deleted and replaced with the following: "March 31, 2001". 7. EARLY TERMINATION FEE. Section 12.1(c) of the Loan Agreement shall be deleted in its entirety and replaced by the following: "(c) If for any reason this Agreement is terminated prior to the end of the then current term or renewal term of this Agreement, in view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result thereof, Borrower agrees to pay to Lender, upon the effective date of such termination, an early termination fee in the amount of one percent (1%) of the Maximum Credit." The provisions of Section 9(b) of Amendment No. 1 to Financing Agreements and of Section 6(b) of Amendment No. 4 to Financing Agreements are no longer applicable and are hereby deleted. 8. RELEASE OF PORTIONS OF PLEDGED COMMON STOCK AND WARRANTS. Lender agrees to release from the Collateral all except 500,000 shares of the common stock of Sport Supply Group Inc. previously pledged by Emerson to Lender and all of the common stock warrants issued by Sport Supply Group Inc. previously pledged by Emerson to Lender pursuant to the Pledge and Security Agreement, dated December 10, 1996, by Emerson in favor of Lender, subject to the terms and conditions contained herein and as provided in Amendment No. 1 to Pledge and Security Agreement executed and delivered by Emerson in favor of Lender as of the date hereof. 9. CONDITIONS PRECEDENT. The effectiveness of the other terms and conditions contained herein shall be subject to (a) the receipt by Lender of each of the following, in form and substance satisfactory to Lender: (i) an original of this Amendment, duly authorized, executed an delivered by Borrower and consented and agreed to by the other Obligors; and (ii) an original of Amendment No. 1 to Pledge and Security Agreement, duly authorized, executed and delivered by Emerson; and (b) no Event of Default shall exist or have occurred, and no event or condition, which with the giving of notice or passage of time, or both, would constitute an Event of Default, shall exist or have occurred. 10. MISCELLANEOUS. (a) ENTIRE AGREEMENT; RATIFICATION AND CONFIRMATION OF THE FINANCING AGREEMENTS. This Amendment contains the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior or contemporaneous term sheets, proposals, discussions, negotiations, correspondence, commitments and communications between or among the parties concerning the subject matter hereof. This Amendment may not be modified or any provision waived, except in writing signed by the party against whom such modification or waiver is sought to be enforced. Except as specifically modified pursuant hereto, the Loan Agreement and the other Financing Agreements are hereby ratified, restated and confirmed by the parties hereto as of the effective date hereof. To the extent of conflict between the terms of this Amendment, the Loan Agreement and the other Financing Agreements, the terms of this Amendment shall control. (b) GOVERNING LAW. This Amendment and the right and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the laws of the State of New York. (c) BINDING EFFECT. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. (d) COUNTERPARTS. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. By the signatures hereto of each of their duly authorized officers, all of the parties hereto mutually covenant and agree as set forth herein. Very truly yours, CONGRESS FINANCIAL CORPORATION By: /s/ Josephine Norris Title: 1st VP [SIGNATURES CONTINUED ON THE NEXT PAGE] [SIGNATURES CONTINUED FROM THE PREVIOUS PAGE] AGREED AND ACCEPTED: EMERSON RADIO CORP. By: /s/ John Walker Title: EVP, CFO MAJEXCO IMPORTS, INC. By: /s/ John Walker Title: SVP - Finance - Treasurer CONSENTED TO AND AGREED: H. H. SCOTT, INC. EMERSON COMPUTER CORP. By: /s/ John Walker Title: SVP - Finance - Treasurer EMERSON RADIO CANADA LTD. By: /s/ John Walker Title: Treasurer EMERSON RADIO & TECHNOLOGIES N.V. By: /s/ John Walker Title: SVP - Finance - Treasurer EX-6 7 AMENDMENT NO. 1 TO PLEDGE AND SECURITY AGREEMENT As of March 31, 1998 Emerson Radio Corp. Majexco Imports, Inc. 9 Entin Road Parsippany, New Jersey 07054 Gentlemen: Congress Financial Corporation ("Pledgee"), Emerson Radio Corp. ("Pledgor") and Majexco Imports, Inc. ("Majexco", and together with Pledgor, individually and collectively, the "Borrower") have entered into certain financing arrangements pursuant to the Loan and Security Agreement, dated March 31, 1994, between Pledgee and Borrower, as amended by Amendment No. 1 to Financing Agreements, dated August 24, 1995, Amendment No. 2 to Financing Agreements, dated February 13, 1996, Amendment No. 3 to Financing Agreements, dated August 20, 1996, Amendment No. 4 to Financing Agreements, dated November 14, 1996, Amendment No. 5 to Financing Agreements, dated February 18, 1997, Amendment No. 6 to Financing Agreements, dated August 14, 1997 and Amendment No. 7 to Financing Agreements dated as of the date hereof (as amended, the "Loan Agreement"), together with various other agreements, documents and instruments at any time executed and/or delivered in connection therewith or related thereto, including, but not limited to, a certain Pledge and Security Agreement, dated December 10, 1996, by Pledgor in favor of Pledgee ("Pledge Agreement") (as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, collectively, the "Financing Agreements"). All capitalized terms used herein shall have the meanings assigned thereto in the Pledge Agreement, unless otherwise defined herein. In connection with Amendment No. 7 to Financing Agreements, Pledgor has requested that Pledgee release certain of the Pledge Securities and agree to amend the Pledge Agreement by reason thereof, and Pledgee is willing to effect such release and to enter into such amendment, subject to the terms and conditions set forth herein. In consideration of the foregoing, the mutual agreements and covenants contained herein and other good and valuable consideration, the parties hereto agree as follows: 1. RELEASE. Pledgee hereby releases from the Pledged Securities (i) all shares of the common stock of Sport Supply Group, Inc. ("SSG") constituting part of the Pledged Stock on the date hereof, except for 500,000 shares thereof (the "Retained SSG Pledged Shares'), which shall remain Pledged Stock and Pledged Securities, and which shall remain part of the Pledged Property, and (ii) all warrants issued by SSG constituting the Pledged Warrants on the date hereof. As soon as practicable following the date hereof, Pledgee shall deliver to the transfer agent for the common stock of SSG, the Certificate No. GYM 7162 evidencing 1,600,000 shares of common stock of SSG heretofore pledged to Pledgee, accompanied by a written request by Pledgee, which shall be confirmed or joined in by Pledgor, addressed to such transfer agent requesting that (x) such Certificate No. GYM 7162 be exchanged for two newly issued certificates, each registered in the name of Pledgor, for 1,100,000 shares and 500,000 shares of common stock of SSG, respectively, (y) the new certificate evidencing the 1,100,000 shares of SSG common stock be delivered to Pledgor, and (z) the new certificate evidencing the 500,000 shares of SSG common stock be delivered to Pledgee. 2. PLEDGED SECURITIES. Exhibit A to the Pledge Agreement is hereby deleted and replaced in its entirety with Amended Exhibit A annexed hereto, which Pledgee is authorized by Pledgor to complete with the certificate number of the certificate evidencing the Retained SSG Pledged Shares. Pledgor shall execute and deliver to Pledgee five (5) stock powers, undated and in blank, with signature guarantee and medallion guarantee, with respect to the new stock certificate evidencing the 500,000 shares of SSG common stock. 3. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective only upon the satisfaction of all conditions to the effectiveness of Amendment No. 7 to Financing Agreements, dated of even date herewith, by and between Pledgor, Pledgee and certain affiliates of Pledgor. 4. EFFECT OF THIS AMENDMENT. Except as specifically modified pursuant hereto, no other changes or modifications to the Pledge Agreement are intended or implied and in all other respects, the Pledge Agreement is hereby specifically ratified, restated and confirmed by Pledgor as of the date hereof. To the extent of any conflicts between the terms of this Amendment and the Pledge Amendment, the terms of this Amendment shall control. Except as expressly stated herein, nothing contained herein shall be construed in any manner to constitute a waiver, release or termination or to otherwise limit or impair any of the Obligations or any duties or responsibilities of Borrower or Pledgor to Pledgee under the Financing Agreements. 5. GOVERNING LAW. This Amendment and the rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the laws of the State of New York. 6. BINDING EFFECT. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 7. COUNTERPARTS. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. By the signatures hereto of each of their duly authorized officers, all of the parties hereto mutually covenant and agree as set forth herein. Very truly yours, CONGRESS FINANCIAL CORPORATION By: /s/ Josephine Norris Title: 1st VP AGREED AND ACCEPTED: EMERSON RADIO CORP. By: /s/ John P. Walker Title: EVP, CFO CONSENTED TO AND AGREED: MAJEXCO IMPORTS, INC. By: /s/ John P. Walker Title: SVP - Finance - Treasurer H. H. SCOTT, INC. EMERSON COMPUTER CORP. By: /s/ John P. Walker Title: SVP - Finance - Treasurer [SIGNATURES CONTINUED ON THE NEXT PAGE] [SIGNATURES CONTINUED FROM THE PREVIOUS PAGE] EMERSON RADIO CANADA LTD. By: /s/ John Walker Title: Treasurer EMERSON RADIO & TECHNOLOGIES N.V. By: /s/ John Walker Title: SVP - Finance - Treasurer EX-27 8
5 0000032621 EMERSON RADIO CORP. 1000 YEAR APR-03-1998 APR-03-1998 2,608 0 10,131 4,884 11,375 28,207 4,533 3,152 51,920 17,043 20,750 0 4,713 510 8,725 51,920 157,133 162,730 142,372 142,372 18,669 1,165 2,510 (1,176) 254 (1,430) 0 0 0 (1,430) (0.04) (0.04)
EX-7 9 SECOND LEASE MODIFICATION AGREEMENT THIS SECOND LEASE MODIFICATION AGREEMENT, made this 15 day of May, 1998 by and between HARTZ MOUNTAIN PARSIPPANY, a New Jersey general partnership having an office at 400 Plaza Drive, Secaucus, New Jersey 07094 (hereinafter referred to as "Landlord") and EMERSON RADIO CORP., a Delaware corporation having an office at 9 Entin Road, Parsippany, NJ 07054-0430 (hereinafter referred to as "Tenant"). WITNESSETH: WHEREAS, by Agreement of Lease dated March 26, 1993, as amended by First Lease Modification Agreement dated July 23, 1993 (collectively the "Lease"), Landlord leased to Tenant and Tenant hired from Landlord approximately 40,646.75 square feet of Floor Space located at on the second floor of 9 Entin Road in Parsippany, New Jersey (hereinafter the "Original Demised Premises"); and WHEREAS, Landlord and Tenant wish to modify the Lease (a) to reflect a decrease in the area of the Demised Premises and (b) to extend the Term of the Lease for an additional five (5) years beyond the current Expiration Date of July 31, 1998, and amend the Lease accordingly; NOW, THEREFORE, for and in consideration of the Lease, the mutual covenants herein contained and the consideration set forth herein, the parties agree as follows: 1. The Term of the Lease is hereby extended for a period of five years from August 1, 1998 until July 31, 2003 (the "Extended Period"). 2. During the Extended Period, the Fixed Rent will be at the rate of Twenty Dollars ($20.00) per annum multiplied by the Floor Space of the New Demised Premises, as defined below. 3. On or before July 31, 1998, Tenant will vacate and surrender in broom-clean condition and otherwise in compliance with all provisions in the Lease concerning surrender of Demised Premises, the portion of the Original Demised Premises outlined in yellow on Exhibit A, attached hereto (the "Released Premises"). 4. Effective August 1, 1998, provided that Tenant has complied with paragraph 3, above, the Demised Premises will be reduced to 19,216 square feet as outlined in red on the attached Exhibit A (the "New Demised Premises"). From and after the later of the date that the Released Premises are vacated by Tenant or August 1, 1998, all reference in the Lease to the Demised Premises shall be deemed to refer to the New Demised Premises. 5. Landlord will, at its sole cost and expense, demise the New Demised Premises from the Original Demised Premises including, but not limited to, construction of a demising wall separating the New Demised Premises and the Original Demised Premises and separating the HVAC and electrical systems. 6. Effective August 1, 1998, provided Tenant has complied with paragraph 3, above, Tenant's Fraction will be reduced to 10%. 7. Effective August 1, 1998, the number of Tenant's reserved parking spaces will be reduced to eight (8). 8. Article 21.06 of the Lease and Section R2 of the Rider to Lease are hereby deleted. 9. Amending Article 21.07 of the Lease, Tenant will be permitted to maintain its existing exterior signage on the Building until such time as Landlord requests its removal. At that time, Tenant shall promptly properly remove same and restore the affected area or Landlord shall do so at Tenant's expense. 10. Notices to the Tenant pursuant to Article 34.01 of the Lease are to be sent to the attention of the Legal Department. 11. The following language is hereby inserted at the end of 3.05 of the Lease: In the event that any check tendered by Tenant to Landlord is returned for insufficient funds, Tenant shall pay to Landlord, in addition to the charge imposed by the preceding sentence, a fee of $25.00. 12. The following language is hereby inserted at the end of Article 11.08. of the Lease: Notwithstanding anything contained in this Lease to the contrary, Landlord shall not be obligated to entertain or consider any request by Tenant to consent to any proposed assignment of this Lease or sublet of all or any part of the Demised Premises unless each request by Tenant is accompanied by a non-refundable fee payable to Landlord in the amount of One Thousand Dollars ($1,000.00) to cover Landlord's administrative, legal, and other costs and expenses incurred in processing each of Tenant's requests. Neither Tenant's payment nor Landlord's acceptance of the foregoing fee shall be construed to impose any obligation whatsoever upon Landlord to consent to Tenant's request. 13. Both parties represent that no broker was instrumental in bringing about or consummating this Second Lease Modification Agreement and that neither party had conversations or negotiations with any broker concerning the Second Lease Modification. Tenant agrees to indemnify and hold harmless Landlord against and from any claims for any brokerage commissions and all costs, expenses and liabilities in connection therewith, including, without limitation, reasonable attorneys' fees and expenses, arising out of any conversations or negotiations had by Tenant with any broker. 14. Except as provided herein, all of the terms and conditions of the Lease dated as amended above are in full force and effect and are confirmed as if fully set forth herein. IN WITNESS WHEREOF, the parties hereto have caused this Second Lease Modification Agreement to be duly executed as of the day and year first above written. ATTEST: HARTZ MOUNTAIN PARSIPPANY BY: HARTZ MOUNTAIN INDUSTRIES, INC. /s/ Witness By: /s/ Irwin A. Horowitz Irwin A. Horowitz Executive Vice President ATTEST: EMERSON RADIO CORP. /s/ Witness By: /s/ John P. Walker John P. Walker Chief Financial Officer EX-8 10 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-63515) pertaining to the Stock Compensation Program and 1994 Non-Employee Director Stock Option Plan of Emerson Radio Corp. of our report dated July 1, 1998, with respect to the consolidated financial statements and schedule of Emerson Radio Corp. and Subsidiaries included in the Annual Report (Form 10-K) for the year ended April 3, 1998. /s/ Ernst & Young LLP ERNST & YOUNG LLP New York, New York July 1, 1998 -----END PRIVACY-ENHANCED MESSAGE-----