-----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, NG9dZ1WwM+BVUndceYZphum8nEjtq/HEHfhHh2QJIcwkBjxYLx7Wvt736U2ix4r9 Oyx3SNYUqkVuh5xpgany4A== 0000032621-99-000024.txt : 19990702 0000032621-99-000024.hdr.sgml : 19990702 ACCESSION NUMBER: 0000032621-99-000024 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990402 FILED AS OF DATE: 19990701 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: 99657346 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 2, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-25226 EMERSON RADIO CORP. (Exact name of registrant as specified in its charter) Delaware 22-3285224 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) Nine Entin Road, Parsippany, NJ 07054 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (973) 884-5800 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value American Stock Exchange $.01 per share Securities registered pursuant to Section 12(g) of the Act: Series A Preferred Stock and Warrants. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirement for the past 90 days. [X] YES [ ] NO. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock of the registrant held by non- affiliates of the registrant at June 23, 1999 (computed by reference to the last reported sale price of the Common Stock on the American Stock Exchange on such date): $9,917,000 Number of Common Shares outstanding at June 23, 1999: 47,828,215 DOCUMENTS INCORPORATED BY REFERENCE: None 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, 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, discount retailers and specialty catalogers 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 that take advantage of the Company's trademarks and utilize the Company's logistical and sourcing advantages for products that 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 home stereo units, portable audio products, home theater products, microwave ovens and various video products including color TVs, black & white TVs and VCRs. 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 competitors 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., and 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 audio, home theater, microwave ovens, televisions and other video products, 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 CD stereo systems Microwave ovens specialty televisions Portable audio, cassette Color specialty & CD systems televisions Personal audio, cassette Color TV/VCR combination & CD systems units Video cassette recorders Digital clock radios Specialty video cassette Specialty clock radios players
All of the Company's products offer various features. Microwave ovens range in size from 0.6 cubic feet to 1.6 cubic feet containing features such as key pad touch controls, multi-power levels, auto defrost and turntables. The portable audio systems incorporate AM/FM radios and/or cassettes and/or CD players in a variety of models. One of Emerson's new products includes the SmartSet(TM) Clock, which is designed to automatically adjust to the correct time, date and month regardless of time zone due to microprocessor technology. The Company's H. H. Scott division markets Home Theater products that utilize proprietary CinemaSurround(registered) technology which offer a dynamic 3-dimensional sound from any stereo source, without the need for any decoding electronics, and innovative sound speakers including multi-media speakers. GROWTH STRATEGY The Company's strategic focus is to: (i) develop and expand its distribution of consumer electronic products in the domestic marketplace to existing and new customers; (ii) develop and sell new products, such as digital video disc (DVD) and 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. In connection with the Company's strategic focus, the Company may from time to time take an equity position in various corporate entities. 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, Inc. ("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 and G Clef trademark are imported directly by the Company's customers. In Fiscal 1999 and Fiscal 1998, products representing approximately 84% and 82% 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) 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 52% and 53%, and Target Stores accounted for approximately 24% and 15% of the Company's net revenues in Fiscal 1999 and Fiscal 1998, 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 either of these customers would have a material adverse affect on the Company's operating income. Approximately 39% and 34% of the Company's net revenues in Fiscal 1999 and Fiscal 1998, 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 40 sales representative organizations, including one through which approximately 26% and 16% of the Company's net revenues were made in Fiscal 1999 and Fiscal 1998, respectively. 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 3% and 2% of the Company's net revenues in Fiscal 1999 and Fiscal 1998, respectively, were derived from customers based in foreign countries. See Note 15 of notes to the 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 that allow licensees to use 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 initial 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 1999, 1998 and 1997 were $3,633,000, $5,597,000 and $5,040,000, respectively. The decrease in licensing revenues was primarily attributable to the expiration of the Agreement described in the next paragraph. 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 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 trademark. 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 Agreement was $4,000,000 in Fiscal 1998 and 1997, and is included in the balances provided above. The Agreements 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. The Daewoo agreement 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. Either party upon 90 days' notice can terminate this agreement without cause. Additionally, the Company has several other licensing agreements in place with Licensees primarily in the United States, Latin America and parts of Europe. Throughout many parts of the world, the Company maintains distributorship, and/or sales support and assistance agreements that allow the distribution of the Company's product into defined geographic areas. Currently the Company has such agreements for India, Bangladesh, North Africa, Canada and the Middle East. The Company intends to pursue additional licensing and distributor opportunities and believes that such activities have had and will continue to have a positive impact on operating results by generating 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 and Thailand. 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 1999 and Fiscal 1998, 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 1999 1998 Tonic Electronics 32% 20% Daewoo 22% 42% Imarflex 12% * * Less than 10%.
No other supplier accounted for more than 10% of the Company's total purchases in Fiscal 1999 or Fiscal 1998. 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", "Inflation and Foreign Currency" 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. The Company has a contractual agreement with one supplier to provide raw materials totaling approximately $1.5 million. 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 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 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 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 (registered)" and "Scott (registered)" 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 2009 and those registered in Canada must be renewed at various times through 2013. 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 several licensees 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 $15 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. 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 and December. Accordingly, to accommodate such increased demand, the Company generally is required to place higher orders with its vendors during the quarters ending June and September, 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 and June, 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 7, 1999, the Company had approximately 112 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, 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. A lease for office space at its Corporate offices in New Jersey for 21,509 square feet expires on October 1, 2003. There is also 29,000 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. The Company utilizes public warehouse space. 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. 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 settled 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 ("Senior Secured Credit Facility") 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 concluded in July 1998. No decision has been rendered by the Court. 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. Furthermore, a change of control will severely limit the Company's ability to utilize existing tax net operating losses (NOL's) affecting loss and foreign tax credit limitations provided by the Internal Revenue Codes. SWISS PROCEEDING INVOLVING CERTAIN DIRECTORS 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 Company's Plan of Reorganization. The Company is not a party to these proceedings. Although, as part of the settlement discussed above, the Stellings and other affected parties requested the discontinuance of the criminal investigations of these individuals, this matter remains open and a hearing commenced in mid-May 1999. It is believed that hearings on all charges will be concluded no earlier than September 1999. The Swiss authorities are seeking monetary penalties from Messrs. Jurick and Farnum. 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. The Court has scheduled a September 28, 1999 trial date. 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 pending in 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 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. On December 11, 1998, the District Court in the Southern District of Indiana granted Emerson Partial Summary Judgment in the amount of $2,956,604 plus additional costs as a result of Orion having refused to accept returns pursuant to the License Agreement (the "Returns"). The Court also granted Orion Summary Judgment in the amount of $3,202,023 with interest for product previously purchased. On or about May 7, 1999 the Court amended its order dated December 11, 1998 awarding Emerson Partial Summary Judgment against Orion concerning liability for the "Returns" and set a trial date of July 19, 1999. At the same time, that Court also issued an order determining that OEA was entitled to interest at the lesser rate of eight percent (8%) (OEA sought an award of interest at eighteen percent (18%)) on the December 11, 1998 summary judgment award to OEA in the amount of $3,202,023 for that certain consumer electronic product that Emerson had ordered and received from OEA. The parties have since agreed that the Returns issue is to be decided in the District Court of New Jersey. The Company believes that it has a meritorious claim against the Otake Defendants, meritorious affirmative defenses in response to Orion's claim concerning liability for the Returns and believes that the results of the 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 a bankruptcy claim that has not been resolved since the restructuring of the Company's debt on March 31, 1994. This 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 and vigorously contested the 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. 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 Fiscal 1993 to Fiscal 1998 tax years and asserts that certain revenues reported as non taxable by Emerson Radio (Hong Kong) Ltd. are subject to a profits tax. In May 1999, the Company proposed a compromise offer to the IRD in which the Company and the IRD without prejudice will settle the assessment for $256,000. The Company has recorded a tax reserve in the current period for the assessment in anticipation of the IRD accepting the compromise offer. Should the proposed settlement be accepted by the IRD, the Company expects its foreign taxes to increase in future periods. Emerson Radio (Hong Kong) Ltd. is also in litigation with the IRD regarding a separate assessment of $547,000 pertaining to the deduction of certain expenses that relate to the taxable years Fiscal 1992 to Fiscal 1999. During February 1999, the Company received a favorable appellate ruling in regards to the assessment, which has been further appealed by the IRD to the final court of appeals of the IRD. The Company believes that it will prevail in this case. 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, SSG, and certain directors and officers of the Company and SSG and Mr. Davis are parties. The two lawsuits have been consolidated and a trial date has been scheduled for September 28, 1999. 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. CONNECTICUT GENERAL LIFE INSURANCE COMPANY On September 22, 1998, Connecticut General Life Insurance Company (CGLIC) filed suit against the Company in the United States District Court for the District of New Jersey seeking damages related to the Company's insurance contract with CGLIC. In April 1999, the Company favorably settled the action and the suit was dismissed with prejudice. 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. TANASHIN On March 10, 1999, the Company was served with a complaint filed by Tanashin Denki Co., Ltd. in the United States District Court for the Eastern District of Virginia (Alexandria Division) alleging that various products sold by the Company infringe various patents owned by Tanashin and seeking injunctive and monetary relief. In April, 1999, the District Court granted the Company's motion for a change of venue and the suit is now pending in the United States District Court for the District of New Jersey. While the outcome of this action is not certain at this time, the Company believes it has meritorious defenses and is indemnified through various indemnification agreements with its vendors. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 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 1999 FISCAL 1998 HIGH LOW HIGH LOW First Quarter $ 5/8 3/8 $1-1/16 $1/2 Second Quarter 11/16 3/8 3/4 7/16 Third Quarter 5/8 1/4 3/4 3/8 Fourth Quarter 7/8 7/16 9/16 3/8
There is no established trading market for the Company's Common Stock Purchase Warrants. (b) Holders At June 7, 1999, there were approximately 621 stockholders of record of the Company's Common Stock and 13 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 $840,000 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 authorized 10 million shares and issued 10,000 shares of Series A Convertible Preferred Stock ("Series A Preferred Stock") on March 31, 1994. As of April 2, 1999, there were 3,714 shares outstanding. 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 year ended April 2, 1999, the Company issued a total of 286,885 shares of the common stock, upon conversion of 100 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 2, 1999. 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 2, 1999. 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. April 2, April 3, March 31, March 31, March 31, 1999 1998 1997 1996 1995 SUMMARY OF OPERATIONS: Net Revenues (1) $158,730 $162,730 $178,708 $245,667 $654,671 Net Earnings (Loss) (2) $ 289 $ (1,430) $(23,968) $(13,389) $ 7,375 BALANCE SHEET DATA AT PERIOD END: Total Assets $ 54,395 $ 54,767 $ 58,768 $ 96,576 $113,969 Current Liabilities 23,351 19,890 21,660 35,008 59,782 Long-Term Debt 20,847 20,929 21,079 20,886 214 Shareholders' Equity 10,197 13,948 16,029 40,382 53,651 Working Capital 6,859 9,610 13,258 48,434 42,598 Current Ratio 1.3 to 1 1.5 to 1 1.6 to 1 2.4 to 1 1.7 to 1 PER COMMON SHARE: (2) Net Income (Loss) Per Common Share - Basic $ (.01) $ (.04) $ (0.61) $ (0.35) $ 0.25 Net Income (Loss) Per Common Share - Diluted $ (.01) $ (.04) $ (0.61) $ (0.35) $ 0.19 Weighted Average Shares Outstanding: Basic 49,398 45,167 40,292 40,253 36,530 Diluted 49,398 45,167 40,292 40,253 47,900 Common Shareholders' Equity per Common Share (3) $ 0.12 $ 0.18 $ 0.15 $ 0.75 $ 1.08
(1) The decline in net direct revenues for Fiscal 1995 through 1999 was due primarily to the implementation of a license agreement effective March 31, 1995. Prior to entering into this license agreement, the Company reported the full dollar value of such sales. Subsequent to entering into this license agreement the Company reported royalty and commission revenue from the licensing agreement. Net Revenues for Fiscal 1995 included $340,465,000 of sales of video products subsequently covered under this license agreement. See "Business- Licensing and Related Activities". (2) For Fiscal 1995 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 differ significantly. Per common share data for Fiscal 1996 through Fiscal 1999 are based on the net earnings or loss and deduction of preferred stock dividend requirements (resulting in additional loss attributable to common stockholders for Fiscal 1996-1999) 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. (3) Calculated based on common shareholders' equity divided by actual shares of Common Stock outstanding. Common shareholders' equity at April 2, 1999 and April 3, 1998, is equal to total shareholders' equity less $4,343,000 and $5,713,000, respectively, for the liquidation preference of the Series A Preferred Stock. Common shareholders' equity at March 31, 1997, 1996 and 1995 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 revenues for Fiscal 1997 through Fiscal 1999 primarily due to a decline of video, T.V., home theater and car stereos, partially offset by increases in audio product sales. The decline in revenues was attributable to management's decision to change the product mix due to competitive reasons. The Company expects its sales in the United States for Fiscal 2000 to increase as a result of additional product offerings. RESULTS OF OPERATIONS - FISCAL 1999 COMPARED WITH FISCAL 1998 NET REVENUES Consolidated net revenues for Fiscal 1999 decreased $4.0 million (2.5%) as compared to Fiscal 1998. The decrease in net revenues resulted primarily from decreases in unit sales of microwave ovens and home theater products. The reduced revenues were offset by increased sales of audio products, particularly CD/radio/cassette products and CD shelf systems. This decrease in product sales was partially offset by a significant reduction in returned product resulting from an overall more restrictive return policy by the Company's customers. It is expected that this trend of declining revenues will not continue. Revenues earned from the licensing of the Emerson and G Clef trademark were $3.6 million for Fiscal 1999 as compared to $5.6 million for Fiscal 1998. The decrease is attributable to the first year transition of a marketing agreement with Daewoo Electronics, Ltd. implemented to replace a previous license agreement. This decline is expected to be temporary as the new program becomes fully implemented in Fiscal 2000. 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 net revenues, was 87.3% and 87.5% in Fiscal 1999 and Fiscal 1998. 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 that tend to be the most competitive and generate the lowest profits. The Company believes that the combination of the (i) Daewoo Agreement; (ii) license agreements; and (iii) introduction of higher margin products will have a favorable impact on the Company's gross profit. The Company continues to promote its direct import programs to limit its working capital risks. In addition, the Company continues to focus on its higher margin products and is reviewing new products that 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 decreased $344,000 in Fiscal 1999 as compared to Fiscal 1998, primarily as a result of reduced freight costs on returns, offset by increased return-to-vendor program fees as this program was fully implemented this fiscal year. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("S,G&A") S,G&A, as a percentage of net revenues, were 8.2% in Fiscal 1999 as compared to 9.5% in Fiscal 1998. In absolute terms, S,G&A decreased by $2.5 million in Fiscal 1999 as compared to Fiscal 1998. The decrease in S,G&A as a percentage of net revenues and in absolute terms was primarily attributable to a reduction in co- op advertising and a reduction in charges related to bad debts, partially offset by an increase in professional and consulting fees. EQUITY IN EARNINGS OF AFFILIATE The Company's 31% share in the earnings of an Affiliate amounted to $1.5 million for Fiscal 1999, which was approximately the same as for Fiscal 1998. WRITE-DOWN OF INVESTMENT IN AND ADVANCES TO JOINT VENTURES Write-down of investment in and advances to Joint Ventures was $900,000 for Fiscal 1999 as compared to $714,000 for Fiscal 1998. For Fiscal 1999 the write-down consisted of a charge of $230,000 for the continuing liquidation of a joint venture and a $670,000 charge for the write-down of a foreign investment. For Fiscal 1998 the charge of $714,000 was entirely for the joint venture. LOSS ON MARKETABLE SECURITIES Due to the write-down of marketable securities which are classified as "available-for-sale", net of gains on completed sales. INTEREST EXPENSE Interest expense decreased by $238,000 in Fiscal 1999 as compared to Fiscal 1998. The decrease was attributable to the amortization of closing costs associated with a borrowing which were fully amortized in the prior year, along with a reduction in short-term average borrowings due to a reduction in working capital requirements. PROVISION FOR INCOME TAXES The Company's provision for income taxes was $207,000 for Fiscal 1999 as compared to $254,000 for Fiscal 1998. The provision for income taxes consisted primarily of foreign tax for both years. NET INCOME As a result of the foregoing factors, the Company generated net income of $289,000 for Fiscal 1999 as compared to a net loss of approximately $1.4 million for Fiscal 1998. RESULTS OF OPERATIONS - FISCAL 1998 COMPARED WITH FISCAL 1997 NET REVENUES Consolidated net revenues for Fiscal 1998 decreased $16.0 million (8.9%) 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(Registered) 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"). COST OF SALES Cost of Sales, as a percentage of net revenues, was 87% in Fiscal 1998 as compared to 97% in Fiscal 1997. Cost of sales in Fiscal 1998 was significantly improved 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 84% of net revenues were directly imported from manufacturers to the Company's customers as compared to 46% for Fiscal 1997. 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 non-recurring 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 Affiliate's stock on December 10, 1996 and a change in the Affiliate's fiscal year. WRITE-DOWN OF INVESTMENT IN AND ADVANCES TO JOINT VENTURES Write-down of investment in and advances to Joint Ventures was $714,000 for Fiscal 1998 as compared to $0 for Fiscal 1997. For Fiscal 1998 the write-down consisted of $714,000 for the liquidation of a 50% investment in a joint venture. 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. PROVISION FOR INCOME TAXES The Company's provision for income taxes was $254,000 for Fiscal 1998 as compared to $230,000 for Fiscal 1997. The provision for income taxes consisted primarily of foreign tax for both years. 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. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $5,286,000 for Fiscal 1999. Cash was primarily provided by the reduction in accounts receivables, the increase in accounts payable and other current liabilities, combined with increased profitability of the Company. The decrease in accounts receivable is due primarily to the change in the nature of the Company's sales to a direct shipment basis. Net cash utilized by investing activities was $2,299,000 for Fiscal 1999. Cash was utilized primarily for the purchase of marketable securities. Net cash used for financing activities was $1,495,000 primarily for the purchase of the Company's stock for treasury and retirement. The Company maintains an asset-based $10 million U. S. line of credit. 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 a certain net worth level, and is in compliance with this requirement. At April 2, 1999, there was $2,216,000 of 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 2, 1999, 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 2, 1999, there were $2,124,000 and $5,000,000 respectively, of letters of credit outstanding under these credit facilities. The Company has continued to enter into 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. During Fiscal 1999, the Company reduced accounts receivable by 33% and continued to gain the benefit of previously implemented cost-reduction programs. The Company intends to maintain these reduced accounts receivable levels and to continue the sale of its products on a direct basis. In Fiscal 1999, products representing approximately 84% 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 to 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 $840,000 of dividends on the Company's Series A Preferred Stock which bears a dividend rate of 4.2% for Fiscal 1999. The Company's liquidity is impacted by the seasonality of its business. The Company generally records the majority of its annual sales in the quarters ending September and December. This requires the Company to open higher amounts of letters of credit during the quarters ending June and September, 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 and June. The higher level of returns during these periods adversely impacts the Company's collection activity, and therefore its liquidity. The Company believes that the license agreements 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 Daewoo Agreement and the introduction of higher margin product lines can continue the profitability achieved in Fiscal 1999, and reverse the trend of losses reported in prior fiscal years. The senior secured credit facility with the Lender was amended in March 1998 and extended to March 31, 2001 and imposes a financial covenant on the Company. Non compliance of the covenant could materially affect the Company's future liquidity. 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 2, 1999 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 1999. 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. These countries are emerging from an economic and financial market crisis that, to date, has not adversely affected the Company's ability to purchase product. If the economic recovery currently in progress should reverse its trend it could adversely affect the Company's relationship with its suppliers and its ability to acquire products for resale. Additional financial turmoil in the South American economies may have an adverse impact on the Company's South American Licensee. YEAR 2000 The Year 2000 issue is primarily the result of computer programs or databases using a two-digit format, as opposed to four digits, to represent a calendar year. Some computer systems will be unable to correctly interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to a disruption in the operation or accuracy of such systems. The Company has undertaken a company-wide study and testing program to locate and cure any Year 2000 issues in the products or systems on which it relies and in the products it offers for sale. This phase of the Company's Year 2000 study is completed. The Company believes its internal systems, as of the end of its second calendar quarter of 1999 will be Year 2000 compliant. The specific costs of achieving Year 2000 compliance are approximately $500,000 of which approximately $350,000 has been expended to date. The Company has been and anticipates continuing to work jointly with strategic vendors and business partners to identify any Year 2000 issues that may impact the Company. The Company anticipates that evaluation and corrective actions, if any, will be ongoing throughout 1999. To date, the Company has not identified any such problems requiring corrective action that will result in a material adverse impact on the Company. However, there can be no assurance that the companies with which the Company does business will achieve Year 2000 compliance in a timely fashion, or that such failure to comply by another company will not have a material adverse effect on the Company. The Company believes the products it currently offers for sale or license are all Year 2000 compliant, and that the cost to remediate any previously sold product that is not Year 2000 compliant will not be material. The Company has and will incur internal staff costs related to the above initiative. Based on the assessment effort to date, the Company does not believe that the Year 2000 issue will have a material adverse effect on its financial condition, results of operations, or cash flows. This represents a forward- looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from the Company's belief and expectations, which are based on certain assumptions and expectations that ultimately may prove to be inaccurate. Potential sources of risk include (a) the inability of principal suppliers to be Year 2000 ready, which could result in delays in product deliveries from such suppliers; (b) disruption of the distribution channel, including transportation vendors; (c) customer problems that could affect revenue demand; and (d) undiscovered issues related to Year 2000 compatibility which could have a material adverse impact. The Company's Year 2000 assessment is ongoing and the consideration of contingency plans will continue to be evaluated as new information becomes available. At this stage, however, the Company has not developed a comprehensive contingency plan to address situations that may result if any of the third parties upon which the Company is dependent is unable to achieve Year 2000 compliance. The need for such a contingency plan will be evaluated throughout 1999. RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which will be effective for the Company for Fiscal 2000, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The Company has not yet determined the effects, if any, of implementing SFAS No. 133 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", "intend", "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 large quantities of products to its largest customers whose net revenues represented 52% and 24% of Fiscal 1999 net revenues; (ii) competitive factors such as competitive pricing strategies utilized by retailers in the domestic marketplace that 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 outcome of the litigation (See "Legal Proceedings"); (v) the availability of sufficient capital to finance the Company's operating plans; (vi) the ability of the Company to comply with the restrictions imposed upon it by its outstanding indebtedness; (vii) the Year 2000 Issue (as described above); and (viii) general economic conditions. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not material. 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 MANAGEMENT OFFICERS AND DIRECTORS The following table sets forth certain information regarding the Officers and Directors of the Company as of the date hereof:
NAME AGE POSITION Geoffrey P. Jurick (3) 58 Chairman of the Board, Chief Executive (3) Officer, President and Director John P. Walker 36 Executive Vice President and Chief Financial Officer Marino Andriani 51 President, Emerson Radio Consumer Products Corporation John J. Raab 63 Senior Vice President - International Elizabeth J. Calianese 41 Vice President - Human Resources, Deputy General Counsel and Secretary Christina A. Iatrou 36 Assistant Secretary and Assistant General Counsel Robert H. Brown, Jr. (1)(2)(3)(4) 45 Director Peter G. Bunger (2)(3) 58 Director Jerome H. Farnum (1)(2)(3) 63 Director Stephen H. Goodman (1)(3)(4) 55 Director
_______________________________ (1) Member of Audit Committee (2) Member of Compensation and Personnel Committee (3) Member of Executive Committee (Mr. Goodman is an alternate member of the Executive Committee) (4) Member of Special Committee GEOFFREY P. JURICK has served as Director since September 1990, Chief Executive Officer since July 1992, Chairman since December 1993 and President since April 1997. Mr. Jurick also previously served as President from July 1993 to October 1994. From March 1990 until approximately 1994, he was President and Director of Fidenas Investment Limited. Since December 1993, Mr. Jurick has served as a Director of Fidenas International Limited, L.L.C. and its predecessor ("FIN") and, since May 1994, as an officer and general manager of Fidenas International. Mr. Jurick has served as a Director and Chairman of GSE Multimedia Technologies Corporation ("GSE"), which is traded in the over-the-counter market, since May 1994. Since March 1996, Mr. Jurick has served as Chairman of Elision International Ltd. ("Elision"). For more than the past five years, Mr. Jurick has held a variety of senior executive positions with several of the entities comprising the Fidenas group of companies ("Fidenas Group"). Since December 1996, Mr. Jurick has served as a Director and Chairman of the Board and since January 23, 1997 as Chief Executive Officer of Sport Supply Group, Inc. ("SSG"), whose securities are traded on the New York Stock Exchange. The Company owns 31% of the outstanding common shares of SSG. See "Item 13. - Certain Relationships and Related Transactions". JOHN P. WALKER has served as Executive Vice President and Chief Financial Officer since April 1996 and was Senior Vice President from April 1994 until March 1996. Mr. Walker was Vice President-Finance from February 1993 to April 1994 and Assistant Vice President-Finance from June 1991 to January 1993. Since December 1996, Mr. Walker has served as a Director and Chief Financial Officer of SSG. Effective July 1998, Mr. Walker became the President and Chief Operating Officer of SSG in addition to his positions as Director and Chief Financial Officer. See "Item 13. - Certain Relationships and Related Transactions". MARINO ANDRIANI has served as President of Emerson Radio Consumer Products Corporation since February 1996. From December 1994 until February 1996, Mr. Andriani was President of Appliance Corp. of America, a Welbilt Consumer Products Company. From March 1993 to December 1994, Mr. Andriani was President of Orient Express Marketing. Prior to March 1993, Mr. Andriani was Executive Vice President-Sales of the Company from September 1990 to March 1993. JOHN J. RAAB has served as Senior Vice President - International since October 1997, Senior Vice President-Operations from October 1995 until September 1997 and was Vice President-Far East Operations from May 1995 until September 1995. Prior to May 1995 he was President and Chief Operating Officer of Robeson Industries Corp. from March 1990 to March 1995. Robeson Industries Corp. filed for relief under Chapter 11 of the United States Bankruptcy Code and emerged from Bankruptcy and was sold in the end of 1994. ELIZABETH J. CALIANESE has served as Secretary since January 1996, as Vice President-Human Resources since May 1995 and as Deputy General Counsel since May 1995. From April 1991 to May 1995, Ms. Calianese served as Assistant General Counsel. CHRISTINA A. IATROU has served as Assistant Secretary since August 1996 and as Assistant General Counsel since May 1995. From October 1987 to May 1995, Ms. Iatrou was a senior associate with the law firm of Crocco & De Maio, P.C. in New York City. ROBERT H. BROWN, JR. has been a Director since July 1992. Since January 1999, Mr. Brown has been President and Chief Executive Officer of Frost Securities, Inc., an investment banking firm. From July 1998 to January 1999, Mr. Brown was President of RHB Capital, LLC. From January 1998 to July 1998, he was Executive Vice President of Dain Rauscher, formerly Rauscher Pierce Refsnes, Inc. ("Rauscher"). From February 1994 to January 1998, Mr. Brown was Executive Vice President of Capital Markets of Rauscher, in Dallas, Texas. From January 1990 until February 1994, Mr. Brown was Senior Vice President and Director of the Corporate Finance Department of Rauscher. From May 1993 through March 1999, Mr. Brown served as a Director of Stevens Graphics Corp., which is traded on the American Stock Exchange. PETER G. BUNGER has been a Director since July 1992. Presently, he is a consultant with Savarina AG. Since October 1992, Mr. Bunger has served as Director of Savarina AG, engaged in the business of portfolio management monitoring in Zurich, Switzerland, and since 1992, as Director of ISCS, a computer software company. Since December 1996, Mr. Bunger has served as a Director of SSG. See "Item 13. - Certain Relationships and Related Transactions". JEROME H. FARNUM has been a Director since July 1992. Since July 1994, Mr. Farnum has been an independent consultant. From 1979 until 1994, Mr. Farnum served as a senior executive with several of the entities comprising the Fidenas Group, in charge of legal and tax affairs, accounting, asset and investment management, foreign exchange relations, and financial affairs. STEPHEN H. GOODMAN has been a Director since January 1999. Since January 1998, he has been President, Chief Executive Officer and a Director of the Singer Company, N.V. ("Singer"), an international manufacturer and distributor of consumer and industrial sewing machines and a global retailer and distributor of other consumer durable product, the common stock of which is listed on the New York Stock Exchange. From March 1986 to December 1997, Mr. Goodman held a variety of positions with Bankers Trust Company, including Managing Director, Corporate Strategy, New York and Managing Director, Strategic Advisory and Mergers & Acquisitions Business, Asia. Mr. Goodman is a Director of Singer, a member of the Supervisory Board of GM Pfaff A. G., a Frankfurt Stock Exchange listed subsidiary of Singer, and a director of a number of Singer affiliates and subsidiaries. Item 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION COMPENSATION OF EXECUTIVE OFFICERS The following executive compensation disclosures reflect all plan and non- plan compensation awarded to, earned by, or paid to the named executive officers of the Company. The "named executive officers" are the Company's Chief Executive Officer (the "CEO"), regardless of compensation level, and the four most highly compensated executive officers, other than the CEO, serving as such on April 2, 1999. Where a named executive officer has served during any part of the Company's fiscal year ended April 2, 1999 ("Fiscal 1999"), the disclosures reflect compensation for the full year in each of the periods presented. SUMMARY COMPENSATION TABLE The following table summarizes for the years indicated the compensation awarded to, earned by, or paid to the named executives for services rendered in all capacities to the Company:
OTHER SECURI- ALL ANNUAL TIES OTHER Name and COMPEN- UNDER- COMPEN- Principal FISCAL SATION LYING SATION Position(s) YEAR SALARY BONUS (1) OPTIONS (2) GEOFFREY P. JURICK 1999 $411,600 $ - $108,145 - $4,844 CHAIRMAN OF THE 1998 321,407 - 125,208 - 13,059 BOARD, CHIEF 1997 443,473 38,500 121,646 - 2,207 EXECUTIVE OFFICER AND PRESIDENT (3) JOHN P. WALKER 1999 100,000 50,000 - - 2,400 EXECUTIVE VICE 1998 107,692 50,000 - - 2,721 PRESIDENT AND 1997 179,166 40,000 18,816 - 7,089 CHIEF FINANCIAL OFFICER (4) MARINO ANDRIANI 1999 385,000 - 8,400 75,000 14,032 PRESIDENT, 1998 385,000 - 8,400 - 11,656 EMERSON 1997 387,100 - 9,808 75,000 11,352 RADIO CONSUMER PRODUCTS CORPORATION(5) JOHN J. RAAB 1999 210,000 - 8,400 50,000 10,100 SENIOR VICE 1998 210,000 - 8,400 - 7,780 PRESIDENT- 1997 212,100 - 8,638 - 11,237 INTERNATIONAL (5) ELIZABETH J. CALIANESE 1999 125,000 25,000 8,400 - 7,110 VICE PRESIDENT- 1998 102,503 10,000 8,400 30,000 1,687 HUMAN RESOURCES, 1997 95,000 - 8,400 30,000 1,425 SECRETARY, AND DEPUTY GENERAL COUNSEL(5)
(1) Consists of (i) car allowance and auto expenses afforded to the listed Company executive officers, including $13,063 paid to Mr. Walker in Fiscal 1997, and $8,400 to Mr. Andriani, Mr. Raab and Ms. Calianese, in Fiscal 1999, 1998 and 1997, respectively, (ii) temporary lodging expenses and associated tax gross-ups in the amount of $108,145, $125,208 and $120,573 for Mr. Jurick, for Fiscal 1999, 1998 and 1997, respectively. (2) Consists of the Company's contribution to its 401(k) employee savings plan, group health, life insurance and disability insurance. Includes $7,170 in premiums paid in Fiscal 1998 for a life insurance policy for Mr. Jurick. (3) Includes reimbursement of salary from SSG of $135,414 and $46,527 for Mr. Jurick in Fiscal 1998 and 1997, respectively. Pursuant to the Management Services Agreement, between SSG and the Company (the "Management Services Agreement"), effective October 18, 1997, the Company reduced Mr. Jurick's salary by $80,000 and will no longer be reimbursed by SSG for a portion of Mr. Jurick's salary. See "Item 13. - Certain Relationships and Related Transactions". (4) Effective January 15, 1998, the Company no longer pays Mr. Walker's salary directly. However, pursuant to the Management Services Agreement by and between SSG and the Company, the Company began reimbursing SSG for Mr. Walker's salary and bonus that on an annualized basis is equivalent to $100,000 and $50,000 respectively during Fiscal 1999 and 1998. See "Item 13. - Certain Relationships and Related Transactions". (5) In November 1995, Mr. Raab was granted a stock option to purchase 50,000 shares of common stock at an exercise price of $2.875 per share. In April 1996, Mr. Andriani was granted a stock option to purchase 75,000 shares of common stock at an exercise price of $2.563 per share and in October 1996, Ms. Calianese was granted a stock option to purchase 30,000 shares of common stock at an exercise price of $ 2.25 per share. Ms. Calianese's options were repriced in Fiscal 1998 to $1.00 per share. Mr. Raab's and Mr. Andriani's options were repriced in Fiscal 1999 to $1.00 per share. The options vest in annual increments of one-third, commencing one year from the date of grant, and their exercise is contingent on continued employment with the Company. Repriced options are reported as compensation in the fiscal year they are repriced. See "Board Report on Option Repricing". OPTION GRANTS DURING 1999 FISCAL YEAR There were no options granted to the named executives identified in the Summary Compensation table. OPTION EXERCISES AND HOLDINGS The following table provides information related to options exercised by the named executive officers during Fiscal 1999 and the number and value of options held at fiscal year end. The Company does not have any outstanding stock appreciation rights. OPTION EXERCISES DURING 1999 FISCAL YEAR AND FISCAL YEAR - END OPTION VALUES
Number of Securi- ties Under- lying Value of Un- Unexercised exercised In-the- Options Money /SARS Options at FY-End /SARS Shares Value (#) at FY-End Acquired Real- Exercisable ($)(1) on Exercise ized /Un- Exercisable Name (#) ($) exercisable Unexercisable Geoffrey P. Jurick --- --- 600,000/0 $ 0/$ 0 John P. Walker --- --- 200,000/0 $ 0/$ 0 Marino Andriani --- --- 75,000/0 $ 0/$ 0 John J. Raab --- --- 50,000/0 $ 0/$ 0 Elizabeth J. Calianese --- --- 20,000/10,000 $ 0/$ 0
(1) The closing price for the Company's Common Stock as reported by the American Stock Exchange on April 2, 1999 was $ .81. Value is calculated on the basis of the difference between the closing price and the option exercise price of "in the money" options, multiplied by the number of shares of Common Stock underlying the option. BOARD REPORT ON OPTION REPRICING The Board believes that the Company has taken constructive steps to improve its performance and believes that hiring and retaining key employees is central to implementing these measures. In furtherance of these goals, in May 1998, the Board reduced the per share exercise price of options previously granted to Mr. Andriani and Mr. Raab. The Board concluded that the results achieved by these two executives were basis for repricing of options granted to them. No other provisions of these options were altered. In accordance with the rules of the SEC, this Option Repricing Report of the Board of Directors is not intended to be "filed" or "soliciting Material" or subject to Regulations 14A or 14C or Section 18 of the Exchange Act, or incorporated into any other filing by the Company with the SEC. The following table summarizes certain information concerning the repricing of options to buy the Company's Common Stock held by all executive officers: TEN YEAR OPTION REPRICING
Length Number of of Original Secur- Option ities Market Term Re- Under- Price of Exercise New maining lying Stock at Price at Exer- At Date of Options Time of Time of cise Date of Name Repricing Repriced Repricing Repricing Price Repricing ELIZABETH J. CALIANESE 05/13/97 30,000 $0.438 $2.25 $1.00 9.4 years MARINO ANDRIANI 05/01/98 75,000 $0.438 $2.563 $1.00 7.9 years JOHN J. RAAB 05/01/98 50,000 $0.438 $2.875 $1.00 7.5 years
CERTAIN EMPLOYMENT CONTRACTS On August 13, 1992, Geoffrey P. Jurick, Chairman, Chief Executive Officer and President of the Company, entered into five-year employment agreements ("Jurick Employment Agreements") with the Company and two of its wholly-owned subsidiaries, Emerson Radio (Hong Kong) Ltd. and Emerson Radio International Ltd. (formerly Emerson Radio (B.V.I.) Ltd.) (hereinafter, collectively the "Companies"), providing for an aggregate annual compensation of $490,000 as of April 1, 1995. Effective October 18, 1997, Mr. Jurick's employment agreement with the Company (but not the wholly-owned subsidiaries) was amended and Mr. Jurick's annual salary under the Jurick Employment Agreements was reduced to $410,000. In addition to his base salary, the Jurick Employment Agreements provide that Mr. Jurick is entitled to an annual bonus upon recommendation by the Compensation and Personnel Committee of the Company's Board of Directors, subject to the final approval of the Company's Board of Directors. By letter agreement dated April 16, 1997, the terms of the Jurick Employment Agreements were extended until March 31, 2000. However, pursuant to the Settlement Agreement, hereinafter defined, Mr. Jurick's cash compensation from the Company and all subsidiaries and affiliates is limited to a total of $750,000 annually until the Settlement Amount is paid. See "Certain Relationships and Related Transactions." Pursuant to the Management Services Agreement, SSG reimbursed the Company for $0, $125,444 and $46,527 in salary payments made to Mr. Jurick in Fiscal 1999, 1998 and 1997, respectively, for the benefit of SSG. The Management Services Agreement was amended as of October 18, 1997 to provide that SSG will no longer reimburse the Company for any of Mr. Jurick's salary payments, but will pay Mr. Jurick directly. See "Item 13. - Certain Relationships and Related Transactions - Management Services Agreement". Subject to certain conditions, each of the Jurick Employment Agreements grants to Mr. Jurick severance benefits, through expiration of the respective terms of each of such agreements, commensurate with Mr. Jurick's base salary, in the event that his employment with the Companies terminates due to permanent disability, without cause or as a result of constructive discharge (as defined therein). In the event that Mr. Jurick's employment with the Companies terminates due to termination for "cause", because Mr. Jurick unilaterally terminates the agreements or for reasons other than constructive discharge or permanent disability, Mr. Jurick shall only be entitled to base salary earned through the applicable date of termination. If Mr. Jurick were to be terminated due to permanent disability, without cause or as a result of constructive discharge, the estimated dollar amount to be paid after April 2, 1999, based on the terms of the employment contract, would be $410,000. However, the estimated amounts to be paid is subject to certain limitations under the Settlement Agreement. See "Item 13. - Certain Relationships and Related Transactions - Certain Outstanding Common Stock". As of April 1, 1994, John P. Walker, Executive Vice President and Chief Financial Officer, entered into a three-year employment agreement with the Company providing for an annual compensation of $165,000 as of April 1, 1995 and increased to $210,000 effective April 1, 1996 ("Walker Employment Agreement"). Effective January 15, 1998, the Walker Employment Agreement was terminated and the Management Services Agreement with SSG was amended to provide that the Company will reimburse SSG for a portion of Mr. Walker's salary and bonus, if any, thus reducing that portion paid directly by the Company to Mr. Walker to $0. ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS There are no employment agreements deemed to have an anti-takeover effect. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation and Personnel Committee, which is presently comprised of Messrs. Brown, Bunger and Farnum, (i) makes recommendations to the full Board concerning remuneration arrangements for executive management; (ii) administers the Company's 1994 Stock Compensation Program; and (iii) makes such reports and recommendations, from time to time, to the Board of Directors upon such matters as the committee may deem appropriate or as may be requested by the Board. Geoffrey P. Jurick serves as Chairman of the Board and Chief Executive Officer of the Company and SSG. John P. Walker serves as Executive Vice President and Chief Financial Officer of the Company and as President, Chief Operating Officer, Chief Financial Officer and Director of SSG. Mr. Bunger, who is a Director of the Company and SSG, serves on the Compensation Committees of the Company and SSG. Geoffrey Jurick was also a member of the Company's Board of Directors during Fiscal 1999 and participated in deliberations concerning executive officer compensation. REPORT OF COMPENSATION AND PERSONNEL COMMITTEE The Compensation and Personnel Committee of the Board of Directors (the "Compensation Committee"), which contains three non-employee Director, oversees the Company's executive compensation strategy. The strategy is implemented through policies designed to support the achievement of the Company's business objectives and the enhancement of stockholder value. The Compensation Committee reviews, on an ongoing basis, all aspects of executive compensation. The Compensation Committee's executive compensation policies support the following objectives: -The reinforcement of management's concern for enhancing stockholder value. -The attraction and retention of qualified executives. -The provision of competitive compensation opportunities for exceptional performance. The basic elements of the Company's executive compensation strategy are: BASE SALARY. Base salaries for the executive managers of the Company represent compensation for the performance of defined functions and assumption of defined responsibilities. The Compensation Committee reviews each executive's base salary on an annual basis. In determining salary adjustments, the Compensation Committee considers the Company's growth in earnings and revenues and the executive's performance level, as well as other factors relating to the executive's specific responsibilities. Also considered are the executive's position, experience, skills, potential for advancement, responsibility, and current salary in relation to the expected level of pay for the position. The Compensation Committee exercises its judgment based upon the above criteria and does not apply a specific formula or assign a weight to each factor considered. ANNUAL INCENTIVE COMPENSATION. At the beginning of each year, the Board of Directors establishes performance goals of the Company for that year, which may include target increases in sales, net income and earnings per share, as well as more subjective goals with respect to marketing, product introduction and expansion of customer base. LONG-TERM INCENTIVE COMPENSATION. The Company's long-term incentive compensation for management and employees consists of the 1994 Stock Compensation Program. The Compensation Committee views the granting of stock options as a significant method of aligning management's long-term interests with those of the stockholders. The Compensation Committee determines awards to executives based on its evaluation of criteria that include responsibilities, compensation, past and expected contributions to the achievement of the Company's long-term performance goals. Stock options are designed to focus executives on the long- term performance of the Company by enabling executives to share in any increases in value of the Company's stock. The Compensation Committee encourages executives, individually and collectively, to maintain a long-term ownership position in the Company's stock. The Compensation Committee believes this ownership, combined with a significant performance-based incentive compensation opportunity, forges a strong linkage between the Company's executives and its stockholders. COMPENSATION OF THE CHIEF EXECUTIVE OFFICER Mr. Geoffrey P. Jurick is the Chief Executive Officer, Chairman of the Board of Directors and President of the Company. The Compensation Committee considered the Company's results in all aspects of its business, and the terms of his employment agreement with the Company, in its review of Mr. Jurick's performance during Fiscal 1999. Mr. Jurick's annual compensation, comprised of annual base salary of $411,600, is consistent with the Committee's targeted annual compensation level and with the limitations established by the Settlement Agreement (See "Item 13. - - Certain Relationships and Related Transactions - Certain Outstanding Common Stock"). Mr. Jurick reduced his salary by $80,000 in Fiscal 1998 as a result of SSG paying Mr. Jurick directly (See "Item 13. - Certain Relationships and Related Transactions - Management Services Agreement"). The terms and conditions of Mr. Jurick's employment agreement are discussed in detail beginning on page 27 (See "Item 11. - Executive Compensation and Other Information - Certain Employment Contracts"). POLICY ON QUALIFYING COMPENSATION Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), for tax years beginning on or after January 1, 1994, provides that public companies may not deduct in any year compensation in excess of $1 million paid to any of the individuals named in the Summary Compensation Table that is not, among other requirements, "performance based," as defined in Section 162(m). None of the named individuals received compensation in excess of $1 million during Fiscal 1999, 1998 or 1997. The Company's policy is to qualify, to the extent reasonable, its executive officers' compensation for deductibility under applicable tax laws. However, the Board of Directors believes that its primary responsibility is to provide a compensation program that will attract, retain and reward the executive talent necessary to the Company's success. Consequently, the Board of Directors recognizes that the loss of a tax deduction could be necessary in some circumstances. COMPENSATION AND PERSONNEL COMMITTEE Robert H. Brown, Jr., Chairman Peter G. Bunger Jerome H. Farnum BOARD OF DIRECTORS AND COMMITTEES The business of the Company is managed under the direction of the Board of Directors. The Board meets during the Company's fiscal year to review significant developments affecting the Company and to act on matters requiring Board approval. The Board of Directors held six formal meetings and acted by unanimous written consent five times during the fiscal year ended April 2, 1999. During Fiscal 1999, each member of the Board participated in at least 75% of all Board meetings and at least 50% of all committee meetings held during the period for which he served as a Director and/or committee member. During Fiscal 1999, the Board of Directors had an Audit Committee a Compensation and Personnel Committee an Executive Committee and a Special Committee to devote attention to specific subjects and to assist the Board in the discharge of its responsibilities. The functions of these committees and their current members are described below. AUDIT COMMITTEE. The Company's Audit Committee is presently comprised of Messrs. Farnum (Chairman), Brown and Goodman. The Audit Committee recommends to the Board of Directors the appointment of a firm of certified public accountants to conduct audits of the Company's consolidated financial statements and monitors the performance of such firm, reviews accounting objectives and procedures of the Company and the findings and reports of the independent certified public accountants, and makes such reports and recommendations to the Board of Directors as it deems appropriate. During Fiscal 1999, the Audit Committee met two times. COMPENSATION AND PERSONNEL COMMITTEE. The Compensation and Personnel Committee, which is presently comprised of Messrs. Brown (Chairman), Bunger and Farnum (i) makes recommendations to the full Board concerning remuneration arrangements for executive management; (ii) administers the Company's 1994 Stock Compensation Program; and (iii) makes such reports and recommendations, from time to time, to the Board of Directors upon such matters as the committee may deem appropriate or as may be requested by the Board. During Fiscal 1999, the Compensation Committee met two times. See "Item 11. - Executive Compensation and Other Information--Report of Compensation and Personnel Committee". EXECUTIVE COMMITTEE. The Executive Committee is presently comprised by Messrs. Brown, Bunger, Farnum and Jurick. Mr. Goodman is an alternate member of the Committee. Subject to the provisions of the Company's By-Laws, the Executive Committee has all of the power and authority of the full Board of Directors except the following; 1.) declare or pay dividends; 2.) make, alter or repeal any By-Law of the Company; 3.) elect, appoint or remove any Directors; 4.) submit to shareholders any action that requires shareholder approval; 5.) amend or repeal any resolution adopted by the Board; and 6.) take any material action affecting the Company's operations including, but not limited to, approval of mergers and acquisitions, purchase or disposal of major Company assets, etc. During Fiscal 1999, the Executive Committee met one time. SPECIAL COMMITTEE. The Special Committee, presently comprised of Messrs. Brown and Goodman, was formed as part of the Settlement Agreement with the Creditors to evaluate any offer to purchase the Emerson Shares which would result in a Change of Control of the Company as defined in the Senior Secured Credit Facility and the Indenture. During Fiscal 1999, the Committee did not meet. See Part I, Item 3, Legal Proceedings-Certain Outstanding Common Stock. The Board of Directors did not have a standing nominating committee, or any other committee performing similar functions during Fiscal 1999. The functions customarily attributable to a nominating committee were performed by the Board of Directors as a whole. COMPENSATION OF DIRECTORS Directors of the Company who are employees do not receive compensation for serving on the Board. Non-employee Directors are paid $10,000 per annum in quarterly installments. Non-employee Directors that are on the Compensation and Personnel Committee are paid $5,000 per annum; Directors of the Executive Committee are paid $5,000 per annum; Directors of the Audit Committee are $7,500 per annum; and Special Committee Directors are paid $2,500 per annum. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of June 7, 1999, the beneficial ownership of (i) each current Director; (ii) each Officer named in the Summary Compensation Table; (iii) the Directors and Executive Officers as a group and (iv) each stockholder known to management of the Company to own beneficially more than 5% of the Company's outstanding shares of Common Stock. For purposes of this Form 10-K, beneficial ownership of securities is defined in accordance with the rules of the Securities and Exchange Commission ("SEC") and means generally that the power to vote or exercise investment discretion with respect to securities regardless of any economic interests therein. Except as otherwise indicated and based upon the Company's review of information as filed with the SEC, the Company believes that the beneficial owners of the securities listed below have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
Name and Address Of Beneficial Amount and Nature Owners of Beneficial Ownership (1) Percent of Class Geoffrey P. Jurick (2)(3) 29,752,642 60.9% Fidenas International 29,152,542 59.6% Limited, L. L. C. 831 Route 10 Suite 38, #113 Whippany, NJ 07981 (2) Oaktree Capital Management 3,483,135 7.1% 550 South Hope St., 22nd Fl Los Angeles, CA 90071 (7) Robert H. Brown, Jr. (4) 50,000 * Peter G. Bunger (4) 25,000 * Jerome H. Farnum (4) 25,000 * John P. Walker (5) 200,000 * Marino Andriani (5) 75,000 * John J. Raab (5) 50,000 * Elizabeth J. Calianese (5) 20,000 * All Directors and Officers 30,197,642 61.8% as a Group ((8) persons)(6) _________________ (*) Less than one percent
(1) Based on 47,828,215 shares of Common Stock outstanding as of June 23, 1999, plus shares of Common Stock under option of any Director or executive officer, exercisable within 60 days. Except as otherwise indicated, does not include (i) shares of Common Stock issuable upon conversion of 3,714 shares of Series A Preferred Stock, (ii) Common Stock issuable upon conversion of certain warrants issued to the Company's former creditors, (iii) Common Stock issuable upon exercise of outstanding options, which are not currently exercisable within 60 days, (iv) Common Stock issuable upon conversion of the Company's 8-1/2% Senior Subordinated Convertible Debentures Due 2002 (the "Debentures"), or (v) Common Stock issuable upon the exercise of warrants granted to (a) Dresdner Securities (USA) Inc., or (b) First Cambridge Securities Corporation ("First Cambridge"), and/or representatives of First Cambridge it so designates or its beneficiaries. (2) Consists of 15,552,542, 1,600,000 and 12,000,000 shares of Common Stock which were held by FIN, Elision, and GSE, respectively. FIN is record holder of an additional 847,458 shares of Common Stock and formerly held such shares as nominee. The nominee relationship has been terminated and FIN and Mr. Jurick disclaim beneficial ownership of such additional shares. Mr. Jurick indirectly owns, through a controlled holding company approximately 95% of FIN. In addition, Mr. Jurick is the manager of FIN. FIN owns approximately 14.3% of Elision. Mr. Jurick indirectly owns, through certain holding companies and beneficial interests in affiliates, a controlling interest in each of GSE and Elision. In accordance with a Stipulation and Order of Settlement, dated June 11, 1996 (the "Stipulation"), the shares of Common Stock held by Elision and GSE were transferred and registered in the name of FIN. All of the shares owned by FIN, GSE and Elision are subject to certain restrictions. See "Item 13. - Certain Relationships and Related Transactions - Certain Outstanding Common Stock". (3) Includes options to purchase 600,000 shares of Common Stock. (4) Comprised of options issued pursuant to the Company's 1994 Non-Employee Director Stock Option Plan. See "Security Ownership of Certain Beneficial Owners and Management--Compensation of Directors." (5) In July 1994, the Company granted stock options to purchase 200,000 shares of Common Stock to Mr. Walker exercisable at an exercise price of $1 per share. In November 1995, Mr. Raab was granted stock options to purchase 50,000 shares of Common Stock at an exercise price of $2.875 per share. In April 1996, Mr. Andriani was granted stock options to purchase 75,000 shares of Common Stock at an exercise price of $2.563 per share and in October 1996, Ms. Calianese was granted stock options to purchase 30,000 shares of Common Stock at an exercise price of $2.25 per share. In May 1998, the options granted to Mr. Raab and Mr. Andriani were repriced to $1.00 per share. In May 1997, the options granted to Ms. Calianese were repriced to $1.00 per share. The options vest in annual increments of one-third, commencing one year from the date of grant, and their exercise is contingent on continued employment with the Company. (6) Includes 1,045,000 shares of Common Stock subject to unexercised stock options which were exercisable within 60 days under the Company's Stock Compensation Program. Does not include options to purchase an aggregate of 10,000 shares of Common Stock not currently exercisable within 60 days. (7) Based on information set forth in Schedule 13D, dated May 22, 1998, filed with the SEC by Oaktree Capital Management LLC, ("Oaktree"), Kenneth Grossman and OCM Principal Opportunities Fund, L. P. as amended by Amendment No. 1, dated December 15, 1998 and Amendment No. 2, dated February 10, 1999. Consists of common shares issuable upon conversion of the owner's holdings of the Company's Debentures if such holdings were converted into shares of the Company's Common Stock. The percentage of beneficial ownership assumes that the common shares that would be issued upon conversion are outstanding. COMPARISON OF CUMULATIVE TOTAL RETURN PERFORMANCE GRAPH The graph below compares the cumulative total stockholders' return on the Company's Common Stock for the period December 22, 1994 (the date on which the Company's Common Stock began trading on the American Stock Exchange) to April 2, 1999, with the cumulative total return over the same period of the American Stock Exchange and a peer group of companies. Companies used to construct the peer group index are Cobra Electronics Corp., Matsushita Electric Industrial Co. Ltd., Recoton Corp. and Sony Corp. Philips Electronics NV and Zenith Electronics Corp. were deleted from the peer group because their stocks were no longer traded. Recoton Corp. was added to the peer group. In selecting companies to be part of the peer group, the Company focuses on publicly traded companies that design electronic products, which have characteristics similar to the Company's in terms of one or more of the following: type of product, distribution channels, sourcing or sales volume. The peer group assumes the investment of $100 in the Company's Common Stock, on December 22, 1994 and reinvestment of all dividends. The information in the graph was provided by Media General Financial Services ("MGFS"). The comparison of the returns are as follows: COMPARISON OF CUMULATIVE TOTAL RETURN OF EMERSON RADIO CORP., PEER GROUP INDEX AND BROAD MARKET INDEX
FISCAL YEAR ENDING COMPANY/INDEX/MARKET 1994 1995 1996 1997 1998 1999 Emerson Radio Corp. 100 135.14 110.81 45.95 18.92 35.14 Peer Group Index 100 95.11 106.39 108.68 122.39 141.70 NASDAQ Market Index 100 102.95 138.47 154.92 234.12 305.95
The Customer Selected Stock List is made up of the following securities: COBRA ELECTRONICS CORP. MATSUSHITA ELECTRIC INDUSTRIES CO. RECOTON CORP. SONY CORP. The stock price performance depicted in the above graph is not necessarily indicative of future price performance. The Corporate Performance Graph will not be deemed to be incorporated by reference in any filing by the Company under the Securities Act or the Exchange Act except to the extent that the Company specifically incorporates the graph by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS SPORT SUPPLY GROUP, INC. On August 1, 1996, the Company and Emerson Radio (Hong Kong) LTD. ("Emerson HK"), filed a Schedule 13D with the SEC. Pursuant to the Schedule 13D, Emerson HK reported that it acquired 669,500 shares of SSG's Common Stock (the "Initial Shares"). On December 10, 1996, the Company acquired directly from SSG (i) an additional 1,600,000 shares of newly-issued SSG Common Stock (the "New Shares") for an aggregate consideration of $11,500,000, or approximately $7.19 per share, and (ii) 5-year 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 (the "Emerson Warrants") for an aggregate consideration of $500,000 ("Emerson Agreement"). Prior to the exercise of any of the Emerson Warrants, the Company and Emerson HK own approximately 31% of the issued and outstanding shares of SSG Common Stock. If all of the Emerson Warrants are exercised by the Company, the Company will own approximately 39% of the issued and outstanding shares of SSG Common Stock. Pursuant to a Registration Rights Agreement (the "Registration Rights Agreement"), SSG granted to the Company and Emerson HK certain demand and incidental registration rights with respect to the resale of the shares of SSG Common Stock they own, as well as on the exercise and resale of the shares of SSG Common Stock the Company may acquire under the Warrant Agreement governing the Emerson Warrants. The total consideration paid by the Company pursuant to the Emerson Agreement was $12 million, of which $11,500,000 was attributable to the 1,600,000 New Shares and $500,000 was attributable to the Emerson Warrants. The $12,000,000 purchase price was borrowed by the Company from Congress Financial Corporation ("Congress"), the Company's United States senior secured lender, under the terms of the Company's existing credit facility and in accordance with the terms of the consent obtained from Congress. Pursuant to a Pledge and Security Agreement as amended, the Company has pledged to Congress 500,000 of the New Shares together with all proceeds thereof and all dividends and other income and distributions thereon or with respect thereto and all rights of the Company to have such New Shares registered under the Registration Rights Agreement. Pursuant to the Emerson Agreement, SSG also caused a majority of the members of its Board of Directors to consist of the Company's designees. SSG's Board of Directors now includes the following people that are associated with the Company: Geoffrey P. Jurick, Chairman, and Chief Executive Officer of Emerson and SSG; John P. Walker, Executive Vice President and Chief Financial Officer of Emerson and President, Chief Operating Officer and Chief Financial Officer of SSG; and Peter G. Bunger, a Director of both companies and member of the Compensation Committee of each Company. Mr. Jurick has employment agreements with the Company and SSG. Messrs. Jurick and Walker split their time between the two companies. MANAGEMENT SERVICES AGREEMENT During Fiscal 1997, SSG and the Company entered into a Management Services Agreement, which was amended in Fiscal 1998, in an effort to utilize SSG's excess capacity and to enable the Company to reduce certain costs. The Management Services Agreement implements a program whereby SSG performs certain services for the Company in exchange for a fee. The services include payroll, banking, computer/management information systems, payables processing, warehouse services (including subleasing warehouse storage space), provision of office space, design services and financial management services. The Management Services Agreement may be terminated by either party upon sixty (60) days' prior notice. Termination of the Management Services Agreement could have a material adverse effect on the Company and its results of operations. The Company was billed $636,000, $272,000 and $3,000 for services provided with respect to the above mentioned agreement during Fiscal 1999, 1998 and 1997 respectively. Effective October 18, 1997, SSG began paying Mr. Jurick directly for his services. Effective January 15, 1998, the Company began reimbursing SSG for base salary and bonus paid to Mr. Walker for the Company's benefit in lieu of paying Mr. Walker directly. The Company billed SSG approximately $135,000 and $47,000 towards Mr. Jurick's salary during Fiscal 1998 and 1997, respectively. CERTAIN OUTSTANDING COMMON STOCK For information on this matter, reference is made to "Part I - Item 3. - Legal Proceedings". FUTURE TRANSACTIONS AND LOANS The Company has adopted a policy that all future affiliated transactions and loans will be made or entered into on terms no less favorable to the Company than those that can be obtained from unaffiliated third parties. In addition, all future affiliated transactions and loans, and any forgiveness of loans, must be approved by a majority of the independent outside members of the Company's Board of Directors who do not have an interest in the transactions. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended ("Section 16(a)") requires the Company's Officers and Directors, and persons who own more than 10% of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the SEC and the American Stock Exchange. Officers, Directors and greater than 10% stockholders are required by certain regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, the Company believes that, during the year ended April 2, 1999, its Officers, Directors and greater than 10% beneficial owners have complied with all applicable filing requirements with respect to the Company's equity securities. 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 2, 1999, April 3, 1998 and March 31, 1997 F- 2 Consolidated Balance Sheets as of April 2, 1999 and April 3, 1998 F- 3 Consolidated Statements of Changes in Shareholders' Equity for the years ended April 2, 1999, April 3, 1998 and March 31, 1997 F- 4 Consolidated Statements of Cash Flows for the years ended April 2, 1999, April 3, 1998 and March 31, 1997 F- 5 Notes to Consolidated Financial Statements F- 6 Schedule VIII-Valuation and Qualifying Accounts and Reserves F- 26 ALL OTHER SCHEDULES ARE OMITTED BECAUSE THEY ARE NOT APPLICABLE OR THE REQUIRED INFORMATION IS SHOWN IN THE FINANCIAL STATEMENTS OR NOTES THERETO. (b) Reports on Form 8-K: Current report on Form 8-K dated January 5, 1999, reporting a proposal for the acquisition of a majority interest in the Company's common stock by Oaktree Capital Management, LLC. (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. (incorporated by reference to Exhibit 10(ae) of Emerson's Annual Report on Form 10-K for the year ended March 31, 1996.) (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. (incorporated by reference to Exhibit (ak) of Emerson's Annual Report on Form 10-K for the year ended March 31, 1997). (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. (incorporated by reference to Exhibit (10) (q) of Emerson's Annual Report on Form 10-K for the year ended April 3, 1998). (10) (r) License Agreement dated as of March 30, 1998 by and between Tel-Sound Electronics, Inc. and Emerson. (incorporated by reference to Exhibit (10) (s) of Emerson's Annual Report on Form 10-K for the year ended April 3, 1998). (10) (s) License Agreement dated as of March 31, 1998 by and between WW Mexicana, S. A. de C. V. and Emerson. (incorporated by reference to Exhibit (10) (s) of Emerson's Annual Report on Form 10-K for the year ended April 3, 1998). (10) (t) Amendment No. 6 to Financing Agreements, dated as of August 14, 1997 (incorporated by reference to Exhibit (10 (g) of Emerson's Quarterly Report on Form 10-Q for quarter ended September 30, 1997. (10) (u) Amendment No. 7 to Financing Agreements, dated as of March 31, 1998. (incorporated by reference to Exhibit (10) (t) of Emerson's Annual Report on Form 10-K for the year ended April 3, 1998). (10) (v) Amendment No. 1 to Pledge and Security Agreement dated as of March 31, 1998. (incorporated by reference to Exhibit (10) (u) of Emerson's Annual Report on Form 10-K for the year ended April 3, 1998). (10) (w) Second Lease Modification dated as of May 15, 1998 between Hartz Mountain, Parsippany and Emerson. (incorporated by reference to Exhibit (10) (v) of Emerson's Annual Report on Form 10-K for the year ended April 3, 1998). (10) (x) Amendment No. 8 to Financing Agreements, dated as of November 13, 1998. (incorporated by reference to Exhibit (10) (a) of Emerson's Quarterly Report on Form 10-Q for the quarter ended October 2, 1998). (10) (y) Third Lease Modification made the 26 day of October, 1998 between Hartz Mountain Parsippany and Emerson. (incorporated by reference to Exhibit (10) (b) of Emerson's Quarterly Report on Form 10-Q for the quarter ended October 2, 1998). (10) (z) Purchasing Agreement, dated June 30, 1998, between AFG-Elektronik GmbH and Emerson Radio International Ltd. (incorporated by reference to Exhibit (10) (c) of Emerson's Quarterly Report on Form 10-Q for the quarter ended October 2, 1998). (10) (aa) Purchasing Agreement, dated March 5, 1999, between AFG-Elektronik GmbH and Emerson Radio International Ltd.* (10) (ab) Amendment No. 9 to Financing Agreements, dated June 16, 1999.* (12) Computation of Ratio of Earnings (Loss) to Combined Fixed Charges and Preferred Stock Dividends. * (21) Subsidiaries of the Company as of April 2, 1999.* (23) Consent of Independent Auditors.* (27) Financial Data Schedule for the fiscal year ended April 2, 1999.* ___________________ * 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: June 24, 1999 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 June 24, 1999 Geoffrey P. Jurick Board, Chief Executive Officer and President /s/ John P. Walker Executive Vice June 24, 1999 John P. Walker President, Chief Financial Officer /s/ Robert H. Brown, Jr. Director June 24, 1999 Robert H. Brown, Jr. /s/ Peter G. Bunger Director June 24, 1999 Peter G. Bunger /s/ Jerome H. Farnum Director June 24, 1999 Jerome H. Farnum /s/ Stephen H. Goodman Director June 24, 1999 Stephen H. Goodman 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 2, 1999 and April 3, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended April 2, 1999. 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 2, 1999 and April 3, 1998, and the consolidated results of its operations and cash flows for each of the three years in the period ended April 2, 1999, 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 May 28, 1999 EMERSON RADIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For The Years Ended April 2, 1999, April 3, 1998 and March 31, 1997 (In thousands, except per share data)
1999 1998 1997 NET REVENUES $158,730 $162,730 $178,708 Costs and expenses: Cost of sales 138,502 142,372 174,184 Other operating costs and expenses 4,007 4,351 3,079 Selling, general and administrative expenses 12,943 15,483 18,716 Restructuring and other charges -- -- 2,972 155,452 162,206 198,951 OPERATING INCOME (LOSS) 3,278 524 (20,243) Equity in earnings (loss) of Affiliate 1,499 1,524 (66) Write-down of investment in and advances to Joint Venture (900) (714) -- Loss on marketable securities (1,109) -- -- Interest expense, net (2,272) (2,510) (3,429) INCOME (LOSS) BEFORE INCOME TAXES 496 (1,176) (23,738) Provision for income taxes 207 254 230 NET INCOME (LOSS) $ 289 $(1,430) $(23,968) NET LOSS PER COMMON SHARE Basic $ (.01) $ (.04) $ (.61) Diluted (.01) (.04) (.61) WEIGHTED AVERAGE SHARES OUTSTANDING Basic 49,398 45,167 40,292 Diluted 49,398 45,167 40,292
The accompanying notes are an integral part of the consolidated financial statements. EMERSON RADIO CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of April 2, 1999 and April 3, 1998 (In thousands, except share data)
1999 1998 ASSETS Current Assets: Cash and cash equivalents $ 3,100 $ 1,608 Available for sale securities (net of fair value adjustment of $1,298) 738 -- Accounts receivable (less allowances of $3,907 and $4,384, respectively) 5,143 7,280 Other receivables 6,782 6,474 Inventories 11,608 11,759 Prepaid expenses and other current assets 2,839 2,379 TOTAL CURRENT ASSETS 30,210 29,500 Property and equipment (net of accumulated depreciation of $2,777 and $3,152, respectively) 1,211 1,381 Investment in Affiliates and Joint Venture 19,525 19,076 Other assets 3,449 4,810 Total Assets $54,395 $54,767 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable $ 2,216 $ -- Current maturities of long-term debt 50 85 Accounts payable and other current liabilities 16,759 15,103 Accrued sales returns 3,926 4,511 Income taxes payable 400 191 TOTAL CURRENT LIABILITIES 23,351 19,890 Long-term debt, less current maturities 20,750 20,750 Other non-current liabilities 97 179 Shareholders' Equity: Preferred shares -- 10,000,000 shares authorized; 3,714 and 5,237 shares issued and outstanding, respectively 3,343 4,713 Common shares -- $.01 par value, 75,000,000 shares authorized; 51,331,615 and 51,044,730 shares issued, 47,828,215 and 51,044,730 shares outstanding, respectively 513 510 Capital in excess of par value 113,288 113,201 Cumulative translation adjustment (78) 197 Accumulated deficit (104,962) (104,673) Treasury stock, at cost 3,503,400 shares (1,907) -- TOTAL SHAREHOLDERS' EQUITY 10,197 13,948 Total Liabilities and Shareholders' Equity $54,395 $ 54,767
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 2, 1999, April 3, 1998 and March 31, 1997 (In thousands, except share data)
Comon Shares Issued Preferred Number Par Treasury Stock of Shares Value Stock Balance-March 31, 1996 $ 9,000 40,252,772 $ 403 $ -- Issuance of common stock warrants Exercise of stock options and warrants 82,870 Preffered stock dividends declared Other Comprehensive loss: Net loss for the year Currency translation adjustment Comprehensive loss Balance-March 31, 1997 9,000 40,335,642 403 Issuance of common stock upon conversion of preferred stock (4,287) 10,709,088 107 Cancellation of common stock warrants Preferred stock dividends declared Comprehensive loss: Net loss for the year Currency translation adjustment Comprehensive loss Balance-April 3, 1998 4,713 51,044,730 510 Issuance of common stock upon conversion of preferred stock (90) 286,885 3 Purchase of treasury stock (1,907) Purchase of preferred stock (1,280) Preferred stock dividends declared Comprehensive income: Net income for the year Currency translation adjustment Comprehensive income Balance-April 2, 1999 $3,343 51,331,615 $513 $ (1,907) [TABLE CONTINUED FROM ABOVE] Capital Total In Cumulative Accumu- Share excess of Translation lated holders Par Value Adjustment Deficit Equity Balance-March 31, 1996 $108,991 $ 163 $ (78,175) $ 40,382 Issuance of common stock warrants 257 257 Exercise of stock options and warrants 40 40 Preferred stock dividends declared (700) (700) Other (10) (10) Comprehensive loss: Net loss for the year (23,968) (23,968) Currency translation adjustment 28 28 Comprehensive loss (23,968) Balance-March 31, 1997 109,278 191 (102,843) 16,029 Issuance of common stock upon conversion of preferred stock 4,180 -- Cancellation of common stock warrants (257) (257) Preferred stock dividends declared (400) (400) Comprehensive loss: Net loss for the year (1,430) (1,430) Currency translation adjustment 6 6 Comprehensive loss (1,424) Balance-April 3, 1998 113,201 197 (104,673) 13,948 Issuance of common stock upon conversion of preferred stock 87 -- Purchase of treasury stock (1,907) Purchase of preferred stock (407) (1,687) Preferred stock dividends declared (171) (171) Comprehensive income: Net income for the year 289 289 Currency translation adjustment (275) (275) Comprehensive income 14 Balance-April 2, 1999 $113,288 $ (78) $(104,962) $10,197
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 2, 1999, April 3, 1998 and March 31, 1997 (In thousands)
1999 1998 1997 Cash Flows from Operating Activities: Net income (loss) $ 289 $ (1,430) $(23,968) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 1,245 1,759 2,844 Equity in earnings of affiliate (1,499) (1,524) 66 Restructuring and other nonrecurring charges -- -- 2,782 Asset valuation and loss reserves 823 (2,378) (752) Other (275) (251) 1,048 Changes in assets and liabilities: Accounts receivable 2,642 4,543 (981) Other receivables (308) (4,357) (2,117) Inventories 1,021 4,505 21,328 Prepaid expenses and other current assets (460) (241) 6,283 Other assets 699 (71) (896) Accounts payable and other current liabilities 900 2,739 2,149 Income taxes payable 209 88 (98) Net cash provided by operations 5,286 3,382 7,688 Cash Flows from Investing Activities: Investment in marketable securities (2,036) -- -- Investment in affiliates (91) 2,709 (5,480) Additions to property and equipment (413) (27) (255) Redemption of certificates of deposit -- -- 100 Other 241 -- 12 Net cash used by investing activities (2,299) 2,682 (5,623) Cash Flows from Financing Activities: Net borrowings (repayments) under line of credit facility 2,216 (5,689) (15,462) Retirement of long-term debt (35) (106) (118) Payment of dividend on preferred stock (407) (257) (231) Purchase of preferred and common stock (3,187) -- -- Other (82) (44) 253 Net cash used by financing activities (1,495) (6,096) (15,558) Net increase (decrease) in cash and cash equivalents 1,492 (32) (13,493) Cash and cash equivalents at beginning of year 1,608 1,640 15,133 Cash and cash equivalents at end of year $ 3,100 $1,608 $1,640
The accompanying notes are an integral part of the consolidated financial statements. EMERSON RADIO CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 2, 1999 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. The Company's investment in an affiliate and ownership in a joint venture are accounted for by the equity method. 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. INVESTMENTS The Company determines the appropriate classifications of securities at the time of purchase. The investments held by the Company at April 2, 1999 were classified as "available-for-sale." Unrealized gains and losses which are deemed to be other than temporary have been reported separately as a component of other comprehensive income. Declines in the market value of securities deemed to be other than temporary are included in earnings (See Note 11 - Available- for-Sale Securities). 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 the 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. Losses resulting from foreign currency transactions are included in the Consolidated Statements of Operations and amounted to a loss of $45,000, $34,000 and $79,000 for the years ended April 2, 1999, April 3, 1998 and March 31, 1997, respectively. The Company does not enter into foreign currency exchange contracts to hedge its exposures related to foreign currency fluctuations. ACCOUNTING PRONOUNCEMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which will be effective for the Company for Fiscal 2000, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The Company has not yet determined the effects, if any, of implementing SFAS No. 133 on its reporting of financial information. RECLASSIFICATION Certain amounts in the prior period's consolidated financial statements have been reclassified to conform to current period's 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 2, 1999. NOTE 2 -- INVENTORIES: Inventories are comprised primarily of finished goods. Spare parts inventories, net of reserves, were $121,000 and $384,000 at April 2, 1999 and April 3, 1998, respectively. NOTE 3 -- INVESTMENT IN UNCONSOLIDATED AFFILIATE: The Company owns 2,269,500 (31% of the outstanding) shares of common stock of Sport Supply Group, Inc. ("SSG") which it purchased in 1996 at an aggregate cost of $15,728,000 or $6.92 per share. In addition, the Company owns warrants to purchase an additional 1 million shares of SSG's common stock for $7.50 per share ("SSG Warrants") which the Company purchased in 1996 at an aggregate cost of $500,000. If the Company exercises all of the SSG Warrants, it will beneficially own approximately 39% of the SSG common shares. Effective March 1997, the Company entered into a Management Services Agreement with SSG, under which SSG provides 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 $6,530,000 which is being amortized on a straight line basis over 40 years. At April 2, 1999, the aggregate market value quoted on the New York Stock Exchange of SSG common shares equivalent in number to those owned by Emerson was approximately $20 million. Summarized financial information derived from SSG's financial reports to the Securities and Exchange Commission was as follows (in thousands): Unaudited April 2, 1999 April 3, 1998 Current assets $ 44,322 $ 37,282 Property, plant and equipment and other assets 30,252 19,878 Current Liabilities 14,965 8,395 Long-term debt 19,045 7,498 Stockholders' Equity 40,563 41,251
Unaudited For the 12 Months For the 14 Months Ended Ended April 2, 1999 April 3, 1998 Net sales $100,953 $ 111,214 Gross profit 39,090 43,275 Net income 5,454 5,903
NOTE 4 -- PROPERTY AND EQUIPMENT: As of April 2, 1999 and April 3, 1998 property and equipment is comprised of the following: 1999 1998 (In thousands) Furniture and fixtures. . . . . . . $3,228 $3,745 Machinery and equipment . . . . . . 493 532 Leasehold improvements . . . . . . 267 256 3,988 4,533 Less accumulated depreciation and amortization . . . . . . . . . . 2,777 3,152 $1,211 $1,381
Depreciation and amortization of property and equipment amounted to $583,000, $776,000 and $1,631,000 for the years ended April 2, 1999, April 3, 1998 and March 31, 1997, 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 minority interest of its investment in an unconsolidated Affiliate. At April 2, 1999 and April 3, 1998, the weighted average interest rate on the outstanding borrowings was 9.36% and 9.75%, respectively, which is the prime rate of interest plus 1.25%. Interest paid totaled $203,000, $316,000 and $1,494,000 for the years ended April 2, 1999, April 3, 1998 and March 31, 1997, respectively. 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 April 2, 1999, there were $2,216,000 outstanding borrowings under the facility, and no outstanding letters of credit issued for inventory purchases. At April 3, 1998, there were no outstanding borrowings and no outstanding letters of credit. NOTE 6 -- LONG-TERM DEBT: As of April 2, 1999 and April 3, 1998, long-term debt consisted of the following: 1999 1998 (In thousands) 8-1/2% Senior Subordinated Convertible Debentures Due 2002 . . . . . . $20,750 $20,750 Equipment notes and other . . . . . . . . 50 85 20,800 20,835 Less current obligations. . . . . . . . . . 50 85 Long-term debt $20,750 $20,750
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 2, 1999, April 3, 1998 and March 31, 1997 consisted of the following: 1999 1998 1997 (In thousands) Current: Federal $ -- $ 13 $ -- Foreign, state and other 207 241 230 $207 $254 $230
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 2, 1999, April 3, 1998 and March 31, 1997 are analyzed below: 1999 1998 1997 Statutory provision (benefit) $169 $(400) $(8,071) Change in valuation allowance (177) 454 8,098 Foreign income taxes 207 223 248 Other, net 8 (23) (45) Total income tax provision $207 $ 254 $ 230
As of April 2, 1999 and April 3, 1998 the significant components of the Company's deferred tax assets and liabilities are as follows: 1999 1998 (In thousands) Deferred tax assets: Accounts receivable reserves $ 4,699 $ 5,003 Inventory reserves 2,243 2,332 Federal operating loss carryforwards 16,207 15,469 State net operating loss carryforwards 5,257 6,759 Other 1,016 1,050 Total deferred tax assets 29,422 30,613 Valuation allowance for deferred tax assets (28,054) (29,844) Net deferred tax assets 1,368 769 Deferred tax liabilities (1,368) (769) Net deferred taxes $ -- $ --
Total deferred tax assets of the Company at April 2, 1999 and April 3, 1998 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 $32,000, $152,000 and $125,000 for the years ended April 2, 1999, April 3, 1998 and March 31, 1997, respectively. Income (loss) of foreign subsidiaries before taxes was $1,194,000, $3,065,000 and ($2,512,000) for the years ended April 2, 1999, April 3, 1998 and March 31, 1997, respectively. It is the policy of the Company to permanently reinvest all the earnings from its foreign subsidiaries. As of April 3, 1998, the Company has a federal net operating loss carryforward of approximately $133,800,000, of which $29,160,000, $13,385,000, $50,193,000, $20,575,000, $18,952,000, $800,000 and $735,000 will expire in 2006, 2007, 2009, 2011, 2012, 2013 and 2019, 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 as follows (in thousands):
Fiscal Years Amount 2000 $995 2001 582 2002 384 2003 384 2004 128
Rent expense, net of rental income, aggregated $1,304,000, $1,570,000 and $1,790,000 for the years ended April 2, 1999, April 3, 1998 and March 31, 1997, respectively. Rental income from the sublease of warehouse and office space aggregated $0, $238,000 and $256,000 in the years ended April 2, 1999, April 3, 1998 and March 31, 1997, respectively. LETTERS OF CREDIT: There were no letters of credit outstanding under the Loan and Security Agreement (See Note 5) as of April 2, 1999 or April 3, 1998. 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 2, 1999, 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 2, 1999, there were $2,124,000 and $5,000,000 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 Fiscal 1993 to Fiscal 1998 tax years and asserts that certain revenues reported as non taxable by Emerson Radio (Hong Kong) Ltd. are subject to a profits tax. In May 1999, the Company proposed a compromise offer to the IRD in which the Company and IRD, without prejudice will settle the assessment for $256,000. The Company has recorded a tax reserve in the current period for the assessment in anticipation of the IRD accepting the compromise offer. Should the proposed settlement be accepted by the IRD, the Company expects its foreign taxes to increase in future periods. Emerson Radio (Hong Kong) Ltd. is also in litigation with the IRD regarding a separate assessment of $547,000 pertaining to the deduction of certain expenses that relate to the taxable years Fiscal 1992 to Fiscal 1999. During February 1999, the Company received a favorable appellate ruling in regards to the assessment, which has been further appealed by the IRD to the final court of appeals of the IRD. The Company believes that it will prevail in this case. 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 four 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, 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 Granted 18,000 $1.00 18,000 Outstanding-April 2, 1999 1,025,000 $1.00-$1.10 $1,085,000
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. As of April 2, 1999 and April 3, 1998, approximately 964,000 and 895,000 options were exercisable, respectively. 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 income would have decreased approximately $25,000, for the year ended April 2, 1999 and the net loss would have increased approximately $21,000 and $45,000 for the years ended April 3, 1998 and March 31, 1997, 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 2, 1999, April 3, 1998 and March 31, 1997; risk-free interest rate of 5%, an expected life of 10 years and a dividend yield of zero. For the years ended April 2, 1999, April 3, 1998 and March 31, 1997, volatility was 15%, 56% and 73%, 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 Price of Per Aggregate Shares Share Price Outstanding-March 31, 1996, March 31, 1997, April 3, 1998 and April 2, 1999 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 March 31, 1994, the Company issued 10,000 shares of 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 4.2% 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 2, 1999, the Company was in arrears $840,000 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 up to $2 million of common shares. Although there are 47,828,215 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 agreed with Mr. Jurick that such shares would not be subject to repurchase under the Plan approved in 1995 and modified in 1998. During the year ended April 2, 1999, the Company repurchased 3,503,400 shares of common stock at a cost of $1,907,000. No stock was repurchased for the years ended April 3, 1998 or March 31, 1997. The shares repurchased during the year ended April 2, 1999 were funded by working capital. NOTE 10 -- CAPITAL STRUCTURE: The outstanding capital stock of the Company at April 2, 1999 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 2, 1999, 100 shares of Series A Preferred Stock were converted into 286,885 shares of common stock. If all existing outstanding Preferred shares were 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 2, 1999 was 4.2% and $840,000 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 1.2 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. Approximately 986,000 outstanding warrants are convertible into approximately 986,000 shares of common stock at conversion prices ranging between $1.20 and $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 convert 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 -- AVAILABLE-FOR-SALE SECURITIES: Available-for-sale securities are stated at fair value, with the unrealized gains and losses reported in a separate component of shareholders' equity. Realized gains and losses, and declines in market value judged to be other-than- temporary are included in earnings. During the fourth quarter of Fiscal 1999 the Company recorded an unrealized loss of $1,298,000 in earnings for securities whose decline in value was deemed to be other-than-temporary. The following is a summary of available-for-sale equity securities at April 2, 1999 (in thousands): Gross Gross Esti- Unreal- Un- mated ized realized Fair Cost Gains Losses Value Equity Securities $2,036 $ -- $1,298 $738
As of April 3, 1998, there were no securities held as available-for-sale. NOTE 12 -- NET EARNINGS (LOSS) PER SHARE: The following table sets forth the computation of basic and diluted earnings (loss) per share for the years ended April 2, 1999, April 3, 1998 and March 31, 1997: (In thousands, except per share amount)
1999 1998 1997 Numerator: Net income (loss) $ 289 $(1,430) $(23,968) Less: preferred stock dividends, and repurchase costs 577 400 700 Numerator for diluted loss per share $(288) (1,830) (24,668) Denominator: Denominator for basic earnings per share - weighted average shares 49,398 45,167 40,292 Basic loss per share $ (.01) (.04) (.61) Diluted loss per share $ (.01) (.04) (.61)
Options and warrants to purchase 1,844,000, 1,826,000 and 2,410,000 of common stock were not included in computing diluted earnings per share for Fiscal 1999, 1998 and 1997, respectively, because the effect would be antidilutive. Preferred stock convertible into 8,680,000, 14,700,000 and 9,000,000 shares of common stock were not included in computing diluted earnings per share for Fiscal 1999, 1998 and 1997, 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 Fiscal 1999, 1998 and 1997, respectively, because the effect would be antidilutive. NOTE 13 -- LICENSE AGREEMENTS: The Company has several license agreements in place that allow licensees to use 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 initial 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 1999, 1998 and 1997 were $3,633,000, $5,597,000 and $5,040,000, respectively. The decrease in licensing revenues was primarily attributable to the expiration of the agreement described in the next paragraph. 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 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 trademark. 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 in Fiscal 1998 and 1997, and are included in the balances provided above. The Agreements 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. The Daewoo agreement 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. Either party upon 90 days notice can terminate this agreement without cause. Additionally, the Company has several other licensing agreements in place with Licensees primarily in the United States, Latin America and parts of Europe. Throughout many parts of the world, the Company maintains distributorship agreements that allow the Distributor to distribute the Company's product into defined geographic areas. Currently the Company has distributors in Spain, India, China, Canada and South Africa. NOTE 14 -- 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 settled 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 ("Senior Secured Credit Facility") 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 concluded in July 1998. No decision has been rendered by the Court. 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. Furthermore, a change of control will severely limit the Company's ability to utilize existing tax net operating losses (NOL's) affecting loss and foreign tax credit limitations provided by the Internal Revenue Codes. 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. The Court has scheduled a September 28, 1999 trial date. 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 pending in 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. On December 11, 1998, the District Court in the Southern District of Indiana, granted Emerson Partial Summary Judgment in the amount of $2,956,604 plus additional costs as a result of Orion having refused to accept returns pursuant to the License Agreement (the "Returns"). The Court also granted Orion Summary Judgment in the amount of $3,202,023 with interest for product previously purchased. On or about May 7, 1999 the Court amended its order dated December 11, 1998 awarding Emerson Partial Summary Judgment against Orion concerning liability for the "Returns" and set a trial date of July 19, 1999 for purposes of determining whether Emerson or Orion is responsible for the Returns. At the same time, that Court also issued an order determining that OEA was entitled to interest at the lesser rate of eight percent (8%) (OEA sought an award of interest at eighteen percent (18%)) on the December 11, 1998 summary judgment award to OEA in the amount of $3,202,023 for certain consumer electronic product that Emerson had ordered and received for OEA. The parties have since agreed that the Returns issue is to be decided in the District Court of New Jersey. The Company believes that it has a meritorious claim against the Otake Defendants, meritorious affirmative defenses in response to Orion's claim concerning liability for the Returns and believes that the results of the 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 a bankruptcy claim that has not been resolved since the restructuring of the Company's debt on March 31, 1994. This 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 and contested the 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. 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 15 -- 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 2, 1999 (In thousands) U.S. Foreign Eliminations Consolidated Sales to unaffiliated customers $154,282 $ 4,448 $ -- $ 158,730 Income (loss) before income taxes $ 472 $ 24 $ -- $ 496 Identifiable assets $ 50,974 $ 3,421 $ -- $ 54,395
Year Ended April 3, 1998 (In thousands) U.S. Foreign Eliminations Consolidated Sales to unaffiliated customers $159,108 $ 3,622 $ -- $ 162,730 Income (loss) before income taxes $ (1,163) $ (13) $ -- $ (1,176) Identifiable assets $ 53,885 $ 912 $ -- $ 54,767
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 Income (loss) before income taxes $(21,947) $(1,791) $ -- $ (23,738) Identifiable assets $ 58,382 $ 386 $ -- $ 58,768
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 2, 1999, April 3, 1998 and March 31, 1997, total assets include, $11,769,000, $9,187,000, and $10,657,000 respectively, of assets located in foreign countries. The Company's net sales to one customer aggregated approximately 52%, 53% and 36% of consolidated net revenues for the years ended April 2, 1999, April 3, 1998 and March 31, 1997, respectively. This customer approximated 10% of the Company's trade accounts receivable at April 2, 1999, and has not been collateralized. The Company's net sales to another customer aggregated 24%, 15% and 13% for the years ended April 2, 1999, April 3, 1998 and March 31, 1997, respectively. Trade accounts receivable from this customer were less than 9% of total trade receivables. Note 16 -- Investment in Joint Venture: The Company has a 50% investment in E & H Partners, a joint venture in liquidation that refurbished and sold 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 2, 1999, April 3, 1998 and March 31, 1997 is as follows: 1999 1998 1997 (In thousands) Activity between Company and E & H Partners Accounts receivable from joint venture (a) $1,226 $1,438 $ 3,522 Investment in joint venture -- -- 440 Sales to joint venture -- -- 5,792 E & H Partners Summarized Financial Information Condensed balance sheet: Current assets $ 323 $1,889 $ 7,947 Total $ 323 $1,889 $ 7,947 Current liabilities $1,318 $2,609 $ 7,476 Partnership equity (995) (720) 471 Total $ 323 $1,889 $ 7,947 Condensed income statement: Net sales (b) $ 396 $1,772 $31,564 Net loss (275) (318) (2,058)
(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 $7,058,000 in Fiscal 1997. 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 Column Column Column B C D E Balance Charged Balance at to at Beginn- costs end ing and of year Description of year expenses Deductions (C) Allowance for doubtful accounts/chargebacks: Year ended: April 2, 1999 $ 3,015 $ (152) $ 177(A) $ 2,686 April 3, 1998 2,686 666 337 3,015 March 31, 1997 2,831 2,558 2,703 2,686 Inventory reserves: Year ended: April 2, 1999 $ 697 1,068 1,380(B) 385 April 3, 1998 2,161 1,507 2,971 697 March 31, 1997 1,222 4,560 3,621 2,161
(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 Rorganization 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 (incorporated by reference to Exhibit 10(ae) of Emerson's Annual Report on Form 10-K for the year ended March 31, 1996). (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. (incorporated by reference to Exhibit (ak) of Emerson's Annual Report on Form 10-K of the year ended March 31, 1997). (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. (incorporated by reference to Exhibit (10) (q) of Emerson's Annual Report on Form 10-K for the year ended April 3, 1998). (10) (r) License Agreement dated as of March 30, 1998 by and between Tel-Sound Electronics, Inc. and Emerson. (incorporated by reference to Exhibit (10) (r) of Emerson's Annual Report on Form 10-K for the year ended April 3, 1998). (10) (s) License Agreement dated as of March 31, 1998 by and between WW Mexicana, S. A. de C. V. and Emerson. (incorporated by Reference to Exhibit (10) (s) of Emerson's Annual Report on Form 10-K for the year ended April 3, 1998). (10) (t) Amendment No. 6 to Financing Agreements, dated as of August 14, 1997 (incorporated by reference to Exhibit (10) (g) of Emerson's Quarterly Report on Form 10-Q for quarter ended September 30, 1997. (10) (u) Amendment No. 7 to Financing Agreements, dated as of March 31, 1998. (incorporated by reference to Exhibit (10) (t) of Emerson's Annual Report on Form 10-K for the year ended April 3, 1998). (10) (v) Amendment No. 1 to Pledge and Security Agreement dated as of March 31, 1998. (incorporated by reference to Exhibit (10) (u) of Emerson's Annual Report on Form 10-K for the year ended April 3, 1998). (10) (w) Second Lease Modification dated as of May 15, 1998 between Hartz Mountain, Parsippany and Emerson. (incorporated by reference to Exhibit (10) (v) of Emerson's Annual Report on Form 10-K for the year ended April 3, 1998). (10) (x) Amendment No. 8 to Financing Agreements, dated as of November 13, 1998. (incorporated by reference to Exhibit (10) (a) of Emerson's Quarterly Report on Form 10-Q for the quarter ended October 2, 1998). (10) (y) Third Lease Modification made the 26 day of October, 1998 between Hartz Mountain Parsippany and Emerson. (incorporated by reference to Exhibit (10) (b) of Emerson's Quarterly Report on Form 10-Q for the quarter ended October 2, 1998). (10) (z) Purchasing Agreement, dated June 30, 1998, between AFG- Elecktronik GmbH and Emerson Radio International Ltd. (incorporated by reference to Exhibit (10) (c) of Emerson's quarterly report on Form 10-Q for the quarter ended October 2, 1998). (10) (aa) Purchasing Agreement, dated March 5, 1999, between AFG- Elecktronik GmbH and Emerson Radio International Ltd.* (10) (ab) Amendment No. 9 to Financing Agreements, dated June 16, 1999.* (12) Computation of Ratio of Earnings (Loss) to Combined Fixed Charges and Preferred Stock Dividends. * (21) Subsidiaries of the Company as of April 2, 1999.* (23) Consent of Independent Auditors.* (27) Financial Data Schedule for the fiscal year ended April 2,1999.* ___________________ * 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. 2, Apr. 3, Mar. 31, Mar. 31, Mar. 31, 1999 1998 1997 1996 1995 Pretax earnings (loss) $ 496 $(1,176) $(23,738) $ (13,363) $ 7,642 Fixed charges: Interest 1,925 1,833 2,789 2,788 2,582 Amortization of debt expenses 347 677 640 487 300 2,272 2,510 3,429 3,275 2,882 Pretax earnings (loss) before fixed charges $2,768 $1,334 $(20,309) $(10,088) $10,524 Fixed charges: Interest $1,925 $1,833 $ 2,789 $ 2,788 $ 2,582 Amortization of debt expenses 347 677 640 487 300 Preferred stock dividend Requirements 171 400 700 700 725(a) $2,443 $2,910 $ 4,129 $ 3,975 $3,607 Ratio of earnings (loss) to combined fixed charges and preferred stock dividends 1.13 .46 (4.92) (2.54) 2.92 Coverage deficiency -- $1,576 $4,129 $3,975 --
________________________ (a) The preferred stock dividend requirements have been adjusted to reflect the pretax earnings which would be required to cover such dividend requirements. EXHIBIT 21 EMERSON RADIO CORP. AND SUBSIDIARIES EXHIBIT TO FORM 10-K SUBSIDIARIES OF THE REGISTRANT Jurisdiction of Percentage Name of Subsidiary Incorporation of Ownership Emerson Radio (Hong Kong) Limited Hong Kong 100%* Emerson Radio International Ltd. British Virgin Islands 100% Sport Supply Group, Inc. Delaware 31%
* One share is owned by a resident director pursuant to local law. EX-1 2 P U R C H A S I N G A G R E E M E N T between AFG-ELEKTRONIK GMBH, Hans-Vogel-Str. 7, D - 90765 Furth - called in the following items SELLER - and EMERSON RADIO INTERNATIONAL LTD., Citco Bldg., Wickhams Cay, P.O. Box 662, Road Town, Tortola, British Virgin Islands - called in the following items BUYER - 1. Based upon purchase order(s) (for 1,000,000 sets) to be expressly agreed upon between the parties and setting forth a description of the goods, the unit price, the terms of payment, and the shipment date(s), among other things, all of which terms shall be incorporated herein by reference, and any amendments or alterations to same agreed to by the parties, and on condition that the seller sell to the buyer exclusively until June 30, 2001 the smart chips for worldwide sale, the buyer has the obligation to take delivery of 1,000,000 smart chips (as shall be specifically set forth on the referenced purchase order(s)) from January 1, 2000 until June 30, 2001. 2. For failure to take delivery of all of the goods by June 30, 2001, the buyer has to pay to the seller a contract penalty of 0.59 US$ (fiftynine cents US) for every smart chip not ordered, and no other monies will be due seller. Seller will give buyer a credit for the full amount of such penalty paid toward any purchase of the smart chips following June 30, 2001. Seller agrees that it will not do anything which will interfere with buyer's ability to perform under this agreement and shall indemnify and hold buyer harmless for any damages or costs buyer may incur which result from the manufacture, use or sale of the smart chips, or from any claims of patent infringement. In the event seller fails to timely ship any of the goods or ships defective goods for reasons under seller's control, buyer can cancel that part of the contract which is affected by the late shipment or the defective product without any penalty. 3. On or before October 1, 2000, the parties shall meet and confer regarding the buyer's ability to take the full quantity of smart chips by June 30, 2001. At such time, in the event the parties mutually agree that the buyer shall not be able to take the full quantity of the smart chips by June 30, 2001, the seller shall no longer be required to sell the smart chips exclusively to the buyer and either party may sell the smart chips to any third party thereafter. In such case, seller shall sell to buyer such quantities as buyer may require, up to June 30, 2001, and buyer or seller may sell the smart chips to any third party. The seller shall be required to use its best efforts to sell as many smart chips as possible prior to June 30, 2001 and for any smart chips sold by buyer or seller between October 1, 2000 and June 30, 2001, the buyer shall be relieved of the requirement to pay the contract penalty set forth in paragraph 2 on any smart chips sold to third parties by buyer or seller. 4. The contract parties agree upon German law as established law for all matters of this contract. 5. All possible legal differences arising from this contract will be settled in Furth, Germany, as the place of exclusive jurisdiction. In all controversies the English version of this agreement shall control. March 5, 1999 /s/ Gottfried Auer /s/ Geoffrey P. Jurick (AFG-Elektronic GmbH - seller) (Emerson Radio International Ltd. - buyer) EX-2 3 AMENDMENT NO. 9 TO FINANCING AGREEMENTS June 16, 1999 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, Amendment No. 6 to Financing Agreements, dated August 14, 1997, Amendment No. 7 to Financing Agreements, dated as of March 31, 1998, and Amendment No. 8 to Financing Agreements, dated as of November 13, 1998, (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 in this Amendment No. 9 to Financing Agreements (the "Amendment"). 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. ELIGIBLE ACCOUNTS. The last sentence of Section 1.17 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "Without limiting the generality of the foregoing, Accounts owed by Wal-Mart Stores, Inc. or its Affiliates, Fred Meyer, Inc. and Target, a division of Dayton Hudson Corporation, shall not be deemed Eligible Accounts." 2. LOANS ON NET AMOUNT OF ELIGIBLE ACCOUNTS. Section 2.1 (a)(i)(A) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(A) the lesser of: (1) $1,500,000; or (2) seventy (70%) percent of the Net Amount of Eligible Accounts of Emerson; PLUS" 3. CONDITIONS PRECEDENT. The effectiveness of the other terms and conditions contained herein shall be subject to: (a) the receipt by Lender of an original of this Amendment, duly authorized, executed and delivered by Borrower and consented and agreed to by the other Obligors; 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. 4. FEE. In consideration of Lender entering into this Amendment, Borrower shall pay Lender an amendment fee in the amount of $5,000, payable simultaneously with the execution hereof, which fee is fully earned as of the date hereof. Such fee may, at Lender's option, be charged directly to any of Borrower's loan accounts maintained by Lender under the Financing Agreements. 5. Miscellaneous. (a) ENTIRE AGREEMENT; RATIFICATION AND CONFIRMATION OF THE FINANCING AGREEMENTS. This Amendment contains the entire agreement of the parties with repect 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 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. (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/ Thomas Grabosky Title: Assistant Vice President AGREED AND ACCEPTED: EMERSON RADIO CORP. By: /s/ John P. Walker Title: EXE. CFO MAJEXCO IMPORTS, INC. By: /s/ John P. Walker Title: S.V.P. Finance - Treasurer [SIGNATURES CONTINED ON NEXT PAGE] [SIGNATURES CONTINUED FROM THE PREVIOUS PAGE] CONSENTED TO AND AGREED: H.H. SCOTT, INC. EMERSON COMPUTER CORP. By: /s/ John P. Walker Title: S.V.P. Finance - Treasurer EMERSON RADIO CANADA LTD. By: /s/ John P. Walker Title: Treasurer EMERSON RADIO & TECHNOLOGIES N.V. By: /s/ John P. Walker Title: S.V.P. Finance - Treasurer EX-23 4 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 May 28, 1999, 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 2, 1999. /s/ Ernst & Young LLP EX-27 5
5 1,000 12-MOS APR-02-1999 APR-02-1999 3,100 738 11,925 3,907 11,608 30,210 1,211 2,777 54,395 23,351 20,750 0 3,343 513 6,341 54,395 155,097 158,730 138,502 138,502 15,380 1,570 2,272 496 207 289 0 0 0 289 (.01) (.01)
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